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,               2022     December 31,       (Unaudited)     2021   ASSETS                 Current assets:                 Cash and cash equivalents   $ 3,643     $ 4,937   Short-term investments     24,862       29,983   Accounts receivable and contract assets     1,405       3,859   Inventories, net     2,033       1,566   Prepaid expenses and other current assets     700       868   Total current assets     32,643       41,213   Property and equipment, net     907       976   Operating lease right-of-use asset, net     337       51   Intangible assets, net     1,941       1,982   Other assets     11       9   Total assets   $ 35,839     $ 44,231                     LIABILITIES AND STOCKHOLDERS' EQUITY                 Current liabilities:                 Accounts payable   $ 1,362     $ 1,779   Accrued liabilities     912       824   Customer deposits     4       43   Deferred revenue- short term     178       155   Operating lease liability - short term     102       56   Total current liabilities     2,558       2,857                     Long-term liabilities:                 Deferred revenue- long term     166       110   Operating lease liability - long term     248       -   Total long-term liabilities     414       110   Total liabilities     2,972       2,967                     Commitments and contingencies (Note 11)                                       Stockholders' equity:                 Preferred stock - 5,000,000 authorized; par value $ 0.0001 per share; none issued and outstanding     -       -   Common stock - 150,000,000 authorized; par value $ 0.0001 per share; 40,992,161 and 40,851,945 shares issued and outstanding each period, respectively     4       4   Additional paid-in capital     92,856       91,025   Accumulated deficit     ( 59,976 )     ( 49,759 ) Accumulated other comprehensive loss     ( 17 )     ( 6 ) Total stockholders' equity     32,867       41,264   Total liabilities and stockholders' equity   $ 35,839     $ 44,231     See accompanying notes to unaudited condensed consolidated interim financial statements.     -1-   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,       2022     2021     2022     2021   Revenues:                                 Product sales   $ 969     $ 1,852     $ 2,431     $ 3,278   Other revenue     196       82       333       198   Total revenues     1,165       1,934       2,764       3,476   Cost of revenues:                                 Products and services     708       1,247       1,640       2,184   Restructuring inventory charge     -       747       -       747   Total cost of revenues     708       1,994       1,640       2,931   Gross profit (loss)     457       ( 60 )     1,124       545                                     Operating expenses:                                 Selling, general and administrative     3,764       6,579       8,370       11,557   Research and development     1,476       1,162       2,971       2,227   Total operating expenses     5,240       7,741       11,341       13,784   Loss from operations     ( 4,783 )     ( 7,801 )     ( 10,217 )     ( 13,239 )                                   Other income (expense):                                 Interest income     -       8       2       10   Other     ( 2 )     ( 6 )     ( 2 )     1         ( 2 )     2       -       11   Net loss   $ ( 4,785 )   $ ( 7,799 )   $ ( 10,217 )   $ ( 13,228 )                                   Net loss per basic and diluted common share   $ ( 0.12 )   $ ( 0.20 )   $ ( 0.25 )   $ ( 0.35 ) Weighted average common shares used to compute net loss per basic and diluted common share     40,978,820       38,162,526       40,943,241       37,938,873                                     Comprehensive loss:                                 Net loss   $ ( 4,785 )   $ ( 7,799 )   $ ( 10,217 )   $ ( 13,228 ) Net unrealized gain (loss) on short-term investments     12       ( 4 )     ( 11 )     ( 2 ) Comprehensive loss   $ ( 4,773 )   $ ( 7,803 )   $ ( 10,228 )   $ ( 13,230 )   See accompanying notes to unaudited condensed consolidated interim financial statements.     -2-   Table of Contents       Wrap Technologies, Inc. Consolidated Statements of Stockholders' Equity (in thousands, except share amounts) (unaudited)                                       Accumulated                               Additional             Other     Total       Common Stock             Paid-In     Accumulated     Comprehensive     Stockholders'       Shares     Amount     Capital     Deficit     Income (Loss)     Equity                                                         Three Months Ended June 30, 2022                                                     Balance at April 1, 2022     40,951,197     $ 4     $ 92,129     $ ( 55,191 )   $ ( 29 )   $ 36,913   Share-based compensation expense     -       -       727       -       -       727   Common shares issued upon vesting of restricted stock units     40,964       -       -       -       -       -   Net unrealized gain on short-term investments     -       -       -       -       12       12   Net loss for the period     -       -       -       ( 4,785 )     -       ( 4,785 ) Balance at June 30, 2022     40,992,161     $ 4     $ 92,856     $ ( 59,976 )   $ ( 17 )   $ 32,867           Six Months Ended June 30, 2022                                                     Balance at January 1, 2022     40,851,945     $ 4     $ 91,025     $ ( 49,759 )   $ ( 6 )   $ 41,264   Common shares issued upon exercise of stock options     50,000       -       75       -       -       75   Share-based compensation expense     -       -       1,756       -       -       1,756   Common shares issued upon vesting of restricted stock units     90,216       -       -       -       -       -   Common shares issued for services     -       -       -       -       -       -   Net unrealized loss on short-term investments     -       -       -       -       ( 11 )     ( 11 ) Net loss for the period     -       -       -       ( 10,217 )     -       ( 10,217 ) Balance at June 30, 2022     40,992,161     $ 4     $ 92,856     $ ( 59,976 )   $ ( 17 )   $ 32,867       -3-   Table of Contents                                           Accumulated                               Additional             Other     Total       Common Stock             Paid-In     Accumulated     Comprehensive     Stockholders'       Shares     Amount     Capital     Deficit     Income (Loss)     Equity                                                         Three Months Ended June 30, 2021                                                     Balance at April 1, 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 $ 5.00 per share, net of issuance costs     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                                                     Balance at January 1, 2021     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 $ 5.00 per share, net of issuance costs     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     See accompanying notes to unaudited condensed consolidated interim financial statements.     -4-   Table of Contents       Wrap Technologies, Inc. Consolidated Statements of Cash Flows (in thousands) (unaudited)         Six Months Ended June 30,       2022     2021   Cash Flows From Operating Activities:                 Net loss   $ ( 10,217 )   $ ( 13,228 ) Adjustments to reconcile net loss to net cash used in operating activities:                 Depreciation and amortization     380       219   Restructuring and other costs     -       747   Gain on sale of assets     -       ( 11 ) Warranty provision     45       10   Non-cash lease expense     49       46   Share-based compensation     1,756       3,007   Common shares issued for services     -       239   Provision for doubtful accounts     8       46   Changes in assets and liabilities:                 Accounts receivable     2,446       ( 798 ) Inventories     ( 467 )     ( 713 ) Prepaid expenses and other current assets     168       ( 65 ) Accounts payable     ( 417 )     48   Operating lease liability     ( 41 )     ( 48 ) Customer deposits     ( 39 )     8   Accrued liabilities and other     106       53   Warranty settlement     ( 63 )     16   Deferred revenue     79       170   Net cash used in operating activities     ( 6,207 )     ( 10,254 )                   Cash Flows From Investing Activities:                 Purchase of short-term investments     ( 14,890 )     ( 25,009 ) Proceeds from maturities of short-term investments     20,000       20,000   Capital expenditures for property and equipment     ( 168 )     ( 367 ) Investment in patents and trademarks     ( 102 )     ( 96 ) Investment in long-term deposits     ( 2 )     -   Proceeds from long-term deposits     -       3   Net cash provided by (used in) investing activities     4,838       ( 5,469 )                   Cash Flows From Financing Activities:                 Proceeds from exercise of warrants     -       12,048   Proceeds from exercise of stock options     75       278   Repayment of debt     -       ( 200 ) Net cash provided by financing activities     75       12,126                     Net decrease in cash and cash equivalents     ( 1,294 )     ( 3,597 ) Cash and cash equivalents, beginning of period     4,937       16,647   Cash and cash equivalents, end of period   $ 3,643     $ 13,050                     Supplemental Disclosure of Non-Cash Investing                 and Financing Activities:                 Change in unrealized gain on short-term investments   $ ( 11 )   $ ( 2 ) Right-of-use asset and liability recorded during period   $ 335     $ -     See accompanying notes to unaudited condensed consolidated interim financial statements.   -5-   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, 2021, included in the Company’s Annual Report on Form 10 -K, as filed with the SEC on March 10, 2022. The accompanying condensed consolidated balance sheet at December 31, 2021, has been derived from the audited consolidated balance sheet at December 31, 2021, 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 that sells a virtual reality (“ VR ”) 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   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 revenue and expense 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 and restricted stock units exercisable or issuable for a total of 6,458,823 shares of Common Stock were outstanding at June 30, 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.   Recent Issued Accounting Guidance   In  October 2021 ,  the FASB issued ASU  2021 - 08  (“ASU  No.   2021 - 08 ”), Business Combinations (Topic  805 ): Accounting for Contract Assets and Contract Liabilities from Contracts with Customers, to require that an acquirer recognize, and measure contract assets and contract liabilities acquired in a business combination in accordance with Topic  606,  Revenue from Contracts with Customers. At the acquisition date, an acquirer should account for the related revenue contracts in accordance with Topic  606  as if it had originated the contracts. The amendments in this update should be applied prospectively and are effective for fiscal years beginning after  December 15, 2022 ,  including interim periods within those fiscal years. We do  not  expect the adoption of this standard to have a material impact on our consolidated financial statements and related disclosures.   The Company has reviewed other recently issued, but not yet effective, accounting pronouncements and does not believe the future adoptions of any such pronouncements will be expected to cause a material impact on its financial condition or the results of operations.   - 6 -   Table of Contents   Wrap Technologies, Inc. Notes to Unaudited Condensed Consolidated Interim Financial Statements (in thousands, except per share and share amounts)       2.   REVENUE AND PRODUCT COSTS   On  January 1, 2018,  the Company adopted FASB ASC Topic  606,  Revenue from Contracts with Customers  ( “ Topic   606 ” )  and, as it had  no  prior revenue or contracts with customers, there was  no  transition required nor any impact on prior results. Topic   606  requires entities to recognize revenue through the application of a  five -step model, which includes identification of the contract, identification of the performance obligations, determination of the transaction price, allocation of the transaction price to the performance obligations and recognition of revenue as the entity satisfies the performance obligations.   The Company enters into contracts that include various combinations of products, accessories, software and services, each of which are generally distinct and are accounted for as separate performance obligations. Product sales includes BolaWrap products and accessorites. Other revenue includes VR revenues, service, training and shipping revenues.   A performance obligation is a promise in a contract to transfer a distinct good or service to a customer and is the unit of account in Topic   606.  For contracts with a single performance obligation, the entire transaction price is allocated to the single performance obligation. For contracts with multiple performance obligations, the Company allocates the contract transaction price to each performance obligation using the Company’s estimate of the standalone selling price (“ SSP ” or “ SSPs ”) of each distinct good or service in a contract. The Company determines SSPs based on the relative SSP. If the SSP is  not  observable through past transactions, the Company estimates the SSP considering available information such as market conditions and internally approved pricing guidelines related to the performance obligations.   Most of the Company’s products and accessories are sold through domestic and international distributors. Performance obligations to deliver products and accessories are generally satisfied at the point in time the Company ships the product, as this is when the customer obtains control of the asset under our standard terms and conditions. Periodically, certain customers request bill and hold transactions for future delivery as scheduled and designated by them. In such cases, revenue is  not  recognized until after control, title and risk of ownership has transferred which is generally when the customer has requested such transaction under normal billing and payment terms and has been notified that the product (i) has been completed according to customer specifications, (ii) has passed quality control inspections, and (iii) has been tagged and packed for shipment, separated from other inventory and ready for physical transfer to the customer. The value associated with custodial storage services is deemed immaterial in the context of such contracts and in total, and accordingly,  none  of the transaction price is allocated to such service.   The Company has elected to recognize shipping costs as an expense in cost of revenue when control has transferred to the customer.   Time-based VR 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.   - 7 -   Table of Contents   Wrap Technologies, Inc. Notes to Unaudited Condensed Consolidated Interim Financial Statements (in thousands, except per share and share amounts)     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. The Company  may  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 six months ended June 30, 2022.       Customer     Deferred       Deposits     Revenue   Balance at January 1, 2022   $ 43     $ 265   Additions, net     4       148   Transfer to revenue     ( 43 )     ( 69 ) Balance at June 30, 2022   $ 4     $ 344   Current portion   $ 4     $ 178   Long-term portion   $ -     $ 166     At  June 30, 2022,  the Company’s deferred revenue of $ 344  consisted of $ 221 related to VR training and $ 123  related to BolaWrap extended warranties and services. At  December 31, 2021,  the Company’s deferred revenue of $ 265 consisted of $ 172  related to VR 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  June 30, 2022,  and  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.     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.   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.   - 8 -   Table of Contents   Wrap Technologies, Inc. Notes to Unaudited Condensed Consolidated Interim Financial Statements (in thousands, except per share and share amounts)     The following table shows the Company’s cash and cash equivalents, Money Market Funds and short-term investments by significant investment category as of  June 30, 2022, and December 31, 2021.     As of June 30, 2022       Adjusted     Unrealized     Unrealized     Market       Cost     Gains     Losses     Value   Level 1:                                 Money Market Funds   $ 1,537     $ -     $ -     $ 1,537   U.S. Treasury securities in short-term investments     24,879       -       ( 17 )     24,862   Total Financial Assets   $ 26,416     $ -     $ ( 17 )   $ 26,399         As of December 31, 2021       Adjusted     Unrealized     Unrealized     Market       Cost     Gains     Losses     Value   Level 1:                                 Money Market Funds   $ 1,670     $ -     $ -     $ 1,670   U.S. Treasury securities in short-term investments     29,989       -       ( 6 )     29,983   Total Financial Assets   $ 31,659     $ -     $ ( 6 )   $ 31,653     Unrealized gains or losses resulting from our short-term investments are recorded in accumulated other comprehensive gain or loss. During the three and six months ended June 30, 2022, a $ 12 gain and $ 11 loss was recorded to accumulated other comprehensive gain (loss), respectively. During the three and six months ended June 30, 2021, $ 4 and $ 2 was recorded to accumulated other comprehensive loss, respectively.   Our financial instruments also include accounts receivable, accounts payable, accrued liabilities and business acquisition liabilities. Due to the short-term nature of these instruments, their fair values approximate their carrying values on the balance sheet.     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,       2022     2021   Finished goods   $ 1,254     $ 1,027   Work in process     -       2   Raw materials     779       537   Inventories, net   $ 2,033     $ 1,566     - 9 -   Table of Contents   Wrap Technologies, Inc. Notes to Unaudited Condensed Consolidated Interim Financial Statements (in thousands, except per share and share amounts)       5.   PROPERTY AND EQUIPMENT, NET   Property and equipment consisted of the following:     June 30,     December 31,       2022     2021   Production and lab equipment   $ 500     $ 500   Tooling     403       273   Computer equipment     503       467   Furniture, fixtures and improvements     178       176         1,584       1,416   Accumulated depreciation     ( 677 )     ( 440 ) Property and equipment, net   $ 907     $ 976     Depreciation expense was $ 124 and $ 237  for the three and six months ended June 30, 2022 and was $ 66 and $ 122  for the three and six months ended June 30, 2021, respectively.     6.   INTANGIBLE ASSETS, NET   Intangible assets consisted of the following:       June 30,     December 31,       2022     2021   Amortizable intangible assets:                 Patents   $ 509     $ 416   Trademarks     143       134   Purchased software     1,212       1,212   Other     50       50         1,914       1,812   Accumulated amortization     ( 317 )     ( 174 ) Total amortizable     1,597       1,638   Indefinite life assets (non-amortizable)     344       344   Total intangible assets, net   $ 1,941     $ 1,982     Amortization expense was $ 73 and $ 143  for the three and six months ended June 30, 2022 and was $ 49 and $ 97  for the three and six months ended June 30, 2021, respectively.   At June 30, 2022, future amortization expense is as follows:   2022 (6 months)   $ 141   2023     278   2024     279   2025     274   2026     186   Thereafter     439   Total estimated amortization expense   $ 1,597       - 10 -   Table of Contents   Wrap Technologies, Inc. Notes to Unaudited Condensed Consolidated Interim Financial Statements (in thousands, except per share and share amounts)       7.   ACCOUNTS PAYABLE AND ACCRUED LIABILITIES   Accounts payable includes $ 86 and $ 228 due to related party Syzygy Licensing, LLC (“ Syzygy ”) as of June 30, 2022, and December 31, 2021, respectively. See Notes 10, 11, 12 and 14 for additional related party information.   Accrued liabilities consist of the following:       June 30,     December 31,       2022     2021   Patent and legal costs   $ 68     $ 28   Accrued compensation     710       628   Warranty costs     78       96   Taxes and other     56       72       $ 912     $ 824     Accrued compensation includes $ 164 of future severance payments for the Company’s former Chief Executive Officer payable through October 2022.   Changes in our estimated product warranty costs were as follows:       Six Months Ended June 30,       2022     2021   Balance, beginning of period   $ 96     $ 48   Warranty settlements     ( 63 )     ( 16 ) Warranty provision     45       42   Balance, end of period   $ 78     $ 74       8.   LEASE   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 $ 25 and $ 49  for the three and six months ended June 30, 2022 and was $ 20  and $ 46  for the three and six months ended June 30, 2021, respectively.   Operating lease expense for capitalized operating leases included in operating activities was $ 30  and $ 58  for the three and six months ended June 30, 2022 and was $ 23  and $ 50  for the three and six months ended June 30, 2021, respectively.    - 11 -   Table of Contents   Wrap Technologies, Inc. Notes to Unaudited Condensed Consolidated Interim Financial Statements (in thousands, except per share and share amounts)     Operating lease obligations recorded on the balance sheet at June 30, 2022, are:   Operating lease liability- short term   $ 102   Operating lease liability - long term     248   Total Operating Lease Liability   $ 350     Future lease payments included in the measurement of lease liabilities on the balance sheet at June 30, 2022, for future periods are as follows:   2022 (6 months)   $ 58   2023     121   2024     125   2025     75   Total future minimum lease payments     379   Less imputed interest     ( 29 ) Total   $ 350     The weighted average remaining lease term is 3.1 years, and the weighted average discount rate is 5.0 %.   The Company did  not  have any short-term lease expense during the six months ended June 30, 2022, or 2021 . The Company does not have any finance leases.     9.   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 ”).   At December 31, 2021 the Company had outstanding Common Stock purchase warrants exercisable for 1,391,667 shares that expired on June 1, 2022 and accordingly had no purchase warrants outstanding at June 30, 2022.     10.   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, in  June 2020  ratified an additional  1,900,000  shares of Common Stock, in June 2021 ratified an additional  1,500,000  shares of Common Stock and in June 2022 ratified an additional  1,500,000  shares of Common Stock for a total of  9,000,000  shares subject to the Plan. At  June 30, 2022,  there were 1,711,281 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 Chief Executive Officer as part of a management transition plan.     - 12 -   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, 2022:               Weighted Average               Options on             Remaining     Aggregate       Common     Exercise     Contractual     Intrinsic       Shares     Price     Term     Value   Outstanding January 1, 2022     3,935,883     $ 5.24       4.79           Granted     2,559,639     $ 2.92                   Exercised     ( 50,000 )   $ 1.50                   Forfeited, cancelled, expired     ( 757,246 )   $ 7.87                   Outstanding June 30, 2022     5,688,276     $ 3.88       6.32     $ 232,778   Exercisable June 30, 2022     2,351,826     $ 4.38       2.32     $ 232,778     At June 30, 2022 outstanding options on 4,074,046 shares of Common Stock were service-based options and 1,614,230 outstanding options granted in April 2022 to the Company’s Chief Executive Officer and President were performance based subject to future market capitalization targets. A total of 1,049,145 options included in the table above were granted in April 2022 outside the Plan as an employment inducement grant but are subject to the terms and conditions of the Plan.   The Company uses the Black-Scholes option pricing model to determine the fair value of service-based 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,       2022     2021   Expected stock price volatility     49 %     50 % Risk-free interest rate     1.09 %     0.92 % Forfeiture rate     0 %     0 % Expected dividend yield     0 %     0 % Expected life of options - years     1.82       5.70   Weighted-average fair value of options granted   $ 1.32     $ 2.46     Estimated volatility is a measure of the amount by which the Company’s stock price is expected to fluctuate each year during the expected life of awards. The Company’s estimated volatility was based on an average of the historical volatility of peer entities whose stock prices were publicly available. The Company’s calculation of estimated volatility is based on historical stock prices of these peer entities over a period equal to the expected life of the awards. The Company uses the historical volatility of peer entities due to the lack of sufficient historical data of its stock price.   The risk-free interest rate assumption is based upon observed interest rates on  zero  coupon U.S. Treasury bonds whose maturity period is appropriate for the term of the options. The dividend yield of  zero  is based on the fact that the Company has never paid cash dividends and has  no  present intention to pay cash dividends. The Company calculates the expected life of the options using the Simplified Method for the employee stock options as the Company does  not  have sufficient historical data.   The Company used the Monte Carlo Simulation Model to value at the grant date the aggregate of 1,614,230 market condition performance options granted in April 2022 to the Company’s newly appointed Chief Executive Officer and a newly appointed President. The assumptions used in the Monte Carlo Simulation were stock price on date of grant of $ 2.89 , contract term of  10  years, expected volatility of  49 % and risk-free interest rate of 2.9 %. Vesting is based on sustained market capitalization of $ 250 million, $ 500 million and $ 1 billion and resulted in implied service periods ranging from approximately 4 to 7 years.   Stock option expense was $ 408 and $ 1,145 for the three and six months ended June 30, 2022 and was $ 689 and $ 1,228  for the three and six months ended June 30, 2021, respectively.     - 13 -   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 ”). RSUs are settled in shares of the Company’s Common Stock as the RSUs become vested. The following table summarizes RSU activity for the six months ended June 30, 2022:               Weighted Average   Weighted Average     Service-Based     Grant Date   Vesting     RSU's     Fair Value   Period (Years) Unvested at January 1, 2022     269,303     $ 6.47     Granted - service based     619,817     $ 2.73     Vested     ( 90,216 )   $ 5.03     Forfeited and cancelled     ( 28,357 )   $ 5.00     Unvested at June 30, 2022     770,547     $ 3.69   2.35   A total of 175,173 RSUs included in the table above were granted in April 2022 outside the Plan as an employment inducement grant but are subject to the terms and conditions of the Plan.   RSU expense was $ 319 and $ 611 for the three and six months ended June 30, 2022 and was $ 1,459 and $ 1,779  for the three and six months ended June 30, 2021, 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 June 30,     Six Months Ended June 30,       2022     2021     2022     2021   Selling, general and administrative   $ 591     $ 2,027     $ 1,485     $ 2,629   Research and development     136       121       271       378   Total share-based expense   $ 727     $ 2,148     $ 1,756     $ 3,007     As of June 30, 2022, total estimated compensation expense of stock options granted and outstanding but not yet vested was $ 4,590 which is expected to be recognized over the weighted average period of 3.5 years. As of June 30, 2022, total estimated compensation cost of RSUs granted and outstanding but not yet vested was $ 2,366 which is expected to be recognized over the weighted average period of 2.4 years.     11.   COMMITMENTS AND CONTINGENCIES   Facility Lease See Note 8.   Related Party Technology License Agreement The Company is obligated to pay royalties and development and patent costs pursuant to an exclusive Amended and Restated Intellectual Property License Agreement dated as of  September 30, 2016,  with Syzygy, a company owned and controlled by stockholder/consultant Mr. Elwood Norris and stockholder/officer Mr. James Barnes. The agreement provides for royalty payments of  4 % of revenue from products employing the licensed ensnarement device technology up to an aggregate of $ 1,000 in royalties or until  September 30, 2026 ,  whichever occurs earlier. The Company recorded $ 34  and $ 83  for royalties during the three and six months ended June 30, 2022 and $ 68  and $ 119  incurred for the three and six months ended June 30, 2021, respectively.   Purchase Commitments At June 30, 2022, the Company was committed for approximately $ 3.2 million for future component deliveries that are generally subject to modification or rescheduling in the normal course of business.     - 14 -   Table of Contents   Wrap Technologies, Inc. Notes to Unaudited Condensed Consolidated Interim Financial Statements (in thousands, except per share and share amounts)       12.   RELATED PARTY TRANSACTIONS   Commencing in October 2017 the Company began reimbursing Mr. 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 $ 9 during the six months ended June 30, 2022, and 2021, respectively.   See Notes 7, 10 and 11 for additional information on related party transactions and obligations.     13.   MAJOR CUSTOMERS AND RELATED INFORMATION   For the three months ended June 30, 2022, revenues from three distributors and one agency accounted for approximately  24 %,  18 %, 12 % and  11 % of revenues with no other single customer accounting for more than 10% of total revenues. 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 six months ended June 30, 2022, revenues from one distributor accounted for approximately  25 % 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.   At June 30, 2021, accounts receivable from two distributors accounted for  18 % and  11 % of accounts receivable with no other single customer accounting for more than  10% of the accounts receivable balance. Three distributors accounted for  48 %, 16 % and  15 % of accounts receivable at December 31, 2021 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,       2022     2021     2022     2021   Americas   $ 1,090     $ 1,123     $ 2,285     $ 1,750   Europe, Middle East and Africa     73       803       247       1,679   Asia Pacific     2       8       232       47       $ 1,165     $ 1,934     $ 2,764     $ 3,476       14.   SUBSEQUENT EVENTS   The Company evaluated 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.     -15-   Table of Contents