11. SHARE-BASED COMPENSATION

The Company maintains the Wrap Technologies, Inc. 2017 Equity Incentive Plan (the "2017 Plan"), which was most recently amended on December 12, 2025 to authorize up to 20,500,000 shares of Common Stock for issuance as equity awards under the 2017 Plan.

As of March 31, 2026, there were 4,033,073 shares of Common Stock remaining available for grant under the 2017 Plan.

Stock Options

The following table summarizes stock option activity for the three months ended March 31, 2026:



			Weighted Average
	Options on Common Shares		Exercise Price	Remaining Contractual Terms	Aggregate Intrinsic Value

Outstanding December 31, 2025	6,449,534		2.05	8.56	3,706
Granted	4,197,500		2.21	-	-
Exercised	-		-	-	-
Forfeited, cancelled, expired	(300,000	)	2.45	-	-
Outstanding March 31, 2026	10,347,034		2.10	8.75	402
Exercisable March 31, 2026	3,072,524		2.31	7.79	141

As of March 31, 2026 there were 8,981,868 service-based stock options outstanding, and 1,365,166 performance-based stock options outstanding. For the performance-based options, 1,290,166 were granted in October 2023 to the Company's current Chief Executive Officer, subject to vesting based on future market capitalization targets, and 75,000 were granted to a consultant, subject to vesting upon the Company's execution of a specified customer contract.

The Company uses the Black-Scholes option pricing model to determine the fair value of the service-based options that have been granted. The following table summarizes the assumptions used to compute the fair value of options granted to employees and non-employees:


	Three Months Ended March 31,
		2026			2025

Expected stock price volatility		76	%		76	%
Risk-free interest rate		3.87	%		4.28	%
Expected dividend yield		0	%		0	%
Expected life of options		6			6
Weighted-average fair value of options granted	$	1.55		$	1.47

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 the 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 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 0% is based on the fact that the Company has never paid cash dividends and has no present intention of paying 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.

Stock option expense was $2,033 and $387 for the three months ended March 31, 2026 and 2025, respectively.

Restricted Stock Units

The 2017 Plan provides for the grant of restricted stock units (“RSUs”). RSUs are settled in shares of the Company’s Common Stock as the RSUs vest. The following table summarizes RSU activity for the three months ended March 31, 2026:


			Weighted Average
	Service-Based RSUs			Grant Date Fair Value	Vesting Period (Years)

Unvested at December 31, 2025	1,014,563		$	2.23	3.62
Granted service based	81,052			2.46	-
Vested	(72,888	)		2.26	-
Forfeited and cancelled	-			-	-
Unvested at March 31, 2026	1,022,727		$	2.25	3.69

The Company used the Monte Carlo Simulation Model to value at the grant date the aggregate of 632,911 market condition performance RSUs granted in January 2024 to the Company’s Chief Executive Officer. The assumptions used in the Monte Carlo Simulation were stock price on the date of grant equal to $3.40, a contract term of 10 years, expected volatility of 78% and risk-free interest rate of 4.10%. Vesting is based on sustained market capitalization of $1 billion, and the derived service period is 4.3 years.

RSU expense was $351 and $1,278 for the three months ended March 31, 2026 and 2025, 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 March 31,
		2026		2025

Selling, general and administrative	$	2,384	$	1,603
Research and development		-		62
Total share-based expense	$	2,384	$	1,665

As of March 31, 2026, total estimated compensation cost of stock options granted and outstanding but not yet vested was $8,707 which is expected to be recognized over the weighted average period of 2.94 years.

As of March 31, 2026, total estimated compensation cost of RSUs granted and outstanding but not yet vested was $1,004, which is expected to be recognized over the weighted average period of 1.88 years.