What changed in this filing

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Item 1. Financial Statements

2022-11-09 compared with 2022-08-10 · 147 added, 329 removed, 327 unchanged (59% of the section changed)

3 unchanged sentences

(in thousands, except par value and share amounts)

September 30,

Current assets:

Cash and cash equivalents

$ 3,643  

$ 4,937  

Short-term investments

24,862  

29,983  

Accounts receivable and contract assets

Accounts receivable and contract assets, net

Inventories, net

1 unchanged sentence

Total current assets

32,643  

41,213  

Property and equipment, net

1 unchanged sentence

Intangible assets, net

$ 35,839  

$ 44,231  

LIABILITIES AND STOCKHOLDERS' EQUITY

1 unchanged sentence

Accounts payable

$ 1,362  

$ 1,779  

Accrued liabilities

17 unchanged sentences

Additional paid-in capital

92,856  

91,025  

Accumulated deficit

( 59,976 )  

Accumulated other comprehensive loss

( 17 )  

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.

2 unchanged sentences

(in thousands, except share and per share amounts)

Three Months Ended June 30,

Six Months Ended June 30,

Three Months Ended

September 30,

Nine Months Ended

September 30,

Product sales

3 unchanged sentences

Products and services

Restructuring inventory charge

Product line exit expense

Total cost of revenues

Gross profit (loss)

Operating expenses:

4 unchanged sentences

Other income (expense):

Interest income

Investment income

Net loss per basic and diluted common share

5 unchanged sentences

Wrap Technologies, Inc.

Consolidated Statements of Stockholders' Equity

Condensed Consolidated Statements of Stockholders' Equity

(in thousands, except share amounts)

Three Months Ended September 30, 2022

Comprehensive

Stockholders'

Income (Loss)

Three Months Ended June 30, 2022

Balance at April 1, 2022

Balance at July 1, 2022

Common shares issued upon exercise of stock options

Share-based compensation expense

2 unchanged sentences

Net loss for the period

Balance at June 30, 2022

Six Months Ended June 30, 2022

Balance at September 30, 2022

Nine Months Ended September 30, 2022

Comprehensive

Stockholders'

Balance at January 1, 2022

2 unchanged sentences

Common shares issued upon vesting of restricted stock units

Common shares issued for services

Net unrealized loss on short-term investments

Net unrealized gain on short-term investments

Net loss for the period

Balance at June 30, 2022

Balance at September 30, 2022

Three Months Ended September 30, 2021

Comprehensive

Stockholders'

Income (Loss)

Three Months Ended June 30, 2021

Balance at April 1, 2021

37,711,698  

$ 72,777  

$ ( 30,739 )  

$ 42,059  

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 $ 5.00 per share, net of issuance costs

153,692  

Balance at July 1, 2021

Common shares issued upon exercise of stock options

82,066  

Common shares issued upon vesting of restricted stock units

277,614  

Common shares issued for services

25,000  

Share-based compensation expense

1 unchanged sentence

Net loss for the period

( 7,799 )  

Balance at June 30, 2021

39,911,390  

$ 87,277  

$ ( 38,538 )  

$ 48,756  

Six Months Ended June 30, 2021

Balance at September 30, 2021

Nine Months Ended September 30, 2021

Comprehensive

Stockholders'

Balance at January 1, 2021

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 $ 5.00 per share, net of issuance costs

153,692  

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

Common shares issued upon exercise of stock options

157,066  

Common shares issued upon vesting of restricted stock units

342,274  

Common shares issued for services

42,876  

Share-based compensation expense

1 unchanged sentence

Net loss for the period

( 13,228 )  

Balance at June 30, 2021

39,911,390  

$ 87,277  

$ ( 38,538 )  

$ 48,756  

Balance at September 30, 2021

See accompanying notes to unaudited condensed consolidated interim financial statements.

Wrap Technologies, Inc.

Consolidated Statements of Cash Flows

Condensed Consolidated Statements of Cash Flows

(in thousands)

Six Months Ended June 30,

Nine Months Ended September 30,

Cash Flows From Operating Activities:

1 unchanged sentence

Depreciation and amortization

Restructuring and other costs

Product line exit expense

Gain on sale of assets

Warranty provision

Software impairment charge

Change in contingent liability

Non-cash lease expense

17 unchanged sentences

Investment in patents and trademarks

Investment in long-term deposits

Purchase of intangible assets

Proceeds from long-term deposits

8 unchanged sentences

Cash and cash equivalents, end of period

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

4 unchanged sentences

(in thousands, except per share and share amounts)

ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Organization and Business Description

18 unchanged sentences

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.

Annual Report ”), 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 Annual Report.

Results of operations for interim periods are not necessarily indicative of the results of operations for a full year.

1 unchanged sentence

Principles of Consolidation

The Company has 

one  wholly-owned subsidiary, Wrap Reality, Inc.

formed in 

December 2020 that sells a virtual reality (“

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.

2 unchanged sentences

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.

3 unchanged sentences

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.

Stock options and restricted stock units exercisable or issuable for a total of 6,396,277 shares of Common Stock were outstanding at September 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

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.

In October 2021 , the Financial Accounting Standards Board (“

FASB ”) issued Accounting Standards Update (“

ASU ”) 2021-08, Business Combinations (Topic 805):

Accounting for Contract Assets and Contract Liabilities from Contracts with Customers (“

ASU 2021-08 ”), to require that an acquirer recognize, and measure contract assets and contract liabilities acquired in a business combination in accordance with FASB Accounting Standards Codification (“

ASC ”) Topic 606 , Revenue from Contracts with Customers (“

Topic 606 ”).

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 ASU 2021-08 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 ASU 2021-08 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.

Wrap Technologies, Inc.

Notes to Unaudited Condensed Consolidated Interim Financial Statements

(in thousands, except per share and share amounts)

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.

          REVENUE AND PRODUCT COSTS

On January 1, 2018, the Company adopted 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.

Product sales includes BolaWrap products and accessories.

Other revenue includes VR revenues, service, training and shipping revenues.

4 unchanged sentences

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.

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 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.

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.

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.

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 

receive consideration, per terms of a contract, from customers prior to transferring goods to the customer.

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.

2 unchanged sentences

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.

The table below details the activity in our contract liabilities during the nine months ended September 30, 2022.

Balance at January 1, 2022

1 unchanged sentence

Transfer to revenue

( 43 )  

Balance at June 30, 2022

Balance at September 30, 2022

Current portion

Long-term portion

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.

December 31, 2021, 

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

At September 30, 2022, the Company’s deferred revenue of $ 300  consisted of $ 177 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 and services. 

The Company recognizes an asset if there are incremental costs of obtaining a contract with a customer such as commissions.

1 unchanged sentence

The Company had 

no  such assets at 

June 30, 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.

no  such assets at September 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.

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.

9 unchanged sentences

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

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

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, 2022, and December 31, 2021.

As of September 30, 2022

Money Market Funds

$ 1,537  

Treasury securities in short-term investments

24,879  

( 17 )  

24,862  

Total Financial Assets

$ 26,416  

$ ( 17 )  

$ 26,399  

As of December 31, 2021

Money Market Funds

$ 1,670  

Treasury securities in short-term investments

29,989  

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.

During the three and nine months ended September 30, 2022, a $ 73 gain and $ 62 gain was recorded to accumulated other comprehensive gain (loss), respectively.

During the three and nine months ended September 30, 2021, a $ 2 loss and a $ 4 loss 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.

INVENTORIES, NET

Inventory is recorded at the lower of cost or net realizable value.

1 unchanged sentence

Inventories consisted of the following:

September 30,

Finished goods

$ 1,254  

$ 1,027  

Work in process

1 unchanged sentence

Inventories, net

$ 2,033  

$ 1,566  

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

( 677 )  

Property and equipment, net

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.

INTANGIBLE ASSETS, NET

Depreciation expense was $ 121 and $ 359  for the three and nine months ended September 30, 2022 and was $ 69 and $ 191  for the three and nine months ended September 30, 2021, respectively.

          INTANGIBLE ASSETS, NET

Intangible assets consisted of the following:

September 30,

Amortizable intangible assets:

1 unchanged sentence

Accumulated amortization

( 317 )  

Total amortizable

1 unchanged sentence

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:

Amortization expense was $ 72 and $ 215  for the three and nine months ended September 30, 2022 and was $ 48 and $ 145  for the three and nine months ended September 30, 2021, respectively.

At September 30, 2022, future amortization expense is as follows:

2022 (3 months)

Total estimated amortization expense

$ 1,597  

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 $ 61 and $ 228 due to related party Syzygy Licensing, LLC (“

Syzygy ”) as of June 30, 2022, and December 31, 2021, respectively.

Syzygy ”) as of September 30, 2022, and December 31, 2021, respectively.

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

Accrued liabilities consist of the following:

September 30,

Patent and legal costs

4 unchanged sentences

Changes in our estimated product warranty costs were as follows:

Six Months Ended June 30,

Nine months Ended September 30,

Balance, beginning of period

Warranty settlements

( 63 )  

Warranty provision

Balance, end of period

          LEASES

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.

The guidance in FASB ASC Topic 842, Leases  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.

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.

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.

1 unchanged sentence

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 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. 

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:

Amortization of ROU operating lease assets was $ 26 and $ 75  for the three and nine months ended September 30, 2022 and was $ 21  and $ 67  for the three and nine months ended September 30, 2021, respectively.

Operating lease expense for capitalized operating leases included in operating activities was $ 30  and $ 88  for the three and nine months ended September 30, 2022 and was $ 23  and $ 73  for the three and nine months ended September 30, 2021, respectively. 

Operating lease obligations recorded on the balance sheet at September 30, 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 June 30, 2022, for future periods are as follows:

Future lease payments included in the measurement of lease liabilities on the balance sheet at September 30, 2022, for future periods are as follows:

2022 (3 months)

2 unchanged sentences

The weighted average remaining lease term is 2.83 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 had $ 3 and $ 0 short-term lease expense during the nine months ended September 30, 2022, and 2021.

The Company does not have any finance leases.

STOCKHOLDERS ’ 

          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.

SHARE-BASED COMPENSATION

March 31, 2017 ,  the Company adopted, and the stockholders approved, the 

2017  Stock Incentive Plan (the “

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 had no purchase warrants outstanding at September 30, 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.

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 

2,000,000  shares of Common Stock for issuance as awards 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 

2 unchanged sentences

9,000,000  shares subject to the Plan.

June 30, 2022, 

there were 1,711,281 shares of Common Stock available for grant under the Plan.

At September 30, 2022, there were 1,624,160 shares of Common Stock remaining 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.

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:

The following table summarizes stock option activity for the nine months ended September 30, 2022:

Weighted Average

Outstanding January 1, 2022

3,935,883  

$ 5.24  

2,559,639  

$ 2.92  

( 50,000 )  

$ 1.50  

Forfeited, cancelled, expired

( 757,246 )  

$ 7.87  

Outstanding June 30, 2022

5,688,276  

$ 3.88  

$ 232,778  

Exercisable June 30, 2022

2,351,826  

$ 4.38  

$ 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.

Outstanding September 30, 2022

Exercisable September 30, 2022

At September 30, 2022, there were 4,022,083 service-based stock options outstanding, and 1,614,230 performance-based stock options outstanding, which performance-based stock options were granted in April 2022 to the Company’s Chief Executive Officer and President, subject to future market capitalization targets.

1,049,145 of the 4,013,885 stock options granted 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,

For the Nine months

Ended September 30,

Expected stock price volatility

Risk-free interest rate

1.09 %  

Forfeiture rate

Expected dividend yield

1 unchanged sentence

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.

2 unchanged sentences

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 Company records forfeitures as they are incurred.

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.

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 exercise 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.

3 unchanged sentences

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.

Wrap Technologies, Inc.

Notes to Unaudited Condensed Consolidated Interim Financial Statements

(in thousands, except per share and share amounts)

Stock option expense was $ 308 and $ 1,448 for the three and nine months ended September 30, 2022 and was $ 1.302 and $ 4,310 for the three and nine months ended September 30, 2021, respectively.

Restricted Stock Units

2 unchanged sentences

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:

The following table summarizes RSU activity for the nine months ended September 30, 2022:

Weighted Average

3 unchanged sentences

Unvested at January 1, 2022

269,303  

$ 6.47  

Granted - service based

619,817  

$ 2.73  

( 90,216 )  

$ 5.03  

Forfeited and cancelled

( 28,357 )  

$ 5.00  

Unvested at June 30, 2022

770,547  

$ 3.69  

Unvested at September 30, 2022

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.

RSU expense was $ 564 and $ 1,180 for the three and nine months ended September 30, 2022 and was $ 467 and $ 2,245 for the three and nine months ended September 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,

Three Months Ended

September 30,

Nine months Ended

September 30,

Selling, general and administrative

$ 2,027  

$ 1,485  

$ 2,629  

Research and development

Total share-based expense

$ 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.

As of September 30, 2022, total estimated compensation expense of stock options granted and outstanding but not yet vested was $ 3,820 which is expected to be recognized over the weighted average period of 3.5 years.

As of September 30, 2022, total estimated compensation cost of RSUs granted and outstanding but not yet vested was $ 1,828 which is expected to be recognized over the weighted average period of 2.3 years.

COMMITMENTS AND CONTINGENCIES

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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.

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/consultant 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.

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 $ 61  and $ 147  for royalties during the three and nine months ended September 30, 2022 and $ 65  and $ 185  incurred for the three and nine months ended September 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.

Wrap Technologies, Inc.

Notes to Unaudited Condensed Consolidated Interim Financial Statements

(in thousands, except per share and share amounts)

RELATED PARTY TRANSACTIONS

At September 30, 2022, the Company was committed for approximately $ 4,376 for future component deliveries that are generally subject to modification or rescheduling in the normal course of business.

          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.

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 $ 13.5 during the nine months ended September 30, 2022, and 2021, respectively.

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

MAJOR CUSTOMERS AND RELATED INFORMATION

For the three months ended June 30, 2022, revenues from three distributors and one agency accounted for approximately 

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 

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.

          MAJOR CUSTOMERS AND RELATED INFORMATION

For the three months ended September 30, 2022, revenues from one distributor accounted for approximately 59 %, of revenues with no other single customer accounting for more than 10% of total revenues.

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 nine months ended September 30, 2022, revenues from one distributor accounted for approximately 39 % 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.

At September 30, 2022, accounts receivable from two distributors accounted for 42 % and 15 % 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.

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For the Three Months

For the Six Months

Ended June 30,

$ 1,090  

$ 1,123  

$ 2,285  

$ 1,750  

For the Nine months

Ended September 30,

Europe, Middle East and Africa

$ 1,165  

$ 1,934  

$ 2,764  

$ 3,476  

SUBSEQUENT EVENTS

Total revenues

          SUBSEQUENT EVENTS

On October 11, 2022, the company received an order from an international government agency for the purchase of over 2,000 BolaWrap devices, cassettes and other accessories totaling over $ 1.5  million.

This order will be recorded in the fourth quarter 2022.

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.

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