WRAP TECHNOLOGIES, INC.
UNITED STATES SECURITIES
AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2020
Commission File Number: 000-55838
Wrap
Technologies, Inc.
(Exact name of registrant as specified in its charter)
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Delaware
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98-0551945
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(State or other jurisdiction of incorporation or
organization)
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(I.R.S. Employer Identification Number)
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1817 W
4th Street
Tempe, Arizona 85281
(Address of principal executive offices) (Zip
Code)
(800) 583-2652
(Registrant’s Telephone Number, Including Area
Code)
Securities registered pursuant to Section 12(b) of the Act:
None
Securities registered pursuant to Section 12(g) of the
Act:
Common Stock, par value $.0001
(Title of class)
Indicate by check mark if the registrant is a well-known seasoned
issuer, as defined in Rule 405 of the Securities Act. Yes
[ ] No [X]
Indicate by check mark if the registrant is not required to file
reports pursuant to Section 13 or Section 15(d) of the Exchange
Act. Yes [ ] No [X]
Indicate by check mark whether the registrant (1) has filed all
reports required to be filed by Section 13 or 15(d) of the
Securities Exchange Act of 1934 during the preceding 12 months (or
for such shorter period that the registrant was required to file
such reports), and (2) has been subject to such filing requirements
for the past 90 days. Yes [X] No [ ]
Indicate by check mark whether the registrant has submitted
electronically every Interactive Data File required to be submitted
pursuant to Rule 405 of Regulation S-T (§232.405 of this
chapter) during the preceding 12 months (or for such shorter period
that the registrant was required to submit such
files).
[X]
Yes [ ] No
Indicate by check mark whether the registrant is a large
accelerated filer, an accelerated filer, a non-accelerated filer,
smaller reporting company, or an emerging growth company. See the
definitions of “accelerated filer,” “large
accelerated filer,” “smaller reporting company,”
and “emerging growth company” in Rule 12b-2 of the
Exchange Act.
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Large Accelerated Filer [ ]
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Accelerated filer [ ]
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Non-accelerated filer [X]
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Smaller reporting company [X]
Emerging growth company [X]
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If an emerging growth company, indicate by check mark if the
registrant has elected not to use the extended transition
period for complying with any new or
revised financial accounting standards provided pursuant to Section
13(a) of the
Exchange Act. [
]
Indicate
by check mark whether the registrant has filed a report on and
attestation to its management’s assessment of the
effectiveness of its internal control over financial reporting
under Section 404(b) of the Sarbanes-Oxley Act (15 U.S.C. 7262(b))
by the registered public accounting firm that prepared or issued
its audit report. [ ]
Indicate by check mark whether the registrant is a shell company
(as defined in Rule 12b-2 of the Act). Yes [ ] No
[X]
The aggregate market value of the registrant’s common stock
held by non-affiliates of the registrant on June 30, 2020 (the last
business day of the registrant’s most recently completed
second fiscal quarter) was $196,229,092
based on the closing
price as reported on
the
Nasdaq Capital Market
(“
Nasdaq
”)
.
Shares of the registrant’s common stock held by each officer
and director and each person known to the registrant to own 10% or
more of the outstanding voting power of the registrant have been
excluded in that such persons may be deemed to be affiliates. This
determination of affiliate status is not a determination for other
purposes.
Indicate the number of shares outstanding of each of the
registrant’s classes of common stock, as of the latest
practicable
date: 37,644,556
shares of common stock, par value $0.0001 per share, as
of
March 3,
2021.
Documents Incorporated by
Reference
The registrant incorporates information required by Part III (Items
10, 11, 12, 13, and 14) of this report by reference to portions of
the registrant’s definitive proxy statement with respect to
its 2021 Annual Meeting of Stockholders to be filed with the
Securities and Exchange Commission within 120 days after the close
of the fiscal year ended December 31, 2020, pursuant to Regulation
14A.
TABLE
OF CONTENTS
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Page
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PART I
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ITEM 1.
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Business
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ITEM1A.
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Risk Factors
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ITEM 1B.
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Unresolved Staff Comments
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ITEM 2.
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Properties
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ITEM 3.
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Legal Proceedings
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ITEM 4.
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Mine Safety Disclosures
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PART II
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ITEM 5.
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Market for Registrant’s Common Equity, Related Stockholder
Matters and Issuer Purchases of Equity Securities
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ITEM 6.
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Selected Financial Data
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ITEM 7.
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Management’s Discussion and Analysis of Financial Condition
and Results of Operations
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ITEM 7A.
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Quantitative and Qualitative Disclosures about Market
Risk
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ITEM 8.
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Financial Statements and Supplementary Data
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ITEM 9.
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Changes in and Disagreement with Accountants on Accounting and
Financial Disclosure
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ITEM 9A.
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Controls and Procedures
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ITEM 9B.
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Other Information
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PART III
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ITEM 10.
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Directors, Executive Officers and Corporate Governance
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ITEM 11.
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Executive Compensation
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ITEM 12.
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Security Ownership of Certain Beneficial Owners and Management and
Related Stockholder Matters
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ITEM 13.
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Certain Relationships and Related Transactions and Director
Independence
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ITEM 14.
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Principal Accounting Fees and Services
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PART IV
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ITEM 15.
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Exhibits, Financial Statement Schedules
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Signatures
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Financial Statements
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F-1
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-i-
P
ART I
FORWARD-LOOKING STATEMENTS
In addition to historical information, this annual report on form
10-K (the “annual report”) contains forward-looking
statements within the meaning of the Private Securities Litigation
Reform Act of 1995 and the Company desires to take advantage of the
“safe harbor” provisions thereof. Therefore, the
Company is including this statement for the express purpose of
availing itself of the protections of such safe harbor with respect
to all of such forward-looking statements. The forward-looking
statements in this report reflect the Company’s current views
with respect to future events and financial performance. These
forward-looking statements are subject to certain risks and
uncertainties, including those discussed herein, that could cause
actual results to differ materially from historical results or
those anticipated. In this report, the words
“anticipates,” “believes,”
“expects,” “intends,” “future”
and similar expressions identify forward-looking statements.
Readers are cautioned to consider the specific risk factors
described below and not to place undue reliance on the
forward-looking statements contained herein, which speak only as of
the date hereof. The Company undertakes no obligation to publicly
revise these forward-looking statements to reflect events or
circumstances that may arise after the date hereof.
For purposes of this Annual Report, the terms “we,”
“us,” “our” “Wrap” and the
“Company” refer to Wrap Technologies, Inc. and its
consolidated subsidiary.
TRADEMARKS, TRADE NAMES AND SERVICE MARKS
BolaWrap and Wrap are registered trademarks in the U.S. and certain
other jurisdictions. They, along with our other common law
trademarks, service marks or trade names appearing in this Annual
Report are the property of the Company. Other trademarks, service
marks or trade names appearing in this Annual Report are the
property of their owners. We do not intend our use or display of
other companies’ trade names or trademarks to imply a
relationship with, or endorsement or sponsorship of us by, any
other companies. We have omitted the
®
and
™ designations, as applicable, for the trademarks used in
this Annual Report.
ITEM 1. BUSINESS
Overview
We are a global public safety technology and services company
delivering modern policing solutions to law enforcement and
security personnel. We began sales of our first public safety
product, the BolaWrap 100 remote restraint device, in late 2018. As
an alternative to more traditional means of restraint and
detainment, BolaWrap represents a breakthrough in the development
of a less-lethal tool on the low end of the applied force
continuum. As communities continue to ask for more compassionate
and safe policing practices, BolaWrap is rapidly gaining worldwide
awareness and recognition through media exposure, trade show
participation, product demonstrations and word of
mouth.
Since our 2018 launch, Wrap's sales and marketing efforts have
generated over 9,000 inquiries from domestic and international law
enforcement personnel. We have demonstrated the product to over
1,000 law enforcement agencies across the country, often with media
in attendance, resulting in hundreds of media reports including
television and print that has increased our product and brand
awareness. Successful field uses, some reported in the media, have
further increased product awareness and we believe is accelerating
adoption of BolaWrap as an effective de-escalation
tool.
To better facilitate sales enablement, Wrap promotes hands-on
demonstrations and on-site train-the-trainer courses focused on
integrating the BolaWrap into an officer's toolkit of devices and
soft skills. We conduct local and regional in-person, webinar and
on-line demonstrations and use of force and de-escalation training
to support law enforcement agencies to respond to the rapidly
changing public demands for modern less-lethal policing. We do not
charge for product demonstrations or training as it is an integral
part of our sales and marketing activities.
In December 2020, Wrap acquired NSENA, Inc.
(“
NSENA
”)
, a virtual reality-based training simulator
business targeting law enforcement and corrections. We now offer
our Wrap Reality branded virtual reality training system and plan
to incorporate BolaWrap and enhanced de-escalation and use-of-force
training in future training content. Our training foundation
employing virtual reality training methods positions Wrap to become
a leader in de-escalation and safer policing
training.
-1-
The immediate addressable domestic market for our products and
virtual reality training services consists of over 15,000 agencies
and 900,000 full-time sworn local, state and federal law
enforcement officers in the U.S. and over 12 million police
officers in over 100 countries we are targeting
globally.
Our efforts are aimed at establishing a global brand around
“BolaWrap” and “Wrap” and building the
product and services foundation for continued business growth. We
have created a strong and growing pipeline of market opportunities
for our restraint product offering and training services within the
law enforcement, military and homeland security business sectors
domestically and internationally. Social trends demanding more
compassionate and safe policing practices are expected to continue
to drive our global business.
History
The Company was first established as a Delaware limited liability
company in 2016, and has accomplished a number of key objectives
since its founding, as follows:
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Date
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Milestone
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March 2, 2016
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Organized as Wrap Technologies, LLC, a Delaware limited liability
company on by our founders Elwood G. Norris, Scot Cohen and James
A. Barnes.
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December 2016
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Demonstrated our first prototype BolaWrap device.
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March 31, 2017
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Reorganized as a corporation and renamed Wrap Technologies,
Inc.
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November 2017
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Began demonstrations and trial field deployments of our first
production devices to a small number of U.S. law enforcement
agencies.
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December 2017
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Wrap became a public company by completing a self-underwritten
public offering, raising gross proceeds of approximately $3.49
million from the sale of 2,328,533 shares of our common stock, par
value $0.0001 per share (“
Common Stock
”),
at a public offering price of $1.50 per share.
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July 31, 2018
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First U.S. patent granted on the BolaWrap deployment
system.
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October 2018
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Wrap demonstrated our new BolaWrap green line laser to the first
law enforcement agency.
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November 2018
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First international sale of BolaWrap.
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December 2018
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Common Stock uplisted to trade on the Nasdaq Capital Market under
symbol “WRTC”.
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May 2019
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Commenced distributing production green line laser equipped
BolaWrap 100 devices and associated cartridges.
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September 2019
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Relocated corporate headquarters from Las Vegas, Nevada to a new
sales, manufacturing, training and product development facility in
Tempe, Arizona.
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December 1, 2020
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Changed stock symbol to “WRAP” to align with our global
branding strategy.
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December 14, 2020
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Acquired
NSENA, a developer and provider of a law
enforcement training platform employing immersive computer graphics
virtual reality with proprietary software, hardware and content. We
have rebranded the business as Wrap Reality and believe our content
library is one of the largest targeting law enforcement currently
consisting of 47 training modules.
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Industry Background
The market for use-of-force related products and devices includes
law enforcement agencies, correctional facilities, military
agencies, private security guard companies and retail consumers. We
believe law enforcement officials are the opinion leaders regarding
market acceptance of new public safety products. We are focused on
the law enforcement agency segment of the market for our BolaWrap
remote restraint solution and the Wrap Reality virtual reality
system.
A number of recent well-publicized national events, such as the
death of George Floyd, the protesting thereafter, the Capitol riots
and other publicized encounters and events throughout 2020, have
highlighted some of the challenges of modern policing and
emphasized the need for more hands-off, less-lethal engagements and
new approaches for more extensive officer training. Police reform
and reorganization of police departments have now become a topic
with heightened community focus and public engagement. We believe
these events will garner additional government funding and
community support for new law enforcement solutions and more
focused training. In conversations with industry leading
organizations such as the Major City Chiefs Association (MCCA),
International Association of Chiefs of Police (IACP), and others,
police reform is a priority and area of focus in the new
Biden-Harris administration.
-2-
Currently, law enforcement agencies authorize a continuum of force
options ranging from verbal commands to lethal force. Studies have
concluded that most police officers never deploy lethal force in
the course of their careers. Although a majority of law enforcement
officers around the world are armed with firearms, only a small
percentage will actually ever use them. Officers, however, use
less-lethal force on a regular basis. Traditional tactics such as
using a control hold, baton, club, or combat to control a suspect
may result not only in a risk of injury to the suspect, but also a
risk that the officer will be injured. Other force options
including chemical spray, impact munitions and conducted electrical
weapons (“
CEWs”
), not only risk injury, but are often
controversial. Each weapon available to law enforcement has
distinct advantages and disadvantages, and we believe law
enforcement agencies require a variety of different tools for
different situations.
We believe BolaWrap is a necessary tool to meet modern policing
requirements when individuals do not respond to verbal commands. At
the same time the public is demanding less-lethal policing. This is
even more apparent in police interactions with the mentally ill.
According to a report by The State of Mental Health in America,
2018, published by The Mental Health America an estimated 40
million adults in the U.S. suffer from mental health issues. And,
in a 2015 report on The Role of Mental Illness in Fatal Law
Enforcement Encounters, the Treatment Advocacy Center: Office of
Research & Public Affairs, 7.9 million individuals have severe
mental illness that affect their thinking and behavior.
Amounting to somewhat fewer than four
in every 100 adults in America, individuals with severe mental
illness generate no less than one in ten calls for police service
and occupy at least one in five prison and jail beds in the U.S. An
estimated one in three individuals transported to hospital
emergency rooms in psychiatric crisis are taken there by
police.
BolaWrap enables
officers to safely and humanely take subjects into custody without
injury to get them the help they need.
BolaWrap
restraint of individuals at a distance may offer
reduced frequency of deployment of other control techniques,
including CEWs, especially in encounters with the mentally
ill.
Litigation and insurance costs involving use of force for law
enforcement agencies can be significant, with settlements in the
millions of dollars for many departments. Reducing the frequency of
need for other use of force tools and the number of injuries and
fatalities caused by law enforcement officers may reduce the number
of suits filed against agencies for excessive use of force,
wrongful death and injury.
We believe BolaWrap may have the benefit of increasing goodwill
between public safety agencies and their communities. Community
relations considerations can be particularly important at a time
when almost any interaction with public safety officers can be
recorded and scrutinized by the media and the public.
The industry response to BolaWrap confirms the need to fill a gap
between verbal commands and pain inducing compliance tools. Our
goal is to equip every public safety officer with the BolaWrap
remote restraint solution.
Markets
We
participate in the global non-lethal market that, according to the
November 2020 report by Global Market Outlook, was estimated to be
$6.8 billion in 2019 and is expected to grow to $8.1 billion in
2025 even factoring the impact of COVID-19. The following segments
are our target markets:
Domestic and International Law Enforcement
Federal, state and local law enforcement agencies in the United
States currently represent the primary target market for our
products and services. According to the FBI’s Criminal
Justice Information Services Division in 2018 there were over
800,000 local and state full-time law enforcement officers in the
U.S. The U.S.
Department of Justice in October 2019 reported
that based on 2016 data, there were over 100,000 full-time federal
officers primarily providing police protection and over 15,300
general purpose law enforcement agencies in the U.S.
Federal
officers include over 37,000 customs and border patrol officers.
We believe our product line can be an
effective tool to safely assist in detention of individuals subject
to the agency’s jurisdiction. The BolaWrap offers an
additional tool for frontline agents to de-escalate encounters
while effecting agent responsibilities.
Additionally, we have estimated an addressable international market
of over 12.1 million police officers in the 100 largest police
forces gathered from individual country statistics outside the U.S.
We delivered our first international order in 2018 and in 2019
entered into agreements with our first international distributors.
Through December 31, 2020 we have sold BolaWrap products to
36 countries. We currently anticipate that sales
attributable to international markets will represent the majority
of our sales in the fiscal year ending December 31, 2021. Our
belief is based on the fact that sales of our products within the
U.S. are characterized by longer sales cycles and regulatory issues
versus international sales where purchase decisions are largely
centralized at the national level.
-3-
Correctional Facilities
In 2005, the United States Bureau of Justice statistics
(“Census of State and Federal Correctional Facilities,
2005,” U.S. Department of Justice, Bureau of Justice
Statistics, published October 2008) estimated that there were
295,000 correctional officers in over 1,800 federal and state
correctional facilities in the United States, therefore
representing a large potential market for our products and
services.
Private Security Firms and Guard Services
According to 2019 Bureau of Labor Statistics estimates
(“Occupational Employment Statistics,” United States
Department of Labor), there were approximately 1.1 million
privately employed security guards in the U.S. They represent a
broad range of individuals, including those employed by
investigation and security services, hospitals, schools, local
government, and others. We believe that some security personnel
armed with the BolaWrap could be effective to de-escalate some
encounters without eliminating other devices available today.
Providing guards with the BolaWrap may reduce the potential
liability of private security companies and personnel in such
encounters.
In most countries private security personnel outnumbers police
officers. Research produced and reported by The Guardian suggests
there were over 20 million private security workers worldwide in
2017 and that global spending on private security was anticipated
to exceed $240 billion in 2020. Just the ten largest target
countries outside the U.S. had approximately 17 million security
workers in 2017.
Although there are use cases in private security, correctional
facilities and in military policing, we are currently targeting our
products and services for law enforcement. We do not currently plan
a consumer version of the device.
Virtual Reality Training Market
According to a 2019 report published by Allied Market Research, the
virtual training and simulation market size was valued at $204.41
billion in 2019 and is projected to grow to $601.85 billion by
2027. Law enforcement and military are important segments of
this market and the rise in awareness regarding virtual training
and simulation drives market growth. Technology innovations now
allow virtual reality to bring real world situations into the
virtual space in a 360-degree immersion.
Wrap Products and Services
BolaWrap Remote Restraint
The BolaWrap 100 is our first remote restraint product. It is a
hand-held remote restraint device that discharges an eight-foot
Kevlar tether to entangle an individual at a range of 10-25 feet.
Inspired by law enforcement professionals, the device allows law
enforcement to safely and effectively control encounters on the low
end of the applied-force continuum.
-4-
The BolaWrap 100 functions by wrapping an individual’s arms
and/or legs, impeding a subject from fleeing a scene, rapidly
approaching an officer, or inducing harm to themselves or others.
This device enables officers to safely and humanely take subjects
into custody without injury in order to get them the help they
need.
The small, light, but rugged BolaWrap 100 is designed to provide
remote restraint while other use of force continuum options remain
open. The design of the device ensures a wide device-effectiveness
zone; it will impede a subject’s movement when deployed at
the arms or legs. A guiding laser ensures accurate placement of the
Kevlar tether, mitigating the risk of injury to subject and officer
by quickly ending an encounter. Quick ejection and rapid
replacement of Bola cartridges allows one device to be reused in a
single encounter or in multiple encounters.
There are limited effective options for remote engagement, so when
verbal commands are ignored, law enforcement is faced with either
going “hands on” or escalating to potentially injurious
less-lethal forces or a firearm. The BolaWrap 100 has shown to be
effective in restraining individuals, hindering the flight ability
and reducing the ability to fight, allowing effective officer
action. We believe our tool is essential to meet modern policing
requirements in working with subjects who are incapable of
responding to verbal commands. With increased public attention paid
to mental illness and implicit bias, there has also been increased
agency demand for an effective non-lethal tool that does not rely
on pain compliance. We believe our device minimizes the need to
employ other uses of force, including hand-to-hand combat and other
less-lethal weapons.
The BolaWrap 100 does not rely on pain to gain compliance or
electricity-enabled neuromuscular incapacitation for effectiveness.
The wrapping effect is intended to impede flight while not inducing
uncontrolled falls or injury. There is no issue of recovery time,
as is the case with CEW, impact munitions or chemical devices.
Other less-lethal weapons relying on “pain compliance”
have been shown to have a largely adverse effect, often causing an
incident to escalate into one causing injury to both subjects and
officers.
We spend significant resources training law enforcement on the safe
and effective use of the BolaWrap 100 in conjunction with
de-escalation and apprehension techniques. However, like any
restraining action, injuries may result from the use of BolaWrap or
as a consequence of its use. Our training includes primary use
cases that fall into the three broad categories routinely
encountered by law enforcement and security personnel:
●
To
remotely restrain and limit the mobility of an individual who is
experiencing a mental health crisis, narcotics-induced psychosis,
or other condition rendering them incapable of responding to law
enforcement’s verbal commands but that presents a danger to
law enforcement, the public or themselves if not
restrained;
●
To
remotely restrain and limit the mobility of an individual
attempting to evade arrest or questioning, as well as individuals
ignoring verbal commands from law enforcement. These individuals
are commonly referred to as passively resistant or non-compliant;
and
●
To
assist in subduing individuals actively resisting arrest by
limiting mobility, possibly making other engagement options less
risky to officers and less injurious to individuals.
-5-
Law enforcement encounters with the mentally ill or those suffering
a mental health crisis present a difficult challenge, often
generating public controversy and costly consequences. According to
the Treatment Advocacy Center: Office of Research & Public
Affairs in a 2015 report on The Role of Mental Illness in Fatal Law
Enforcement Encounters, one in ten police encounters involve the
mentally ill and a minimum of one in four fatal police encounters
involve the mentally ill.
Early reports from a number of field deployments by law enforcement
agencies during 2019 and 2020, on stationary as well as moving
targets, have been encouraging and we expect additional use data in
2021. A field deployment is generally considered
‘successful’ by law enforcement agencies if compliance
is achieved, and no additional force is required after the BolaWrap
is exposed or used. Agencies have reported achieving compliance by
utilizing the BolaWrap in the following ways:
●
By
pointing the BolaWrap’s green line laser at the suspect in
conjunction with verbal commands
●
Via
the loud sound emitted by the BolaWrap upon deployment
●
Through
the impact and/or restraint of the Kevlar cord around the
suspect
●
When
used in conjunction with other less-lethal tools
We request that all agencies fill out a Use of Device Report when
the BolaWrap is used during an encounter in the field. However, not
all field deployments are reported to us by law enforcement
agencies, as many consider the deployment of the BolaWrap to be low
level that does not constitute a reportable use of force. Some
deployments to date have been captured on bodycam and shared with
the public. Others were reported by the agency or the media but
were not captured on bodycam. As more agencies adopt the BolaWrap
onto their duty belts, we believe we will continue to see an
increase in the rate of field deployments, which we anticipate will
contribute to further adoption of the device by law enforcement
worldwide.
We are unable to predict the market acceptance of BolaWrap products
or the level of future sales. We believe we can grow orders and
shipments during 2021. We plan to extend the product line with
additional models and features in the future. However, there can be
no assurance of the timing or quantity of orders or sales in future
periods. See “Risk Factors” included below in this
Annual Report for additional information regarding risks and
uncertainties associated with our business.
Wrap Reality
During 2019, we partnered with an independent technology company to
scope and configure a virtual reality system and developed training
scenarios using BolaWrap. We used the system and scenarios during
two large trade shows in October and November 2019. In December
2019 we installed a system in our Tempe training facility being
used for demonstrations and training. During 2020, we outlined
situations and contracted for additional virtual reality scenarios
that we received in January 2021.
In December 2020 we acquired
NSENA Inc. (“
NSENA
”), a developer and provider
of a law enforcement training system employing immersive computer
graphics virtual reality with proprietary software-enabled content.
The NSENA system leverages
high-quality enterprise head-mounted devices (HMDs) and a high-GPU
gaming personal computer to power proprietary software.
We
have rebranded the system, software and business as Wrap Reality
and believe our content library is one of the largest targeting law
enforcement currently consisting of 47 training scenarios. Wrap
Reality’s scenarios were developed by and for police officers
and cover a wide array of skills and scenarios including
de-escalation, conflict resolution and all levels of
use-of-force.
Wrap
Reality takes advantage of the most advanced virtual reality
hardware available. The
Wrap Reality
system allows up to two participants to enter the simulated
training environment simultaneously, and customized weapons
controllers enable trainees to engage in strategic decision making
along the force continuum.
-6-
While we are marketing and selling the current Wrap Reality system,
we plan to integrate previous scenarios into a robust platform
integrated with BolaWrap and additional de-escalation techniques
into new Wrap Reality scenarios. We also seek to enhance the Wrap
Reality experience through software and platform
innovation.
Wrap Armor
We have
designed, tested and obtained independent certification for our
Wrap Armor labeled 20” x 30” rifle rated police shield
and a pistol rated patrol shield. In April 2020 we delivered our
first order of Wrap Armor shields. We believe our strong and light
National Institute of Justice 0108.01 Type III (High Powered Rifle)
compliant tactical shield offers police agencies an affordable
defense against increasingly sophisticated threats. We are
currently evaluating and testing additional models and sizes,
securing sources of supply and determining the sales and marketing
resources to be allocated to market this product line. We
have not yet developed our plans for
this or similar shield products.
Selling, Marketing and Training
Our sales, marketing and training organizations work together
closely to drive revenue growth by enhancing market awareness of
our solutions, generating leads, building a strong sales pipeline
and cultivating customer and distributor
relationships.
Sales
Law enforcement agencies represent our primary target market. In
this market, we expect that the decision to purchase BolaWrap
product and accessories will normally be made by a group of people
including the agency head, his/her training staff, and use of force
and weapons experts. The decision sometimes involves political
decision-makers, such as city council members and various
committees. Although we expect the decision-making process for a
remote restraint device will be less complicated than that for
other less-lethal products such as CEWs, the process may take as
little as a few weeks or as long as a year or more partially due to
budgeting reasons and other distractions of agencies. For instance,
during the summer of 2020, the U.S. had a significant number of
protests in many major cities, which took agency time away from
proactive planning actions.
We employ demonstrations as a primary sales step with
demonstrations scheduled from the over 9,000 law enforcement leads
created by our marketing activities since 2018. Demonstrations are
generally followed by delivery of product for test and evaluation
and training with selected agencies. Some of these deliveries are
paid sales and some are issued as an incentive, with the goal and
expectation of larger future sales of devices and cartridges. In
2019 and 2020, we demonstrated to more than 250 agencies and 690
agencies, respectively. We and our distributors seek, when
possible, to convert demonstration and training deliveries to sales
or after a trial period to have the devices returned for use as
further demonstration or training devices. We consider training as
an integral element of our sales and marketing approach and believe
that departments that have trained instructors knowledgeable about
our product will be more likely to purchase devices. We provide our
product training as a service to agencies; however, training may be
fee-based in the future.
Initial sales in 2018 and early 2019 were made by our executive and
sales employees. In June 2019, we implemented a channel
distribution strategy in which we sell our products to existing
independent regional police equipment distributors who then sell to
local law enforcement agencies.
We are focusing our internal
sales, sales support and business development resources on building
relationships with large agencies and actively supporting
distributors. Our sales force is currently comprised of 20
professionals. This team includes sales and business development
personnel primarily in the field working directly with agencies,
distributors and their customers and providing sales support
including supporting demonstration and training contractors.
In addition to full-time sales, sales
support and business development personnel from time to time we
utilize part-time consultants with law enforcement or government
agency expertise to support our sales and marketing
activities.
We currently have distribution agreements with 14 domestic
distributors representing all 50 states and Puerto Rico. These
nonexclusive and cancelable agreements provide certain territorial
rights to distributors but allow us to sell direct to certain
agencies.
We have distribution agreements with 35 international distributors.
These agreements are generally exclusive, require minimum
performance and allow us to sell direct to customers subject to
certain compensation. We focus significant sales and business
development efforts to support our international
distributors.
-7-
While one of our sales managers is focused on sales of Wrap Reality
virtual reality systems, we are training our demonstration,
training and other staff and our distributors on the virtual
reality training product to build awareness and grow sales. We are
also seeking to partner with other organizations to enhance our
virtual reality sales, marketing and technology. We are currently
collaborating with
the National Tactical Officers
Association (NTOA) to assist in creating virtual reality training
scenarios responsive to the needs of their 40,000 members from
specialties that include patrol,
Tactical Emergency Medical
Support
(TEMS), crisis negotiations, canine,
corrections, sniper, protective operations, explosives, command,
tactical dispatchers, behavioral sciences and others.
Marketing
Prospective customers learn about Wrap solutions through a variety
of ways, including targeted social media, paid advertising, media,
press releases, web site searches, sales calls and public
relations. When a lead is generated through our marketing
activities and qualified, we connect them with a sales
representative and/or a distributor to discuss their needs and the
solutions in which they are interested. We track our marketing and
sales activities to provide immediate preview into activities,
leads, quotes and pipeline opportunities. We believe we are
developing a strong pipeline of opportunities for Wrap
solutions.
Our
marketing staff also engages with local, state and federal agencies
and personnel both directly and through professional firms that
advocate less-lethal engagements and increased education and
training.
We
actively promote our brands and believe the Wrap and BolaWrap
tradenames are becoming increasingly known world-wide as the
pioneer and leader in remote restraint.
We participate in a variety of domestic and
international trade shows and conferences, both directly and with
our distributors. We expect our marketing efforts will also
continue to benefit from significant free media
coverage.
We
intend to increase the use of our trademarks throughout our product
distribution chain and believe growing brand awareness will assist
in expanding our business. We believe our reputation as a pioneer
in the new category of remote restraint, strong training and
product support provide us competitive advantages.
Demonstration, Training and Support
The Company maintains a demonstration and training department as a
part of its sales and marketing activities and does not charge for
product demonstrations or training. Training is not a condition or
requirement of sale as most sales are made through distributors to
their end customers. The Company conducts local and regional
in-person, webinar and on-line demonstrations and use of force and
de-escalation training to support law enforcement agencies with no
purchase requirement. Such training may occur before or after
initial or subsequent purchase or field deployment of the
Company’s products. The Company believes that law enforcement
trainers and officers that have seen demonstrations or have been
trained about its products are more supportive of their departments
purchase and deployment of product.
Most law enforcement and corrections agencies will not purchase new
use of force devices until a training program is in place to
certify officers in their proper use. Generally, they also must
adapt any new tools to their use of force policies and clear use
with any relevant committees or review boards. We have developed
and offer robust training and class materials that certify law
enforcement officers and trainers as BolaWrap Instructors in the
use and limitations of the BolaWrap 100.
Recognizing the need to provide robust training and sales support
we launched the Wrap “Train the Trainer” program in
October 2018. The program is designed such that our Master BolaWrap
Instructors train local BolaWrap Instructors at local agencies who
then train line officers in accordance with an agency’s
policies.
BolaWrap Master Instructors are considered independent contractors
and are required to have law enforcement training experience and be
effective communicators. In order to be certified as a Master
Instructor, candidates must complete a two-day Master Instructor
school at our Tempe training facility, observe a Train the Trainer
course and then be observed teaching a Train the Trainer Course. We
have 52 Master Instructors, residing in 24 states that have
completed the two-day course and more than 40 have been certified
as Master Instructors allowing them to conduct Instructor
Certification Training. In addition, we have seven Master
Instructors who have been designated Senior Master Instructors
qualified to teach and certify other Master
Instructors.
-8-
BolaWrap Instructors are generally sworn law enforcement officers,
typically department trainers, defensive tactic instructors or SWAT
officers. To be certified as a BolaWrap Instructor, individuals
must attend a five-hour BolaWrap Instructor certification course,
pass a written exam and show proficiency in deploying and using the
BolaWrap. We also assist Instructors on lessons learned and best
practices for teaching line officers in the use of BolaWrap. The
nature and extent of line officer training is at each
agency’s discretion. Instructor certification is effective
for two years after which it requires renewal.
We employ a cloud-based software system, the Wrap Learning
Management System, to schedule and organize training events,
registration and training records. This software also hosts
training resources and materials including a 30-minute BolaWrap
Familiarization Course that distributors, purchasers and other
interested parties are highly encouraged to utilize to educate
themselves on BolaWrap use.
We have assembled a team of five experienced and well-known
trainers
from different regions
across the U.S. that form the Wrap Training Academy Advisory Board.
The Wrap Training Academy Advisory Board provides guidance to
maintain a high-quality training program for Wrap
products.
Since launching our ‘Train the Trainer’ program in
October 2018,
we now have at least one individual at over
520
U.S. police departments that has
received formal training and over
1,550
officers
are currently certified BolaWrap 100 instructors qualified and
certified to train line officers. We encourage training prior to
use of the BolaWrap 100 by individual departments but the nature
and extent of training, if any, is at the discretion of each the
individual agency.
We also demonstrate and provide training on our Wrap Reality
platform and modules.
We believe our professional training and sales support team and
systems provide both a competitive advantage and a barrier to new
competition. The nature of modern policing requires that equipment
and services be supported and that line officers have access to
training and procedures to properly perform their duties and
minimize the policing risks. We believe we have positioned our
training and support teams to respond to agencies of all
sizes.
Our Strategy
Our
product and training solutions continue to gain worldwide awareness
and recognition through media exposure, product demonstrations, and
word of mouth as a result of positive responses and increased
acceptance of our solutions. We believe we have a strong global
brand, technology and product foundation, which we continue to
expand to serve new markets and customers for greater business
growth. We believe we have strong market opportunities for our
product solutions throughout the world in the law enforcement,
defense, public safety and security sectors as a result of
increasing threats by non-compliant individuals and the demand for
less-lethal policing. We believe our training and virtual reality
platform are positioned in rapid growth markets
worldwide.
Our commercialization strategy focuses on the
immediate
addressable domestic market of approximately 900,000 full-time
sworn officers
in over 15,300 federal,
state and local
law enforcement agencies and the
o
ver 12.1 million police officers in
the 100 largest police forces
internationally.
Our goal is to realize the potential of our entire
suite of technology solutions targeting law enforcement and
security personnel worldwide.
In 2021
we intend to continue operating with
financial discipline in order to create value for our
stockholders.
We intend to continue the pursuit of domestic
and international business opportunities with our network of
well-established distributors and grow our revenues. We plan to
develop improved and new products to our portfolio including
products for use by security and
related personnel.
We also seek business initiatives and
opportunities including acquisitions and collaborations that may be
complementary to existing product and service offerings through our
sales network.
Manufacturing and Suppliers
Manufacturing
We
believe maintaining scalable manufacturing capabilities is
essential to the performance of our products and the growth of our
business. Our manufacturing and assembly involve unique processes
and materials. We contract with third-party suppliers to produce
various parts, components and subassemblies. We established initial
startup production in our Las Vegas facility in 2018. In October
2019, we completed a move and started production at our new
facility in Tempe, Arizona. This facility now includes our
corporate administration, sales, training, engineering,
manufacturing and warehousing. In our Tempe facility, we complete
the final assembly, test and ship our products. We have refined our
internal processes to improve how we design, test, and qualify
products. We continue to implement rigorous manufacturing and
quality processes to track production and field issues. We
implement design and component changes periodically to reduce our
product costs and improve product reliability and
manufacturability.
-9-
Suppliers
We
minimize inventories and maximize the efficiency of our supply
chain by having a number of components and sub-assemblies produced
by outside suppliers. We rely on one supplier for laser assembly
with some parts sole sourced from other suppliers. We also rely on
one supplier for certain virtual reality hardware. We are making
efforts to source alternative suppliers to reduce such reliance.
Our ability to assemble and manufacture our products could be
adversely affected if we were to lose a sole source supplier and
were unable to find an alternative supplier. We believe we have
developed strong relationships with our key suppliers. If these
suppliers should experience quality problems or part shortages, our
production schedules could be significantly delayed, or our costs
significantly increased.
Backlog
At
December 31, 2020, we had backlog of approximately $120,000
expected to be delivered in the first quarter of 2021. The amount
of backlog at any point in time is dependent upon order timing,
scheduled delivery dates to our customers and product lead times.
Most domestic orders are shipped shortly after order and backlog is
typically associated with larger international orders. Distributor
and customer orders for future deliveries are generally subject to
modification, rescheduling or in some instances, cancellation in
the normal course of business.
Warranties
We warrant our products to be free from defects in materials and
workmanship for a period up to one year from the date of purchase.
The warranty will be generally a limited warranty, and in some
instances impose certain shipping costs on the customer. We expect
in most cases it will be more economical and effective to replace
the defective device rather than repair.
Competition
We target the BolaWrap product as a new solution for law
enforcement and not as a replacement for other devices currently in
use. However, we do compete with other use of force products for
budget dollar allocations. Law enforcement agencies may also
determine that we are an alternative to other solutions in spite of
such positioning.
Other use of force devices, including CEWs, pepper spray, batons,
and impact weapons may compete with the BolaWrap product
indirectly. Many law enforcement and corrections personnel consider
such less-lethal weapons to be distinct tools, each best-suited to
a particular set of circumstances. Consistent with this tool kit
approach, purchasing any given tool does not preclude the purchase
of one or several more. In other cases, budgetary considerations
and limited space on officers’ belts dictate that only a
limited number of devices will be purchased and carried. We believe
the BolaWrap’s unique remote restraint use, effectiveness,
and low possibility of injury will enable it to compete effectively
against other alternatives.
There are a number of competitors offering virtual reality
simulators for law enforcement to compete with Wrap Reality. We
also compete against established video-based simulators. There are
other virtual reality providers and developers focused on other
applications that may in the future elect to develop and compete in
the law enforcement training space.
Our Wrap Armor ballistic shield products, in addition to competing
for law enforcement budget dollars, also competes with many other
shield manufacturers.
Many of our present and potential future competitors have, or may
have, substantially greater resources to devote to compete in the
law enforcement market and to further technological and new product
developments. Also, these competitors or others may introduce
products with features and performance competitive to our
product.
-10-
Government Regulation
The BolaWrap 100 is classified as a “firearm” by the
U.S. Bureau of Alcohol, Tobacco, Firearms and Explosives
(“
ATF
”), and is subject to federal
firearms-related regulations. We hold two Federal Firearms
Manufacturing Licenses that expire in 2022 through 2023. ATF
regulations are enforced by surveillance and inspection. If ATF
finds a violation, it can institute a wide range of enforcement
actions, ranging from public warnings to more severe sanctions such
as fines, penalties, suspension or withdrawal of regulatory
approvals, product recalls, seizure of products, operating
restrictions or total shutdown of production, and criminal
prosecution.
Many states also have regulations restricting the sale and use of
certain firearms and may determine their own classification and
restrictions irrespective of ATF regulation. In most cases, the law
enforcement and corrections market are subject to different ATF and
state regulations or exemptions than the private citizen market,
and we do not expect additional state restrictions or approvals for
sales to law enforcement. Where different regulations exist, we
expect that the regulations affecting the private citizen market
may also apply to the private security markets, except as the
applicable regulations otherwise specifically provide.
We are
subject to a variety of government laws and regulations that apply
to companies engaged in international operations, including, among
others, the Foreign Corrupt Practices Act, U.S. Department of
Commerce export controls, local government regulations and
procurement policies and practices (including regulations relating
to import-export control, investments, exchange controls and
repatriation of earnings).
The
BolaWrap 100 is also considered a crime control product by the U.S.
government. Accordingly, the export of our devices is regulated
under export administration regulations. As a result, we must
obtain export licenses from the Department of Commerce for all
shipments outside the U.S. We do not expect the need to obtain
these licenses will cause a material delay in our foreign
shipments. Export regulations also prohibit the further shipment of
our products from foreign markets in which we hold a valid export
license to markets in which we do not hold an export license for
our products. International destination regulations, which may
affect our device, and sale thereof, are numerous and often
unclear. We work with our international distributors, agents and
advisors who are familiar with the applicable import regulations in
each of our targeted international markets.
Our
products are produced to comply with standard product safety
requirements for sale in the U.S. and similar requirements for sale
in international markets.
We are
developing additional models of restraint devices that may be
subject to different or additional international, federal and state
regulations.
We expect to meet the electrical and other
regulatory requirements for any future electronic systems or
components we develop for sale throughout the world.
Intellectual Property Rights and Proprietary
Information
We intend to vigorously protect our intellectual property assets
including issued patents, pending patents, trademarks, copyrights,
trade craft, contractual obligations and trade secrets such as
know-how. Our policy is to enter into confidentiality and
nondisclosure agreements with key employees and consultants or
third party to whom any of our proprietary information is
disclosed. These agreements prohibit the disclosure of confidential
information to others, both during and subsequent to employment or
the duration of the working relationship. These agreements may not
prevent disclosure of confidential information or provide adequate
remedies for any breach. We rely on copyrights, trade secrets and
other proprietary rights to protect the content of our training
services including the Wrap Reality virtual reality training
software and content.
In
addition to such factors as innovation, technological expertise,
and experienced personnel, we believe strong product offerings that
are continually upgraded and enhanced will keep us competitive, and
we seek patent and other intellectual property protection on
important technological improvements that we make.
Prior to the filing and granting of patents, our
policy is to disclose key features to patent counsel and maintain
these features as trade secrets prior to product introduction.
Patent applications may not result in issued patents covering all
important claims and could be denied in their
entirety.
We currently have ten issued U.S. patents related to the BolaWrap
technology and nine additional U.S. patents pending. In September
2018, we commenced filing our first foreign patent applications
targeting the European Union (38 countries) and 17 other countries,
of which two have issued to date. We have reserved rights to file
additional foreign patents. The failure to obtain patent protection
or the loss of patent protection on our existing and future
technologies or the circumvention of our patents by competitors
could have a material adverse effect on our ability to compete
successfully.
We have been granted trade name protection for
“BolaWrap” and “Wrap” in multiple countries
and expect to employ a combination of registered and common law
trade names, trademarks and service marks in our business. We rely
on a variety of intellectual property protections for our products
and technologies, including contractual obligations, and we intend
to pursue a policy of vigorously enforcing such
rights.
-11-
The law enforcement product and services industry is characterized
by frequent litigation regarding patent and other intellectual
property rights. Others, including academic institutions and
competitors, hold numerous patents in less-lethal and related
technologies. Although we are not aware of any existing patents
that would materially inhibit our ability to commercialize our
technology, others may assert claims in the future. Such claims,
with or without merit, may have a material adverse effect on our
financial condition, results of operations or cash
flows.
Research and Development
Our research and development initiatives are led by our internal
personnel and make use of specialized consultants when necessary.
These initiatives include basic research, mechanical engineering
design and testing. Future development projects will focus on new
versions of the BolaWrap technology and new public safety
technologies.
For the
fiscal years ended December 31, 2020 and 2019, we spent
approximately $
2.8
million and
$2.2 million, respectively, on company-sponsored research and
development. Future levels of research and development expenditures
will vary depending on the timing of further new product
development and the availability of funds to carry on additional
research and development on currently owned technologies or in
other areas. During 2021 in addition to continued development and
enhancement of our remote restraint products we expect to incur
additional costs improving our training systems including enhancing
our Wrap Reality simulator and related content.
Related Party License and Royalties
We are obligated to pay royalties pursuant to an exclusive Amended
and Restated Intellectual Property License Agreement, dated as of
September 30, 2016, with Syzygy Licensing, LLC
(“
Syzygy
”), a private technology invention,
consulting and licensing company owned and controlled by Elwood G.
Norris and James A. Barnes, both officers and stockholders of the
Company. Syzygy has no ongoing operations, and does not engage in
any manufacturing, production or other related
activities.
The agreement provides for the payment of royalties of 4% of
revenue from products employing the licensed device technology up
to the earlier to occur of (i) the payment by the Company of an
aggregate of $1.0 million in royalties, or (ii) September 30, 2026.
All development and patent costs have been paid by us and patent
applications and the technology related to the BolaWrap 100 have
been assigned to the Company, subject to the royalty
obligation.
As a part of our acquisition of NSENA in December 2020, we agreed
to pay additional earn-out consideration equal to 10% of net
revenues (or a lesser amount equal to 50% of direct profit) from
specific identified prospects that become revenue customers before
September 30, 2021, but only on amounts collected between
consummation of the acquisition and June 30, 2022.
Seasonality
We do not expect to experience any significant seasonality trends.
However, seasonality trends may occur in the future.
Financial Information about Customer Concentration and Geographic
Areas
Financial
information regarding customer concentration and geographic areas
in which we operate is contained in Note 16, Major Customers and
Related Information to our consolidated financial
statements.
Human Capital
Executive Officers
The
current executive officers of Wrap Technologies, Inc. and their
ages and business experience are set forth below.
-12-
Thomas P. Smith,
age
53,
joined the Company
in March 2019 as President. In October 2020 he was also appointed
as Interim Chief Executive Officer. Mr. Smith
co-founded TASER International (now Axon
Enterprise, Inc.) (“
TASER
”) in 1993. He served as President of TASER
until October 2006, and as Chairman of the Board of Directors of
TASER from October 2006 until he retired to pursue entrepreneurial
activities in February 2012. Amongst his most significant roles and
responsibilities at TASER, Mr. Smith managed domestic and
international export sales, significantly expanding the sale and
distribution of TASER’s products, including sales to more
than 17,200 federal, state and local law enforcement agencies in
over 100 countries. In 2012 he co-founded Achilles Technology
Solutions, LLC (“
Achilles
”), and through its wholly-owned subsidiary
ATS Armor, LLC (“
ATS Armor
”), which he co-founded in 2015, developed
products for law enforcement and military. Mr. Smith served as the
Managing Member of Achilles from 2012 to January 2020. In addition,
Mr. Smith served as the Managing Member of ATS Armor and ATS MER
(“
ATS
MER
”), a research and
development company acquired by Achilles in 2015 that was primarily
funded by government SBIR contracts, until March 2019 and February
2019, respectively. ATS Armor filed a petition for Chapter 7
Bankruptcy in March 2019, and ATS MER filed a petition for Chapter
7 Bankruptcy in February 2019. Mr. Smith holds a B.S. degree
in Ecology and Evolutionary Biology from the University of Arizona
and a M.B.A. degree from Northern Arizona
University.
Scot
Cohen
age 52,
cofounded the
Company with Messrs. James Barnes and Elwood Norris in March 2016,
and currently serves as its Executive Chair since July 2017. Prior
to that, he served as a Manager until the Company’s
incorporation in March 2017 at which time he was appointed to serve
as the Company’s Corporate Secretary until January 2018. Mr.
Cohen has over 20 years of experience in institutional asset
management, wealth management, and capital markets. He
currently manages several operating partnerships that actively
invest in the energy sector in addition to maintaining an active
investment portfolio in various public companies, early-stage
private companies, hedge funds and alternative assets including
real estate. Some of these include serving as Principal of the
Iroquois Capital Opportunity Fund, a closed end private equity fund
he founded in 2010 which focuses on investments in North American
oil and gas assets; as the Manager of V3 Capital, LLC, an investor
in public and private companies that he also founded in 2015; and
was the co-founder of Iroquois Capital Investment Group, LLC. Mr.
Cohen currently sits on the board of directors of Charlie’s
Holding, Inc., and serves as Executive Chair of the Board of Petro
River Oil Corp. since 2012. Mr. Cohen earned his Bachelor of
Science degree from Ohio University.
James A.
Barnes
age 66,
cofounded the
Company with Messrs. Elwood Norris and Cohen in March 2016, and
currently serves as Chief Financial Officer, Secretary and
Treasurer. He served as Manager until the Company’s
incorporation in March 2017 when he was appointed President and
Chief Financial Officer. He served as a member of the
Company’s Board of Directors from March 2017 to November
2018. In January 2018 he was appointed to the additional positions
of Secretary and Treasurer and resigned as President. He has served
as the President of Sunrise Capital, Inc., a private venture
capital and financial and regulatory consulting firm, since 1984.
He was Chief Financial Officer of Parametric Sound Corporation (now
Turtle Beach Corporation) from 2010 to February 2015, and from
February 2015 to February 2017 served as Vice President
Administration at Turtle Beach Corporation. Since 1999, he has been
Manager of Syzygy Licensing LLC, a private technology invention and
licensing company he owns with Mr. Elwood Norris. He previously
practiced as a certified public accountant and management
consultant with Ernst & Ernst, Touche Ross & Co., and as a
principal in J. McDonald & Co. Ltd., Phoenix, Arizona. He
graduated from the University of Nebraska with a Bachelor of Arts
Degree in Business Administration in 1976 and is a certified public
accountant (status: inactive).
Elwood G.
Norris
age 82,
cofounded the
Company with Mr. Barnes and Mr. Cohen in March 2016 and currently
serves as the Company’s Chief Technology Officer. He served
as a director on the Company’s Board of Directors from March
2017 to January 2018. He was previously a director and President of
Parametric Sound Corporation (now Turtle Beach Corporation) from
2010 to February 2015, and from February 2015 to September 2016 he
served as Chief Scientist, a non-executive position, at Turtle
Beach. He was a director of LRAD Corporation (now Genasys Inc.)
from August 1980 to June 2010. He served as Chairman of LRAD
Corporation’s Board of Directors, an executive position, in
which he served in a technical advisory role and acted as a product
spokesman from September 2000 to April 2009. He is an inventor, and
has authored more than 80 U.S. patents, primarily in the fields of
electrical and acoustical engineering, and has been a frequent
speaker on innovation to corporations and government organizations.
He is the inventor of our BolaWrap technology. Mr. Elwood Norris is
a majority owner of Syzygy but has no employment or management
relationship with Syzygy.
Executive
officers serve at the discretion of the board of
directors.
-13-
Employees
We employ 52 full-time employees with 50 in the United States and
two located in the United Kingdom. In addition to our four
executive officers, we had 24 persons engaged in sales, marketing,
sales support and training, 12 in production, eight in research and
development and four in administration. In addition, we
engage
consultants from time to time
to provide additional sales, marketing, training
and research and development services, and anticipate engaging
consultants going forward to supplement our full- and part-time
personnel.
We are
dedicated to preserving operational excellence and remaining an
employer of choice. We provide and maintain a work environment that
is designed to attract, develop and retain top talent through
offering our employees an engaging work experience that contributes
to their career development. We recognize that our success is based
on the collective talents and dedication of those we employ, and we
are highly invested in their success.
Available Information
As a public company, we are required to file our annual reports on
Form 10-K, quarterly reports on Form 10-Q, current reports on Form
8-K, proxy statements on Schedule 14A and other information
(including any amendments) with the Securities and Exchange
Commission (the “
SEC
”). The SEC maintains an Internet site that
contains reports, proxy and information statements, and other
information regarding issuers that file electronically with the
SEC. You can find our SEC filings at the SEC’s website
at
www.sec.gov
.
Our Internet address is
www.wrap.com
.
Information contained on our website is not part of this Annual
Report. Our SEC filings (including any amendments) are also made
available free of charge on
www.wrap.com
,
as soon as reasonably practicable after we electronically file such
material with, or furnish it to, the SEC.
-14-
An investment in our Company involves a high degree of risk. In
addition to the other information included in this Annual Report,
you should carefully consider the following risk factors in
evaluating an investment in our Company. You should consider these
matters in conjunction with the other information included or
incorporated by reference in this Annual Report.
If any of the following risks actually
occurs, our business, reputation, financial condition, results of
operations, revenue, and future prospects could be negatively
impacted. In that event, the market price of our Common Stock could
decline, and you could lose part or all of your
investment.
Risk Factors Relating to Our Business and Industry
We have a history of operating losses, expect additional losses and
may not achieve or sustain profitability.
We have a history of operating losses and expect to incur
additional losses until we achieve sufficient revenue and resulting
margins to offset our operating costs. Our net loss for the
years ended December 31, 2020 and 2019 was $12,580,209 and
$8,325,488, respectively. Our ability to achieve future
profitability is dependent on a variety of factors, many of which
are outside of our control. Failure to achieve profitability or
sustain profitability, if achieved, may require us to raise
additional financing, which could have a material negative impact
on the market value of our Common Stock.
Global economic conditions or business interruptions related to the
COVID-19 pandemic or other events may negatively impact our
financial conditions and results of operations.
We are
monitoring the impact of the COVID-19 pandemic, which has caused
significant uncertainty and disruption to global financial markets
and supply chains, beginning in early calendar year 2020. The
significance of the operational and financial impact of the
COVID-19 pandemic will depend on how long and widespread the
uncertainty and disruption continue. The extent to which the
COVID-19 pandemic impacts our financial conditions and results of
operations will depend on future developments, which are highly
uncertain and cannot be predicted, including new information which
may emerge concerning the severity of the outbreak and the actions
being taken to contain and treat it. Uncertainty surrounds the
duration and broader impact of the COVID-19 pandemic and therefore,
the effects it will have on our financial results and operations.
If economic or market conditions in key global markets deteriorate,
we may experience material adverse effects on our business,
financial condition and results from operations.
Factors
deriving from the domestic and international response to the
COVID-19 pandemic that may negatively impact sales and gross margin
in the future include but are not limited to: limitations on the
ability of our suppliers to meet delivery requirements and
commitments; limitations on the ability of employees to perform
their work due to illness caused by the pandemic or local, state or
federal orders requiring employees to remain at home; limitations
on the ability of carriers to deliver products to customers;
limitations on the ability of our customers to conduct their
business and purchase our products and services; and limitations on
the ability of our customers to pay us on a timely
basis.
Substantially all of our employees are located in the U.S. In
addition to our employees, we rely on (i) distributors, agents and
third-party logistics providers in connection with product sales
and distribution and (ii) raw material and component suppliers in
the U.S., Canada, Europe and China. If we, or any of these
third-party partners encounter any disruptions to our or their
respective operations or facilities, or if we or any of these
third-party partners were to shut down for any reason, including by
pandemic, fire, natural disaster, such as a hurricane, tornado or
severe storm, power outage, systems failure, labor dispute, or
other unforeseen disruption, then we or they may be prevented or
delayed from effectively operating our or their business,
respectively.
We may need additional capital to execute our business plan, and
raising additional capital, if possible, by issuing additional
equity securities may cause dilution to existing stockholders. In
addition, raising additional capital by issuing additional debt
instruments may restrict our operations.
Although we believe we have adequate financial resources to fund
our operations and capital needs for at least the next twelve
months, and that we may be able to generate funds from product
sales during that time, existing working capital may not be
sufficient to achieve profitable operations due to product
introduction costs, operating losses and other factors. Principal
factors affecting the availability of internally generated funds
include:
●
failure
of product sales and services to meet planned
projections;
●
government spending
levels impacting sales of our products;
●
working
capital requirements to support business growth;
●
our
ability to integrate acquisitions;
●
our
ability to control spending;
●
our
ability to collect accounts receivable; and
●
acceptance
of our products and services in planned markets.
-15-
In the event we are required to raise additional capital through
the issuance of equity or convertible debt securities, the
percentage ownership of our stockholders could be diluted
significantly, and such newly issued securities may have rights,
preferences or privileges senior to those of our existing
stockholders. In addition, the issuance of any equity securities
could be at a discount to the market price.
If we incur debt financing, the payment of principal and interest
on such indebtedness may limit funds available for our business
activities, and we could be subject to covenants that restrict our
ability to operate our business and make distributions to our
stockholders. These restrictive covenants may include
limitations on additional borrowing and specific restrictions on
the use of our assets, as well as prohibitions on our ability to
create liens, pay dividends, redeem stock or make investments.
There is no assurance that any equity or debt financing transaction
will be available on acceptable terms, if at all.
We expect to be dependent on sales of our BolaWrap product for the
foreseeable future, and if this product is not widely accepted, our
growth prospects will be diminished.
We
expect to depend on sales of the BolaWrap product and related
cartridges for the foreseeable future. A lack of demand for this
product, or its failure to achieve broader market acceptance, would
significantly harm our growth prospects, operating results and
financial condition.
To execute our
business plan successfully, we will need to execute on the
following objectives, either on our own or with strategic
collaborators:
●
Grow
our commercialization of the BolaWrap product, and develop
additional future products and accessories for
commercialization;
●
Maintain
required regulatory approvals for our products in global market
locations;
●
Expand
and, as required, enforce our intellectual property portfolio for
the BolaWrap product and other future products;
●
Maintain
sales, distribution and marketing capabilities, and/or enter into
strategic partnering arrangements to access such capabilities,
and;
●
Grow
market acceptance for the BolaWrap 100 and/or other future
products.
We are materially dependent on the acceptance of our product by the
law enforcement market. If law enforcement agencies do not purchase
our product, our revenue will be adversely affected and we may not
be able to expand into other markets, or otherwise continue as a
going concern.
A
substantial number of law enforcement agencies may not purchase our
remote restraint product. In addition, if our product is not widely
accepted by the law enforcement market, we may not be able to
expand sales of our product into other markets. Law enforcement
agencies may be influenced by claims or perceptions that our
product is not effective or may be used in an abusive manner. Sales
of our product to these agencies may be delayed or limited by such
claims or perceptions.
We may incur significant and unpredictable warranty costs as our
products are introduced and produced.
We
warrant our products to be free from defects in materials and
workmanship for a period of up to one year from the date of
purchase. We may incur substantial and unpredictable warranty costs
from post-production product or component failures. Future warranty
costs could further adversely affect our financial position,
results of operations and business prospects.
We could incur charges for excess or obsolete inventory and incur
production costs for improvements or model changes.
While
we strive to effectively manage our inventory, rapidly changing
technology, and uneven customer demand may result in short product
cycles and the value of our inventory may be adversely affected by
changes in technology that affect our ability to sell the products
in our inventory. If we do not effectively forecast and manage our
inventory, we may need to write off inventory as excess or
obsolete, which in turn can adversely affect cost of sales and
gross profit.
-16-
We have
experienced, and may in the future experience, improvement and
model changes and unusual production costs associated with
implementing production for our products. We currently have no
reserve for slow moving or obsolete inventory but may incur future
charges for obsolete or excess inventory.
Our international operations could be harmed by factors including
political instability, natural disasters, fluctuations in currency
exchange rates, and changes in regulations that govern
international transactions.
We sell our products worldwide and have exported to multiple
countries. We expect exports to continue to be a significant part
of our future business. The risks inherent in international trade
may reduce our international sales or impede growth and harm our
business and the businesses of our customers and our suppliers.
These risks include, among other things:
|
●
|
Changes in tariff regulations;
|
|
●
|
Political instability, war, terrorism and other political
risks;
|
|
●
|
Foreign currency exchange rate fluctuations;
|
|
●
|
Establishing and maintaining relationships with local distributors,
agents and dealers;
|
|
●
|
Lengthy shipping times and accounts receivable payment
cycles;
|
|
●
|
Import and export control and licensing requirements;
|
|
●
|
Compliance with a variety of U.S. laws, including the Foreign
Corrupt Practices Act, by us or key subcontractors;
|
|
●
|
Compliance with a variety of foreign laws and regulations,
including unexpected changes in taxation and regulatory
requirements;
|
|
●
|
Greater difficulty in safeguarding intellectual property abroad
than in the U.S.; and
|
|
●
|
Difficulty in staffing and managing geographically diverse
operations.
|
These and other risks may preclude or curtail international sales
or increase the relative price of our products compared to those
manufactured in other countries, reducing the demand for our
products. Failure to comply with U.S. and international
governmental laws and regulations applicable to international
business, such as the Foreign Corrupt Practices Act or U.S. export
control regulations, could have an adverse impact on our business
with the U.S. and international governments.
We anticipate that a majority of our revenue in the short-term will
be generated from international sales, which may adversely affect
our ability to timely collect accounts receivable.
During the year ended December 31, 2020, we generated approximately
64% of our revenue from international sales, 56% of which was
uncollected at the end of the fiscal year. Due principally to the
longer sales cycle and regulatory issues associated with domestic
sales versus international sales, we currently anticipate that a
substantial portion of our sales in the year ended December 31,
2021 will be generated from international
orders.
In the event we are unable to timely
collect account receivables associated with international sales, or
collection of such international sales are delayed, our financial
condition could be adversely and materially
affected.
-17-
If we are unable to manage our projected growth, our growth
prospects may be limited, and our future profitability may be
adversely affected.
We intend to continue to expand our sales, marketing and training
programs and our manufacturing capability. Rapid expansion may
strain our managerial, financial and other resources. If we are
unable to manage our growth, our business, operating results and
financial condition could be adversely affected. Our systems,
procedures, controls and management resources also may not be
adequate to support our future operations. We will need to
continually improve our operational, financial and other internal
systems to manage our growth effectively, and any failure to do so
may lead to inefficiencies and redundancies, and result in reduced
growth prospects and profitability.
We may face personal injury and other liability claims that harm
our reputation and adversely affect our sales and financial
condition.
Our product is intended to be used in confrontations that could
result in injury to those involved, whether or not involving our
product. Our product may cause or be associated with such injuries.
A person injured in a confrontation or otherwise in connection with
the use of our product may bring legal action against us to recover
damages on the basis of theories including personal injury,
wrongful death, negligent design, dangerous product or inadequate
warning. We may also be subject to lawsuits involving allegations
of misuse of our product. If successful, personal injury, misuse
and other claims could have a material adverse effect on our
operating results and financial condition. Although we carry
product liability insurance, significant litigation could also
result in a diversion of management’s attention and
resources, negative publicity and an award of monetary damages in
excess of our insurance coverage.
Our future success is dependent on our ability to expand sales
through distributors, and our inability to grow our sales force or
maintain and add distributors would negatively affect our
sales.
Our distribution strategy is to pursue sales through multiple
channels with an emphasis on independent distributors, domestically
and internationally. Our inability to recruit and retain sales
personnel and maintain and add police equipment distributors who
can successfully sell our products could adversely affect our
sales. If we do not competitively price our products, meet the
requirements of any future distributors or end-users, provide
adequate marketing support, or comply with the terms of any
distribution arrangements, such distributors may fail to
aggressively market our product or may terminate their
relationships with us. These developments would likely have a
material adverse effect on our sales. Our reliance on the sales of
our products by distributors also makes it more difficult to
predict our revenue, cash flow and operating results.
We expect to expend significant resources to generate sales due to
our lengthy sales cycle, and such efforts may not result in sales
or revenue.
Generally,
law enforcement agencies consider a wide range of issues before
committing to purchase a product, including product benefits,
training costs, the cost to use our product in addition to, or in
place of, other use of force products, product reliability and
budget constraints. The length of our sales cycle may range from
30 days to a year or more. We may incur substantial selling
costs and expend significant effort in connection with the
evaluation of our product by potential customers before they place
an order, if they place an order at all. If these potential
customers do not purchase our product, we will have expended
significant resources without corresponding revenue.
Most of our intended end-users are subject to budgetary and
political constraints that may delay or prevent sales.
Most of
our and our distributors intended end-user customers are government
agencies. These agencies often do not set their own budgets and
therefore have little control over the amount of money they can
spend. In addition, these agencies experience political pressure
that may dictate the manner in which they spend money. As a result,
even if an agency wants to acquire our product, it may be unable to
purchase our product due to budgetary or political constraints.
Some government agency orders may also be canceled or substantially
delayed due to budgetary, political or other scheduling delays,
which frequently occur in connection with the acquisition of
products by such agencies.
Our dependence on third-party suppliers for key components of our
product could delay shipment of our products and reduce our
sales.
We
depend on certain domestic and foreign suppliers for the delivery
of components used in the assembly of our product. Our reliance on
third-party suppliers creates risks related to our potential
inability to obtain an adequate supply of components or
sub-assemblies and reduced control over pricing and timing of
delivery of components and subassemblies. Specifically, we will
depend on suppliers of sub-assemblies, machined parts, injection
molded plastic parts, and other miscellaneous custom parts for our
product. We do not have any long-term supply agreements with any
suppliers. Any interruption of supply for any material components
of our products could significantly delay the shipment of our
products and have a material adverse effect on our revenue,
profitability and financial condition.
-18-
We may not be able to successfully integrate acquisitions in the
future, and we may not be able to realize, revenue enhancements or
other synergies from such acquisitions.
On
December 14, 2020, we acquired substantially all of the virtual
reality system assets and business of
NSENA.
Our ability to successfully
implement our business plan and achieve targeted financial results
and other benefits including, among other things, greater market
presence and development, and enhancements to our product portfolio
and customer base, is dependent on our ability to successfully
identify, consummate and integrate acquisitions, including
NSENA
as well as other
businesses we may acquire in the future. We may not realize the
intended benefits of the
NSENA
acquisition or the acquisition of other businesses in the future as
rapidly as, or to the extent, anticipated by our management. There
can be no assurance that we will be able to successfully integrate
the NSENA business or any other acquired businesses, products or
technologies without substantial expenses, delays or other
operational or financial problems. Acquisitions, including our
acquisition of NSENA, involve a number of risks, some or all which
could have a material adverse effect on our acquired businesses,
products or technologies. Furthermore, there can be no assurance
that the NSENA business or any other acquired business, product, or
technology will be profitable or achieve anticipated revenues and
income. Our failure to manage our acquisition and integration
strategy successfully could have a material adverse effect on our
business, results of operations and financial condition. The
process of integrating an acquired business involves risks,
including but not limited to:
●
Demands on
management related to changes in the size and possible locations of
our businesses and employees;
●
Diversion of
management's attention from the management of daily
operations;
●
Difficulties in the
assimilation of different corporate cultures, employees and
business practices;
●
Retaining the
loyalty and business of the employees or customers of acquired
businesses;
●
Retaining employees
that may be vital to the integration of acquired businesses or to
the future prospects of the combined businesses;
●
Difficulties and
unanticipated expenses related to the integration of departments,
information technology systems, including accounting systems,
technologies, books and records, and procedures, and maintaining
uniform standards, such as internal accounting controls,
procedures, and policies;
●
Costs and expenses
associated with any undisclosed or potential liabilities,
and;
●
The use of more
cash or other financial resources on integration and implementation
activities than we expect.
Failure
to successfully integrate NSENA or any other acquired business in
the future may result in reduced levels of revenue, earnings, or
operating efficiency than might have been achieved if we had not
acquired such businesses.
In
addition, the acquisition of NSENA and any future businesses could
result in additional debt and related interest expense, contingent
liabilities, and amortization expenses related to intangible
assets, as well as the issuance of our Common Stock, which could
have a material adverse effect on our financial condition,
operating results, and cash flow.
Government regulation of our products may adversely affect
sales.
Our device is classified as a firearm regulated by the U.S. Bureau
of Alcohol, Tobacco, Firearms and Explosives (“ATF”)
involving substantial regulatory compliance. ATF regulations are
enforced by surveillance and inspection. If ATF finds a violation,
it can institute a wide range of enforcement actions, ranging from
public warnings to more severe sanctions such as fines, penalties,
suspension or withdrawal of regulatory approvals, product recalls,
seizure of products, operating restrictions or total shutdown of
production, and criminal prosecution. Any such actions could have a
material adverse impact on our operations.
Our device may face state restrictions, especially regarding sales
to security agencies. Our product sales may be significantly
affected by federal, state and local regulation. Failure to comply
with regulations could also result in the imposition of fines,
penalties and other actions that could adversely impact our
financial position, cash flows and operating results.
Our product is also controlled by the U.S. Department of Commerce
(“
DOC
”) for exports directly from the United
States. Consequently, we need to obtain export licenses from the
DOC for the export of our products from the United States.
Compliance with or changes in U.S. export regulations could
significantly and adversely affect any future international
sales.
-19-
Certain foreign jurisdictions may restrict the importation or sale
of our products, limiting our international sales
opportunities.
Our products, including the BolaWrap 100, have limited issued
patents or other intellectual property protection. If we are unable
to protect our intellectual property, we may lose a competitive
advantage or incur substantial litigation costs to protect our
rights.
Our
future success depends in part upon our proprietary technology. We
currently own ten issued U.S. patents related to the BolaWrap 100
and have nine U.S. patents pending. We have filed foreign patent
applications in the European Union (up to 38 countries) and 17
other countries, and reserved our rights to file additional foreign
patents. Our protective measures taken thus far, including our
issued patents, pending patents, issued and pending trademarks and
trade secret laws, may prove inadequate to protect our proprietary
rights. There can be no assurance we will be granted any patent
rights from pending patents. The scope of any possible patent
rights may not prevent others from developing and selling competing
products. The validity and breadth of claims covered in any
possible patents involve complex legal and factual questions, and
the resolution of such claims may be highly uncertain, lengthy, and
expensive. In addition, any patents, if granted, may be held
invalid upon challenge, or others may claim rights in or ownership
of our patents.
Our competitive position will be seriously damaged if our products
are found to infringe on the intellectual property rights of
others.
Other companies and our competitors may currently own or obtain
patents or other proprietary rights that might prevent, limit or
interfere with our ability to make, use or sell our products. Any
intellectual property infringement claims made against us, with or
without merit, could be costly and time-consuming to defend and
divert our management’s attention from our business. In the
event of a successful claim of infringement against us and our
failure or inability to license the infringed technology, our
business and operating results could be adversely affected. Any
litigation or claims, whether or not valid, could result in
substantial costs and diversion of our resources. An adverse result
from intellectual property litigation could force us to do one or
more of the following:
|
●
|
Cease selling, incorporating or using products or services that
incorporate the challenged intellectual property;
|
|
●
|
Obtain a license from the holder of the infringed intellectual
property right, which license may not be available on reasonable
terms, if at all; and
|
|
●
|
Redesign products or services that incorporate the disputed
technology.
|
If we are forced to take any of the foregoing actions, we could
face substantial costs and shipment delays and our business could
be materially harmed. Although we carry general liability
insurance, our insurance may not cover potential claims of this
type or be adequate to indemnify us for all liability that may be
imposed.
In addition, it is possible that our distributors and customers may
seek indemnity from us in the event that our products are found or
alleged to infringe the intellectual property rights of others. Any
such claim for indemnity could result in substantial expense to us
that could harm our operating results.
Competition in the law enforcement market could reduce our sales,
make our products obsolete or inferior and prevent us from
achieving profitability.
The law
enforcement market is highly competitive. We face competition from
numerous larger, better capitalized, more experienced and more
widely known companies that make restraint devices, less-lethal
weapons and other law enforcement products. One or more of our
competitors may have developed or may succeed in developing
technologies and products that are more effective than any of ours,
rendering our technology and products obsolete or noncompetitive.
Increased competition could result in reduced sales, greater
pricing pressure, lower gross margins, and prevent us from
achieving profitability.
-20-
Foreign currency fluctuations may reduce our competitiveness and
sales in international markets.
The
relative change in currency values creates fluctuations in product
pricing for future potential international customers. These changes
in international end-user costs may result in lost orders and
reduce the competitiveness of our products in certain international
markets. These changes may also negatively affect the financial
condition of some international customers and reduce or eliminate
their future orders of our products.
Our business is dependent on the continued services of our
executive team and key employees.
Our
business and operations are substantially dependent upon the
experience and continued service of our executive team including
our President and Interim Chief Executive Officer, Thomas Smith. We
do not maintain “key person” life insurance on Mr.
Smith or any of our other executive officers and have no employment
agreements or post-employment agreements to have access to
important institutional knowledge should any executive officer
resign or be dismissed. The loss of one or several key employees
could have a material adverse effect upon our business, financial
condition, results of operations and cash flows.
We are
also dependent on our ability to retain and motivate high quality
personnel, especially sales and skilled engineering personnel.
Competition for such personnel is intense, and we may not be able
to attract, assimilate or retain other highly qualified managerial,
sales and technical personnel in the future. The inability to
attract and retain the necessary managerial, sales and technical
personnel could cause our business, operating results or financial
condition to suffer.
Our current Chief Executive Officer serves in an interim capacity.
Our business may be adversely affected if we are unable to
effectively handle any transition in the position of Chief
Executive Officer or other executive positions.
Our President Thomas Smith was appointed as interim Chief Executive
Officer in October 2020. Executive leadership transitions can be
inherently difficult to manage and may cause significant and costly
disruption to our business. The loss of services of Mr. Smith or
other members of senior management, or the inability to attract
qualified permanent replacements, could have a material adverse
effect on our business, financial condition, results of operations
and cash flows.
Risk Factors Relating to Our Financial Statements and Operating
Results
We cannot predict our future operating results. Our quarterly and
annual results will likely be subject to fluctuations caused by
many factors, any of which could result in our failure to achieve
our expectations.
We currently expect that the BolaWrap product will be the primary
source of our revenue in the foreseeable future. We expect our
revenue to vary significantly due to a number of factors. Many of
these factors are beyond our control. Any one or more of these
factors, including those listed below, could cause us to fail to
achieve our revenue expectations. These factors include, among
others:
●
Our
ability to develop and supply product to customers;
●
Market
acceptance of, and changes in demand for, our
products;
●
Gains
or losses of significant customers, distributors or strategic
relationships;
●
Unpredictable
volume and timing of customer orders;
●
The
availability, pricing and timeliness of delivery of components for
our products;
●
Fluctuations
in the availability of manufacturing capacity or manufacturing
yields and related manufacturing costs;
●
Timing
of new technological advances, product announcements or
introductions by us and by our competitors;
●
Unpredictable
warranty costs associated with our products;
-21-
●
Budgetary
cycles and order delays by customers or production delays by us or
our suppliers;
●
Regulatory
changes affecting the marketability of our products;
●
Logistics
challenges of obtaining supplies and components and shipping
products resulting from the pandemic;
●
General
economic conditions that could affect the timing of customer orders
and capital spending and result in order cancellations or
rescheduling; and
●
General
political conditions in this country and in various other parts of
the world that could affect spending for the products that we
intend to offer.
Some or all of these factors could adversely affect demand for our
products and, therefore, adversely affect our future operating
results. As a result of these and other factors, we believe that
period-to-period comparisons of our operating results may not be
meaningful in the near term, and accordingly you should not rely
upon our performance in a particular period as indicative of our
performance in any future period.
Our expense may vary from period to period, which could affect
quarterly results and our stock price.
If we incur additional expense in a quarter in which we do not
experience increased revenue, our results of operations will be
adversely affected, and we may incur larger losses than anticipated
for that quarter. Factors that could cause our expense to fluctuate
from period to period include:
●
The
timing and extent of our research and development
efforts;
●
Investments
and costs of maintaining or protecting our intellectual
property;
●
Marketing
and sales efforts to promote our products and technologies;
and
●
The
timing of personnel and consultant hiring.
Most of
our operating expenses are relatively fixed in the short term. We
may be unable to rapidly adjust spending to compensate for any
unexpected sales shortfalls, which could harm our quarterly
operating results and our stock price. We do not have the ability
to predict future operating results with any
certainty.
Our disclosure controls and procedures may not prevent or detect
all acts of fraud.
Our
disclosure controls and procedures are designed to reasonably
assure that information required to be disclosed in reports filed
or submitted under the Securities Exchange Act is accumulated and
communicated to management and is recorded, processed, summarized
and reported within the time periods specified in the SEC’s
rules and forms. Our management expects that our disclosure
controls and procedures and internal controls and procedures, no
matter how well conceived and operated, can provide only
reasonable, not absolute, assurance that the objectives of the
control system are met. Because of the inherent limitations in all
control systems, they cannot provide absolute assurance that all
control issues and instances of fraud, if any, within our company
have been prevented or detected. These inherent limitations include
the realities that judgments in decision-making can be faulty, and
that breakdowns can occur because of a simple error or mistake.
Additionally, controls can be circumvented by the individual acts
of some persons, by collusion of two or more people, or by an
unauthorized override of the controls. The design of any system of
controls also is based in part upon certain assumptions about the
likelihood of future events, and we cannot assure that any design
will succeed in achieving its stated goals under all potential
future conditions. Accordingly, because of the inherent limitations
in a cost-effective control system, misstatements due to error or
fraud may occur and not be detected.
-22-
Failure to maintain an effective system of internal control over
financial reporting could harm stockholder and business confidence
in our financial reporting, our ability to obtain financing and
other aspects of our business.
Maintaining
an effective system of internal control over financial reporting is
necessary for us to provide reliable financial reports. Section 404
of the Sarbanes-Oxley Act of 2002 and the related rules and
regulations promulgated by the SEC require us to include in our
Form 10-K a report by management regarding the effectiveness of our
internal control over financial reporting. The report includes,
among other things, an assessment of the effectiveness of our
internal control over financial reporting as of the end of the
respective fiscal year, including a statement as to whether or not
our internal control over financial reporting is effective. This
assessment must include disclosure of any material weaknesses in
our internal control over financial reporting identified by
management. While our management has concluded that our internal
control over financial reporting was effective as of December 31,
2020, it is possible that material weaknesses will be identified in
the future. In addition, components of our internal control over
financial reporting may require improvement from time to time. If
management is unable to assert that our internal control over
financial reporting is effective in any future period, investors
may lose confidence in the accuracy and completeness of our
financial reports, which could have an adverse effect on the
Company’s stock price.
Risk Factors Relating to Our Common Stock
Our stock price is volatile and may continue to be volatile or may
decline regardless of our operating performance, resulting in
substantial losses for investors.
The market price of our Common Stock has fluctuated significant to
date and in the future may fluctuate significantly in response to
numerous factors, many of which are beyond our control, including
the factors listed below and other factors described in this
“Risk Factors” section:
●
Actual
or anticipated fluctuations in our operating
results;
●
Failure
of securities analysts to initiate or maintain coverage of our
Company, changes in financial estimates by any securities analysts
who follow our Company, or our failure to meet these estimates or
the expectations of investors;
●
Rating
changes by any securities analysts who follow our
Company;
●
Changes
in the availability of federal funding to support local law
enforcement efforts, or local budgets;
●
Announcements
by us of significant technical innovations, acquisitions, strategic
partnerships, joint ventures or capital commitments;
●
Changes
in operating performance and stock market valuations of other
security product companies generally;
●
Price
and volume fluctuations in the overall stock market, including as a
result of trends in the economy as a whole;
●
Announcements of
merger or acquisition transactions;
●
Changes
in our board of directors or management;
●
Sales
of large blocks of our Common Stock, including sales by our
executive officers, directors and significant
stockholders;
●
Lawsuits
threatened or filed against us;
●
Short
sales, hedging and other derivative transactions involving our
capital stock;
●
General
economic conditions in the United States and abroad;
and
●
Other
events or factors, including those resulting from war, incidents of
terrorism or responses to these events.
In addition, stock markets have experienced extreme price and
volume fluctuations that have affected and continue to affect the
market prices of equity securities of many security and technology
companies. Stock prices of many security and technology companies
have fluctuated in a manner unrelated or disproportionate to the
operating performance of those companies.
-23-
We are and, in the future, may be subject to securities litigation,
which may be expensive and could divert management
attention.
Our share price is volatile, and in the past companies that have
experienced volatility in the market price of their stock have been
subject to securities class action litigation. For instance, in
September 2020 a putative class action lawsuit and in November 2020
a shareholder derivative lawsuit were filed against us and certain
of our directors and officers.
Lawsuits of this nature divert financial and management resources
that would otherwise be used to benefit our operations. Although we
deny the material allegations in the lawsuits and intend to defend
ourselves vigorously, defending the lawsuits may result in
substantial costs. Any lawsuit to which we or our directors or
officers are a party, with or without merit, may result in an
unfavorable judgment. We also may decide to settle lawsuits on
unfavorable terms. Any such negative outcome could result in
payments of substantial damages or fines, damage to our reputation
or adverse changes to our offerings or business practices. Any of
these results could adversely affect our business.
In addition, we may be the target of securities-related litigation
in the future. Such litigation may divert our management’s
attention and resources, result in substantial costs, and have an
adverse effect on our business, results of operations and financial
condition. We maintain director and officer insurance that we
regard as reasonably adequate to protect us from potential claims;
however, we cannot assure you that it will. Further, if we are
subject to future litigation, the costs of insurance may increase,
and the availability of coverage may decrease. As a result, we may
not be able to maintain our current levels of insurance at a
reasonable cost, or at all, which might make it more difficult to
attract qualified candidates to serve as executive officers or
directors of the Company.
Sales of a substantial number of shares of our Common Stock may
adversely affect the market price of our Common Stock.
Sales or distributions of a substantial number of shares of our
Common Stock in the public market, or the perception that such
sales could occur, could adversely affect the market price of our
Common Stock. Many of the outstanding shares of our Common Stock,
other than the shares held by executive officers and directors, are
eligible for immediate resale in the public market. Substantial
selling of our Common Stock could adversely affect the market price
of our Common Stock.
Our Common Stock could be delisted from the Nasdaq Stock
Market.
Nasdaq’s
continued listing standards for our Common Stock require, among
other things, that (i) we maintain a closing bid price for our
Common Stock of at least $1.00, and (ii) we maintain: (A)
stockholders’ equity of $2.5 million; (B) market value of
listed securities of $35 million; or (C) net income from continuing
operations of $500,000 in the most recently completed fiscal year
or in two of the last three most recently completed fiscal years.
Any failures to satisfy any continued listing requirements could
lead to the receipt of a deficiency notice from Nasdaq and
ultimately to a delisting from trading of our Common Stock. If our
Common Stock were delisted from Nasdaq, among other things, this
could result in a number of negative implications, including
reduced liquidity in our Common Stock as a result of the loss of
market efficiencies associated with Nasdaq and the loss of federal
preemption of state securities laws as well as the potential loss
of confidence by suppliers, customers and employees, institutional
investor interest, fewer business development opportunities,
greater difficulty in obtaining financing and possible breaches of
certain contractual obligations.
Our officers and directors are among our largest stockholders and
may have certain personal interests that may affect the
Company.
Management owned approximately 41% of our Common Stock
at December 31, 2020. As a result, our management, acting
individually or as a group, has the potential ability to exert
influence on the outcome of issues requiring approval by our
stockholders. This concentration of ownership may have effects such
as delaying or preventing a change in control of the Company that
may be favored by other stockholders or preventing transactions in
which stockholders might otherwise recover a premium for their
shares over current market prices.
We may issue additional shares of Common Stock in the future. The
issuance of additional shares of Common Stock may reduce the value
of your Common Stock.
We may
issue additional shares of Common Stock without further action by
our stockholders. Moreover, the economic and voting interests of
each stockholder will be diluted as a result of any such issuances.
Although the number of shares of Common Stock that stockholders
presently own will not decrease, such shares will represent a
smaller percentage of the total shares that will be outstanding
after the issuance of additional shares. The issuance of
additional shares of Common Stock may cause the market price of our
Common Stock to decline.
-24-
Sales of shares of Common Stock issuable upon the exercise of any
future options or warrants may lower the price of our Common
Stock.
At December 31, 2020, we had warrants, options and restricted stock
units outstanding on 7.6 million shares of our Common Stock. The
issuance of shares of Common Stock issuable upon the exercise of
options or warrants or issuance from restricted stock units could
cause substantial dilution to existing holders of our Common Stock,
and the sale of those shares in the market could cause the market
price of our Common Stock to decline. The potential dilution from
the issuance of these shares could negatively affect the terms on
which we are able to obtain equity financing.
We may issue preferred stock in the future, and the terms of the
preferred stock may reduce the value of your Common
Stock.
We are
authorized to issue up to 5 million shares of preferred stock in
one or more series. Our Board of Directors may determine the terms
of future preferred stock offerings without further action by our
stockholders. If we issue preferred stock, it could affect your
rights or reduce the value of your Common Stock. In particular,
specific rights granted to future holders of preferred stock could
be used to restrict our ability to merge with or sell our assets to
a third party. Preferred stock terms may include voting rights,
preferences as to dividends and liquidation, conversion and
redemption rights and sinking fund provisions.
We incur substantial costs as a result of being a public
company.
As a public company, we incur significant levels of legal,
accounting, insurance, exchange listing fees and other expenses
that we did not incur as a private company. We are subject to the
reporting requirements of the Securities Exchange Act of 1934, as
amended (the “
Exchange
Act
”), the Sarbanes-Oxley
Act of 2002 (the “
Sarbanes-Oxley
Act
”), the Dodd-Frank
Act, the listing requirements of the Nasdaq Capital Market and
other applicable securities rules and regulations. Compliance with
these rules and regulations increases our legal and financial
compliance costs, makes some activities more difficult,
time-consuming or costly and increases demand on our systems and
resources as compared to when we operated as a private company. The
Exchange Act requires, among other things, that we file annual,
quarterly and current reports with respect to our business and
operating results. The Sarbanes-Oxley Act requires, among other
things, that we maintain effective disclosure controls and
procedures and internal control over financial reporting. In order
to maintain and, if required, improve our disclosure controls and
procedures and internal control over financial reporting to meet
this standard, significant resources and management oversight may
be required. As a result, management’s attention may be
diverted from other business concerns, which could adversely affect
our business and operating results. We may need to hire more
corporate employees in the future or engage outside consultants to
comply with these requirements, which would increase our costs and
expenses.
In addition, changing laws, regulations and standards relating to
corporate governance and public disclosure are creating uncertainty
for public companies, increasing legal and financial compliance
costs and making some activities more time-consuming. These laws,
regulations and standards are subject to varying interpretations,
in many cases due to their lack of specificity, and, as a result,
their application in practice may evolve over time as new guidance
is provided by regulatory and governing bodies. This could result
in continuing uncertainty regarding compliance matters and higher
costs necessitated by ongoing revisions to disclosure and
governance practices. We intend to invest resources to comply with
evolving laws, regulations and standards, and this investment may
result in increased general and administrative expenses and a
diversion of management’s time and attention from
revenue-generating activities to compliance activities. If our
efforts to comply with new laws, regulations and standards differ
from the activities intended by regulatory or governing bodies due
to ambiguities related to their application and practice,
regulatory authorities may initiate legal proceedings against us
and our business may be adversely affected.
As a result of disclosure of information in this report and in the
filings that we are required to make as a public company, our
business, operating results and financial condition have become
more visible, which has resulted in, and may in the future result
in threatened or actual litigation, including by competitors and
other third parties. If any such claims are successful, our
business, operating results and financial condition could be
adversely affected, and even if the claims do not result in
litigation or are resolved in our favor, these claims, and the time
and resources necessary to resolve them, could divert the resources
of our management and adversely affect our business, operating
results and financial condition.
-25-
The payment of dividends will be at the discretion of our Board of
Directors.
We have
never declared dividends on our Common Stock, and currently do not
anticipate that we will do so in the foreseeable future. The
declaration and amount of future dividends, if any, will be
determined by our Board of Directors and will depend on our
financial condition, earnings, capital requirements, financial
covenants, regulatory constraints, industry practice and other
factors our Board of Directors deems relevant.
ITEM 1B. U
NRESOLVED STAFF
COMMENTS
None.
ITEM 2. PROPERTIES
Our executive offices, sales, training, assembly and warehouse
facilities are located at 1817 West 4
th
Street, Tempe,
Arizona. The lease of 11,256 square feet commenced in June 2019 and
expires July 2022.
The aggregate monthly payments are
currently $7,884 increasing 3% each June during the lease term,
plus other certain costs and charges as specified in the lease
agreement, including the Company’s proportionate share of the
building operating expenses and real estate taxes.
The Company also leases 1,987 square feet of office and warehousing
space located at 4620 Arville Street, Suite E, Las Vegas, Nevada
89103, pursuant to a lease amendment that commenced January 2021
and terminates at the end of March 2021. The monthly rate is $1,683
plus shared operating expenses. In February 2019, we entered into a
two-year lease expiring at the end of February 2021 for 1,906
square feet of office and warehousing space located at
20331 Lake Forest Drive, Suite C-11,
Lake Forest, California 92630.
The monthly rate is currently $2,649 per month
plus shared operating costs. We intend to vacate the Nevada and
California facilities at the end of the respective lease terms
consolidating operations at the Tempe facility. We are evaluating
our facility requirements and expect we may need additional space
during the next 12 months.
Beginning in October 2017, we commenced reimbursing officer Mr.
Elwood Norris $1,500 per month on a month-to-month basis for
laboratory facility costs. From November 2018 through November
2020, we paid $5,000 per month on a month-to-month basis for a 50%
share of 1,000 square feet at 55 Fifth Ave, Suite 1702, New York,
NY 10003. We from time to time rent executive space on a
month-to-month basis for remotely located employees.
ITEM 3. LEGAL PROCEEDINGS
Securities Litigation
On September 23, 2020, Carone Cobden filed a putative class action
complaint against the Company, former Chief Executive Officer David
Norris (“Norris”), Chief Financial Officer James A.
Barnes (“
Barnes
”) and President Thomas Smith
(“
Smith
”) in the United States District Court for
the Central District of California, docketed as Case No.
2-20-cv-08760-DMG-PVCx (the “
Cobden
Complaint
”). The
Cobden Complaint alleges that the named defendants, in their
capacities as officers of the Company, knowingly made false or
misleading statements or omissions regarding trials of the
Company’s BolaWrap product conducted by the Los Angeles
Police Department (the “
BolaWrap Pilot
Program
”). The
Cobden Complaint also alleges that the conduct of the named
defendants artificially inflated the price of the Company’s
traded securities, and that the disclosure of certain adverse
information to the public led to a decline in the market value of
the Company’s securities. The Cobden Complaint
further alleges violations of Sections 10(b) and 20(a) of the
Exchange Act, and Rule 10b-5 promulgated thereunder, and defines
the class period as July 31, 2020 through September 23,
2020.
On October 1, 2020, Joseph Mercurio filed a second putative class
action complaint against the Company, Norris, Smith, and Barnes in
the same court, which contains substantially the same factual
allegations and legal claims as set forth in the Cobden Complaint,
and is docketed as Case No. 2-20-cv-09030-DMG-PVCx (the
“
Mercurio
Complaint
”). On October 15, 2020, Paula
Earley filed a third putative class action complaint against the
Company, Smith, Norris, Barnes, Chief Strategy Officer Mike Rothans
(“
Rothans
”), and former Chief Executive Officer Marc
Thomas (“
Thomas
”) in the same court, which contains many of
the same factual allegations and legal claims as set forth in the
Cobden and Mercurio Complaints, but defines the class period as
April 29, 2020 through September 23, 2020, and alleges additional
false or misleading statements in connection with BolaWrap and the
BolaWrap Pilot Program (the “
Earley
Complaint
”). The
Earley Complaint is docketed as Case No.
2-20-cv-09444-DMG-PVCx.
-26-
On November 3, 2020, the Hon. Dolly M. Gee consolidated
the three above-mentioned cases under the
caption
In re Wrap Technologies, Inc.
Securities Exchange Act Litigation
, Case No. 20-8760-DMG (PVCx) (the
“
Securities
Action
”). On
January 7, 2021, the Court appointed a lead plaintiff in the
Securities Action, who designated its attorneys as lead
counsel. On January 21, 2021, Judge Gee ordered that a
consolidated amended complaint be filed in the Securities Action on
or before March 12, 2021, with defendants’ motion to dismiss
to be filed on or before April 26, 2021, and a hearing on the
motion to dismiss to be held on July 23, 2021. The Company
believes that the complaints underlying the Securities Action are
without merit and intends to vigorously defend against the claims
raised therein.
Shareholder Derivative Litigation
On November 13, 2020, Naresh Rammohan filed a shareholder
derivative action in the United States District Court for the
Central District of California against Smith, Barnes, Rothans,
Thomas, Norris, Scot Cohen, Patrick Kinsella, Michael Parris, and
Wayne Walker, alleging unjust enrichment, breach of fiduciary duty,
waste of corporate assets, and contribution claims under the
Securities Exchange Act of 1934, docketed as Case No.
2:20-cv-10444-DMG-PVCx (the “
Rammohan
Complaint
”). The
Rammohan Complaint names the Company as a nominal defendant and
recites many of the allegations set forth in the Securities Action
relating to the BolaWrap Pilot Program. On January 20, 2021,
Ray Westerman filed a second derivative complaint in the same court
against the same parties, alleging breach of fiduciary duty and
contribution claims under the Securities Exchange Act of 1934,
docketed as Case No. 2:21-cv-00550-DMG-PVCx (the
“
Westerman
Complaint
”). On
January 22, 2021, Jesse Lowe filed a third derivative complaint in
the same court against the same parties, alleging breach of
fiduciary duty and asserting various claims under the Securities
Exchange Act of 1934, docketed as Case No. 2:21-cv-00597-DMG-PVCx
(the “
Lowe
Complaint
”).
The above-mentioned derivative cases (collectively, the
“
Derivative
Actions
”) each been have
been transferred to Judge Gee as cases related to the Securities
Action. On January 27, 2021, Judge Gee issued an order to
show cause why the Derivative Actions should not be consolidated
under the caption
In re Wrap Technologies, Inc.
Shareholder Derivative Litigation
, Case No. 2:20-10444-DMG-PVCx and stayed pending
the resolution of the anticipated motion to dismiss in the
Securities Action. On February 5, 2021, the parties in the
Derivative Actions responded jointly to the order to show cause,
stipulating that the case should be consolidated and stayed as
suggested by the Court. We believe that the Derivative
Actions will be consolidated and stayed by the Court. As with
the Securities Action, the Company believes that the Derivative
Actions are without merit and intends to vigorously defend against
the claims raised therein.
We may
become subject to other legal proceedings, as well as demands and
claims that arise in the normal course of our business, including
claims of alleged infringement of third-party patents and other
intellectual property rights, breach of contract, employment law
violations, and other matters and matters involving requests for
information from us or our customers under federal or state law.
Such claims, even if not meritorious, could result in the
expenditure of significant financial and management resources. We
make a provision for a liability relating to legal matters when it
is both probable that a liability has been incurred and the amount
of the loss can be reasonably estimated. These provisions are
reviewed and adjusted to include the impacts of negotiations,
estimated settlements, legal rulings, advice of legal counsel, and
other information and events pertaining to a particular matter. At
December 31, 2020 we had no provision for liability under existing
litigation.
An
unfavorable outcome on any litigation matters could require payment
of substantial damages, or, in connection with any intellectual
property infringement claims, could require us to pay ongoing
royalty payments or could prevent us from selling certain of our
products. As a result, a settlement of, or an unfavorable outcome
on, any of the matters referenced above or other litigation matters
or legal proceedings could have a material adverse effect on our
business, operating results, financial condition and cash
flows.
ITEM 4. MINE SAFETY DISCLOSURES
Not applicable.
PA
RT II
ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
AND ISSUER PURCHASES OF EQUITY SECURITIES
Our Common Stock is listed on the Nasdaq Capital Market under the
symbol “WRAP”.
Holders
At
March 3,
2021
there were 37,644,556
shares of Common Stock outstanding and approximately
25
stockholders
of
record.
-27-
Equity Compensation Plan Information
Our 2017 Stock Incentive Plan (the “
2017
Plan
”) was adopted by
our Board of Directors on March 31, 2017, and approved by a
majority of our stockholders on March 31, 2017. The 2017 Plan
reserved 2.0 million shares of our Common Stock for issuance as one
of four types of equity incentive awards: (i) stock options, (ii)
shares of Common Stock, (iii) restricted stock awards, and (iv)
restricted stock units. The 2017 Plan permits the qualification of
awards under the plan as “performance-based
compensation” within the meaning of
Section 162(m) of the Internal Revenue
Code.
The
Board of the Company approved an increase in the Plan authorizing
an additional 2,100,000 shares of Common Stock on March 16, 2019,
ratified by stockholders on May 23, 2019, and a further increase
authorizing an additional 1,900,000 shares on April 8, 2020,
ratified by stockholders on June
5,
2020,
for a
total of
6,000,000 shares of Common Stock reserved for issuance under the
2017 Plan as of the date of this Report.
The following table sets forth information as of December 31, 2020,
with respect to compensation plans (including individual
compensation arrangements) under which our equity securities are
authorized for issuance, aggregated as
follows:
|
|
|
|
Number of securities
|
|
|
|
|
remaining available for
|
|
|
Number of securities to be
|
Weighted-average exercise
|
future issuance under
|
|
|
issued upon exercise of
|
price of outstanding
|
equity compensation plans
|
|
|
outstanding options,
|
options, warrants and
|
(excluding securities
|
|
Plan
Category
|
warrants and rights
|
rights
|
reflected in column (a))
|
|
|
(a)
|
(b)
|
(c)
|
|
|
|
|
|
|
Equity
compensation plans approved by security holders
|
4,359,592
|
$
4.58
|
1,150,055
|
|
Equity
compensation plans not approved by security holders
|
-
|
-
|
-
|
|
Total
|
4,359,592
|
$
4.58
|
1,150,055
|
Recent Sales of Unregistered Securities
No unregistered securities were issued during the fiscal year that
were not previously reported in a Quarterly Report on Form
10-Q or Current Report on Form 8-K.
Transfer Agent
Our
Transfer Agent and Registrar for our Common Stock is Colonial Stock
Transfer, located at 66 Exchange Place, Suite 100, Salt Lake City,
Utah 84111.
Issuer Purchases of Equity Securities
Not applicable.
ITEM 6. SELECTED FINANCIAL DATA
Information requested by this Item is not included, as we are
electing to take advantage of scaled disclosure requirements
available to Smaller Reporting Companies.
-28-
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
The
discussion and analysis set forth below should be read in
conjunction with the information presented in other sections of
this Annual Report, including “Item 1. Business,”
“Item 1A. Risk Factors,” and “Item 8. Financial
Statements and Supplementary Data.” The following discussion
may contain forward-looking statements that reflect our plans,
estimates and beliefs. Words such as “expects,”
“anticipates,” “intends,”
“plans,” “believes,” “seeks,”
“estimates” and similar expressions or variations of
such words are intended to identify forward-looking statements but
are not the only means of identifying forward-looking statements.
Our actual results could differ materially from those discussed in
these forward-looking statements.
Overview
We are a global public safety technology and services
company
organized in March 2016 delivering modern policing
solutions to law enforcement and security personnel.
We began product sales of our first public safety
product, the BolaWrap 100 remote restraint device, in late
2018.
The
immediate addressable domestic market for our solutions consists of
approximately 900,000 full-time sworn law enforcement officers
at over 15,300 federal, state and
local
law enforcement agencies.
We are also exploring other domestic markets,
including military and private security. Our international focus is
on countries with the largest police forces. The 100 largest
international police agencies are estimated to have over 12.1
million law enforcement personnel. According to
Statistics
MRC, a market research consulting firm, we participate in a segment
of the non-lethal products global market expected to grow to $11.85
billion by 2023.
Our
products, services and solutions include:
BolaWrap Remote Restraint Device
–
is a hand-held remote
restraint device that discharges an eight-foot bola style Kevlar
tether to entangle an individual at a range of 10-25 feet. BolaWrap
100 assists law enforcement to safely and effectively control
encounters early in the use of force continuum without resorting to
painful force options.
Wrap Reality
– is a law
enforcement training system employing immersive computer graphics
virtual reality with proprietary software-enabled content. It
allows up to two participants to enter
a simulated training environment simultaneously, and customized
weapons controllers enable trainees to engage in strategic decision
making along the force continuum.
Wrap Armor
– we offer a
light-weight rifle rated police shield and a pistol rated patrol
shield that offers police agencies an affordable defense against
increasingly sophisticated threats.
In
addition to the United States domestic law enforcement market, we
have sold our restraint products to 36 countries. We have
established an active distributor network with
14 domestic distributors representing all 50
states and Puerto Rico. We have distribution agreements with 35
international distributors. We focus significant sales, training
and business development efforts to support our distribution
network.
We
focus significant resources on research and development innovations
and continue to enhance our products and plan to introduce new
products. We believe we have established a strong branding and
market presence globally and have established significant
competitive advantages in our markets.
2020 Developments
Proceeds from Public Offering
In June 2020, we consummated a registered direct public offering
resulting in net proceeds of approximately $11.67 million
(“
June 2020
Offering
”). We sold
2,066,667 units (“
June 2020
Units
”), with each unit
consisting of (i)
one share of Common Stock and (ii) a
warrant to purchase one share of Common Stock. The
June 2020 Units
were offered and sold to
Investors at a public offering price of $6.00 per
unit
. Each of the warrants offered and sold
in the June 2020 Offering are exercisable for a period of 24 months
from the date of issuance, are non-transferrable and have an
exercise price of $6.00 per share.
-29-
Proceeds from Warrant Exercises
During
the year ended December 31, 2020 the Company received gross
proceeds of $26,190,483 from the exercise of 5,155,976 warrants and
paid $1,016,645 as an agent fee to facilitate exercise of certain
warrants resulting in net proceeds of $25,173,838. Elwood Norris,
the Company’s Chief Technology Officer, exercised 333,334 of
these warrants at $5.00 per share for cash of
$1,666,670.
PPP Loan
In May 2020, we obtained $414,362 in proceeds from a
U.S.
Small Business Administration ("
SBA
") Promissory Note (the
"
PPP Loan
") pursuant to the
Paycheck Protection Program ("
PPP
") of the Coronavirus Aid, Relief,
and Economic Security Act (the "
CARES Act
") as administered by the SBA.
Under the terms of the CARES Act, the
Company subsequently applied for and in December 2020 was granted
forgiveness for the PPP Loan plus interest. The Company’s PPP
Loan in the amount of $414,362 and accrued interest was forgiven in
full by the Small Business Administration. The Company recognized
$416,683 in debt forgiveness income as a result of the
forgiveness.
Asset Purchase Agreement with NSENA
On December 14, 2020, the Company, through a new wholly owned
subsidiary Wrap Reality, Inc. (“
Wrap
Reality
”), entered into
an Asset Purchase Agreement (the “
Asset Purchase
Agreement
”) with NSENA
Inc, a Delaware corporation (“
NSENA
”) and Ethan Moeller
(“
Moeller
”), the majority stockholder of NSENA and
acquired NSENA’s immersive virtual reality technology and
business (the “
Transaction
”). In addition, the Company hired three
NSENA persons as employees (including Moeller)
(“
Key
Employees
”) and retained
two NSENA consultants (“
Consultants
”).
Wrap Reality paid NSENA cash consideration of $210,000 and agreed
to pay $100,000 on March 15, 2021, $100,000 on June 15, 2021 and
$75,000 on September 15, 2021. In addition, Wrap Reality assumed
$15,000 of liabilities related to funds received by NSENA but
unearned on existing revenue related contract arrangements. As
additional earn-out consideration, Wrap Reality has agreed to pay
NSENA 10% of net revenues (or a lesser amount equal to 50% of
direct profit) from specific identified prospects that become
revenue customers (“
NSENA Earn-out
Consideration
”) before
September 30, 2021, but only on amounts collected between
consummation of the acquisition and June 30,
2022.
Each of the Key Employees executed an At-Will Employment,
Confidential Information, Non-Compete/Non-Solicitation, Invention
Assignment, and Arbitration Agreement and the Key Employees were
issued service-based stock options exercisable for an aggregate of
150,000 shares of the Company’s Common Stock exercisable for
ten years at $5.46 per share, vesting over two years unless
accelerated by certain events. Mr. Moeller was granted an
additional ten-year performance-based stock option exercisable at
$5.46 per share on 100,000 shares of Common Stock based on
achieving certain virtual reality revenue targets by December 1,
2024. Each of the two Consultants were granted service-based stock
options exercisable for 20,000 shares of the Company’s Common
Stock for five years at $5.46 per share, vesting over two years
unless accelerated under the terms of the stock
options.
Business Outlook and Challenges
Our
products and solutions continue to gain worldwide awareness and
recognition through social media, media exposure, trade shows,
product demonstrations and word of mouth as a result of positive
responses from agencies and early adoption and deployment success.
We believe the Wrap is gaining traction as a recognized global
brand, with innovative technology and an initial product foundation
achieved through aggressive marketing and public relations. We
believe that we have strong market opportunities for our remote
restraint solution throughout the world in the law enforcement and
security sectors as a result of increasing demands for less lethal
policing and increasing threats posed by non-compliant
subjects.
We grew our business in 2020 with revenues increasing 460% and
continue to expand our business in 2021, both domestically and
internationally, through direct and distributor sales. We have a
robust and growing pipeline of opportunities and are pursuing large
business prospects internationally and also pursuing business with
large police agencies in the U.S. It is difficult to anticipate how
long
it will take to close these opportunities, or if they
will ultimately come to fruition.
To support our increased sales and distribution activities we have
developed and offer robust training and class materials that
certify law enforcement officers and trainers as BolaWrap
Instructors in the use and limitations of the BolaWrap in
conjunction with modern policing tactics for de-escalation of
encounters. Over 520 agencies have received BolaWrap training with
over 1,550 training officers at those agencies certified as
BolaWrap instructors qualified to train the rest of their
departments.
-30-
At
December 31
, 2020, we had
backlog of approximately $120,000 expected to be delivered in the
next twelve months. Distributor and customer orders for future
deliveries are generally subject to modification, rescheduling or
in some instance’s cancellation in the normal course of
business.
Since inception in March 2016, we have generated significant losses
from operations and anticipate that we will continue to generate
significant losses from operations for the foreseeable
future.
We believe that we have adequate financial resources
to sustain our operations for the next year
.
We expect that we will need to continue to innovate new
applications for our public safety technology, develop new products
and technologies to meet diverse customer requirements and identify
and develop new markets for our products.
COVID-19 Impact
We face significant challenges in operating and growing our
business related to the outbreak of the novel coronavirus
(“
COVID-19
”) which continues to spread throughout the
United States and the World. The outbreak of COVID-19 has resulted
in travel restrictions, quarantines,
“stay-at-home” and
“shelter-in-place” orders and extended shutdown of
certain businesses around the world. We are monitoring the outbreak
of COVID-19 and the related business and travel restrictions and
changes to behavior intended to reduce its spread, in addition to
the impact on our employees. We continued to operate with some
modifications, and we took actions intended to protect our
employees and our customers that adversely affected our results by
increasing costs during a period of stalled sales and production
activity.
Starting during the second quarter of 2020 our customers
experienced staffing issues limiting our ability to demonstrate and
train. We believe we made an important transition during the second
quarter including remote sales and training through webinars and
expect this to be an ongoing aspect of our business. We curtailed
most sales and training travel and reduced our production personnel
until late in the second quarter when some customer locations
domestically and internationally eased restrictions and we began to
again close business prospects. In the third quarter we continued
to face some domestic and substantial international restrictions
that affected our ability to travel and train customers. We believe
this had an adverse effect on our sales in the third and fourth
quarters. Severe international travel restrictions persist and
impact the timing of future international orders. It is uncertain
when these restrictions will ease allowing our sales and training
personnel to travel to many international
destinations.
The magnitude and the duration of the pandemic and the extent and
duration of the pandemic’s adverse effect on economic and
social activity, consumer confidence, customer spending and
preferences, labor and healthcare costs, and unemployment rates is
uncertain as of the date of this Report. Our ability to sell, train
and service our products and conduct our business may be adversely
impacted as a result of continuing or future pandemic related
travel restrictions, mandatory business closures, and stay-at home
or similar orders; temporary reductions in our workforce, closures
of our offices and facilities and the ability of our customers and
suppliers to continue their operations as a result of the pandemic.
While there could ultimately be a material impact on operations and
liquidity of the Company, at the time of issuance of this Report,
the impact cannot be determined.
Critical Accounting Policies and Estimates
The
preparation of financial statements in accordance with accounting
principles generally accepted in the United States
(“
U.S. GAAP
”)
requires us to make estimates and judgments that affect the
reported amounts of assets, liabilities, revenue and expense, and
related disclosure of contingent assets and liabilities. We
evaluate our estimates, on an on-going basis, including those
estimates related to recognition and measurement of contingencies
and accrued costs. We base our estimates on historical experience
and on various other assumptions we believe to be reasonable under
the circumstances. Actual results may differ from these estimates
under different assumptions or conditions.
As part
of the process of preparing our financial statements, we are
required to estimate our provision for income taxes. Significant
management judgment is required in determining our provision for
income taxes, deferred tax assets and liabilities, tax
contingencies, unrecognized tax benefits, and any required
valuation allowance, including taking into consideration the
probability of the tax contingencies being incurred. Management
assesses this probability based upon information provided by its
tax advisers, its legal advisers and similar tax cases. If at a
later time our assessment of the probability of these tax
contingencies changes, our accrual for such tax uncertainties may
increase or decrease. Our effective tax rate for annual and interim
reporting periods could be impacted if uncertain tax positions that
are not recognized are settled at an amount which differs from our
estimates.
-31-
Some of
our accounting policies require higher degrees of judgment than
others in their application. These include share-based compensation
and contingencies and areas such as revenue recognition, allowance
for doubtful accounts, valuation of inventory and intangible
assets, operating lease liabilities, warranty liabilities and
impairments.
Revenue Recognition
. We sell our products to customers
including law enforcement agencies, domestic distributors and
international distributors and revenue from such transactions is
recognized in the periods that products are shipped (free on board
(“
FOB
”)
shipping point) or received by customers (FOB destination), when
the fee is fixed or determinable and when collection of resulting
receivables is reasonably assured. We identify customer performance
obligations, determine the transaction price, allocate the
transaction price to the performance obligations and recognize
revenue as we satisfy the performance obligations. Our primary
performance obligations are products/accessories and virtual
reality software licensing or sale. Our customers do not have the
right to return product unless the product is found to be
defective.
Share-Based Compensation.
We follow the fair value
recognition provisions issued by the Financial Accounting Standards
Board (“
FASB
”)
in Accounting Standards Codification (“
ASC
”) Topic 718, Stock
Compensation (“
ASC
718
”) and we adopted Accounting Standards Update
(“
ASU
”) 2018-07
for share-based transactions with non-employees. Share-based
compensation expense recognized during 2020 and 2019 includes stock
option and restricted stock unit compensation expense.
The grant date fair
value of stock options is determined using the Black-Scholes
option-pricing model.
The grant date is the date at which an
employer and employee or non-employee reach a mutual understanding
of the key terms and conditions of a share-based payment award.
The
Black-Scholes option-pricing model requires inputs including the
market price of the Company’s Common Stock on the date of
grant, the term that the stock options are expected to be
outstanding, the implied stock volatilities of several
publicly-traded peers over the expected term of stock options,
risk-free interest rate and expected dividend. Each of these inputs
is subjective and generally requires significant judgment to
determine.
The grant date fair
value of restricted stock units is based upon the market price of
the Company’s Common Stock on the date of the grant.
We determine the amount of share-based compensation expense
based on awards that we ultimately expect to vest and account for
forfeitures as they occur.
The fair value of
share-based compensation is amortized to compensation expense over
the vesting term.
Allowance for Doubtful Accounts.
Our products are sold to
customers in many different markets and geographic locations. We
estimate our bad debt reserve on a case-by-case basis due to a
limited number of customers mostly government agencies or
well-established distributors. We base these estimates on many
factors including customer credit worthiness, past transaction
history with the customer, current economic industry trends and
changes in customer payment terms. Our judgments and estimates
regarding collectability of accounts receivable have an impact on
our financial statements.
Valuation of Inventory
. Our inventory is comprised of raw
materials, assemblies and finished products. We must periodically
make judgments and estimates regarding the future utility and
carrying value of our inventory. The carrying value of our
inventory is periodically reviewed and impairments, if any, are
recognized when the expected future benefit from our inventory is
less than carrying value.
Valuation of Intangible Assets.
Intangible assets consisted
of (a) capitalized legal fees and filing costs related to obtaining
patents and trademarks, (b) customer agreements, tradenames,
software, non-solicitation and non-compete agreements acquired in
business combinations and valued at fair value at the acquisition
date, and (c) the purchase cost of indefinite-lived website
domains. We must make judgments and estimates regarding the future
utility and carrying value of intangible assets. The carrying
values of such assets are periodically reviewed and impairments, if
any, are recognized when the expected future benefit to be derived
from an individual intangible asset is less than carrying value.
This generally could occur when certain assets are no longer
consistent with our business strategy and whose expected future
value has decreased.
Accrued Expenses.
We establish a warranty reserve based on
anticipated warranty claims at the time product revenue is
recognized. This reserve requires us to make estimates regarding
the amount and costs of warranty repairs we expect to make over a
period of time. Factors affecting warranty reserve levels include
the number of units sold, anticipated cost of warranty repairs, and
anticipated rates of warranty claims. We have very limited history
to make such estimates and warranty estimates have an impact on our
financial statements. Warranty expense is recorded in cost of
revenues. We evaluate the adequacy of this reserve each reporting
period.
-32-
We use
the recognition criteria of ASC 450-20, “Loss
Contingencies” to estimate the amount of bonuses when it
becomes probable a bonus liability will be incurred and we
recognize expense ratably over the service period. We accrue bonus
expense each quarter based on estimated year-end results, and then
adjust the actual in the fourth quarter based on our final results
compared to targets.
Historically,
our assumptions, judgments and estimates relative to our critical
accounting policies have not differed materially from actual
results. There were no significant changes or modification of our
critical accounting policies and estimates involving management
valuation adjustments affecting our results for the year ended
December 31, 2020.
Recent Accounting Pronouncements
New
pronouncements issued for future implementation are discussed in
Note 1 to our financial statements.
Segment and Related Information
The
Company operates as a single segment. The Company’s chief
operating decision maker is its Chief Executive Officer, who
manages operations for purposes of allocating resources. Refer to
Note
16
, Major Customers and
Related Information, in our financial statements for further
discussion.
Operating Expense
Our
operating expense includes (i) selling, general and administrative
expense, and (ii) research and development expense. Research and
development expense is comprised of the costs incurred in
performing research and development activities and developing
production on our behalf, including compensation and consulting,
design and prototype costs, contract services, patent costs and
other outside expenses. The scope and magnitude of our future
research and development expense is difficult to predict at this
time and will depend on elections made regarding research projects,
staffing levels and outside consulting and contract costs. The
future level of selling, general and administrative expense will be
dependent on staffing levels, elections regarding expenditures on
sales, marketing and customer training, the use of outside
resources, public company and regulatory costs, and other factors,
some of which are outside of our control.
We
expect our operating costs will increase as we expand product
distribution activities and expand our research and development,
production, distribution, training, service and administrative
functions in the near term. We may also incur substantial non-cash
stock-based compensation costs depending on future option and
restricted stock unit grants that are impacted by stock prices and
other valuation factors. Historical expenditures are not indicative
of future expenditures.
Results of Operations
Year Ended December 31, 2020 Compared to Year Ended December 31,
2019
The
following table sets forth for the periods indicated certain items
of our condensed statement of operations. The financial information
and the discussion below should be read in conjunction with the
financial statements and notes contained in this
Report.
-33-
|
|
Year Ended December 31,
|
Change
|
||
|
|
2020
|
2019
|
$
|
%
|
|
Revenues:
|
|
|
|
|
|
Product
sales
|
$
3,868,384
|
$
656,071
|
$
3,212,313
|
490
%
|
|
Other
revenue
|
75,673
|
40,719
|
34,954
|
86
%
|
|
Total
revenues
|
3,944,057
|
696,790
|
3,247,267
|
466
%
|
|
Cost
of revenues
|
2,601,323
|
420,016
|
2,181,307
|
519
%
|
|
Gross profit
|
1,342,734
|
276,774
|
1,065,960
|
385
%
|
|
|
|
|
|
|
|
Operating expenses:
|
|
|
|
|
|
Selling,
general and administrative
|
11,630,644
|
6,653,465
|
4,977,179
|
75
%
|
|
Research
and development
|
2,788,887
|
2,236,985
|
551,902
|
25
%
|
|
Total
operating expenses
|
14,419,531
|
8,890,450
|
5,529,081
|
62
%
|
|
Loss
from operations
|
$
(13,076,797
)
|
$
(8,613,676
)
|
$
(4,463,121
)
|
52
%
|
Revenue
We
reported revenue of $
3,944,057
for the year ended December 31, 2020 (“Fiscal 2020”) as
compared to revenue of $696,790 for the year ended December 31,
2019 (Fiscal 2019”), a
466
% increase over the prior year. We
believe our sales during the second, third and fourth quarters of
Fiscal 2020 were negatively impacted by the COVID-19 pandemic as we
were limited in our ability to make product demonstrations and
conduct training especially in our international markets. As some
areas of the United States eased restrictions, we were able to
commence limited in-person demonstrations and training to
supplement our webinar capabilities. We incurred product
promotional costs of $
747,443
for Fiscal 2020 related to the cost of demonstration products and
accessories delivered to law enforcement agencies that were
expensed as marketing costs.
We had
$
16,015
of deferred revenue at
December 31, 2020, of which $14,125 related to virtual reality
training and $1,890 related to extended warranties
.
We
believe we can grow sales in the future but the impact of the
COVID-19 pandemic has created much uncertainty in the global
marketplace. We are unable to predict the impact on demand for our
products in future periods. We expect
sales levels may be uneven as we grow both our
domestic and international customer base and as well as from the
continued impact of COVID-19 restrictions
. While we plan for
increased revenues in 2021, there can be no assurance, especially
given the uncertainties of the COVID-19 pandemic, that we can
achieve revenue growth.
At
December 31, 2020, we had backlog of $120,260 expected to be
delivered in the next twelve months. Distributor and customer
orders for future deliveries are generally subject to modification,
rescheduling or in some instance’s cancellation in the normal
course of business.
Gross Profit
Our
cost of revenue for Fiscal 2020 was $
2,601,323
resulting in a gross margin of
34
%. We curtailed production
for ten weeks during the second quarter of Fiscal 2020 due to the
COVID-19 restrictions in Arizona and this down time negatively
impacted our gross margin. The gross margin for Fiscal 2019 of 40%
was assessed on a small revenue base.
Due to
our limited history of revenue and startup costs incurred to
establish volume manufacturing, historical margins may not be
indicative of future margins.
In
addition, our margins vary based on the sales channels through
which our products are sold and product mix. Due to timing of
international orders our mix of cartridges was higher during Fiscal
2020 than Fiscal 2019. Currently, our cartridges have lower margins
than BolaWrap devices, however, late in 2020 we implemented
initiatives to improve gross margins attributable to our
cartridges. We continue to implement product updates and revisions,
including raw material and component changes that may impact
product costs. With such product updates and revisions, we have
limited warranty cost experience and estimated future warranty
costs can impact our gross margins.
-34-
In September 2019 we relocated manufacturing operations and
commenced production at our new facility in Tempe, Arizona. While
this significantly increases our capacity, we continue to implement
production and process changes targeted to improve
efficiency.
Selling, General and Administrative Expense
Selling,
general and administrative expense increased by $
4,977,179
during Fiscal 2020, when compared
to Fiscal 2019. We incurred a $
546,723
increase in non-cash stock-based
compensation expense allocated to selling, general and
administrative expense that totaled $
1,956,818
in the Fiscal 2020 as compared to
$1,410,095 in the Fiscal 2019. Other increases included a
$
2,043,748
increase in cash
compensation and recruiting costs from an increase in headcount
over the prior year and a $
276,645
increase in public company related
costs. Marketing and promotion costs increased $
979,833
due primarily to promotional
products and online advertising. Travel efforts resumed during the
third quarter of the year ended December 31, 2020, however, due to
the COVID-19 pandemic, travel was still limited. Our travel costs
related to sales, demonstrations and training decreased by
$
107,768
from the prior year
even though the number of sales and training personnel increased
from the prior year.
Due in
part to our receipt of $414,362 in PPP Loan proceeds, we maintained
staffing in April 2020, and were able to respond to limited
re-openings commencing late in the second quarter of Fiscal 2020.
We developed and deployed new tools such as webinars to communicate
with prospective and existing customers. We believe these decisions
positioned us to respond to increased opportunities resulting from
recent highly publicized policing issues and an increased focus on
less lethal engagement.
The
Company’s PPP Loan in the amount of $414,362 and accrued
interest was forgiven in full in December 2020 by the Small
Business Administration. The Company recognized $416,683 in debt
forgiveness income as a result of the
forgiveness.
In
2021, we expect to spend increased resources on the marketing and
selling of our products, training distributors and customers and
administratively supporting our operations to respond to increased
opportunities, but amounts could vary depending on sales levels,
the impact of the COVID-19 pandemic and
other factors outside of our
control.
Research and Development Expense
Research
and development expense increased by $
551,902
for Fiscal 2020, when compared to
Fiscal 2019. We incurred a $
153,925
period over period increase in
non-cash share-based compensation expense allocated to research and
development expense as a result of new award grants and vesting
timing. The increase in costs during Fiscal 2020 when compared to
the prior year included a $
485,910
increase in cash compensation costs
resulting from an increase in headcount primarily associated with
product development. Prototype related costs increased by
$
18,984
for Fiscal 2020, which
increase was
primarily related to
development efforts to improve our BolaWrap 100 product and develop
new products.
Outside consulting costs decreased by
$
48,766
for Fiscal 2020,
primarily due to the addition of permanent staff. Travel costs
related to research and development decreased $
100,822
for Fiscal 2020 when compared to
Fiscal 2019 primarily due to COVID-19 restrictions and completion
of the Arizona facility setup. We expect our research and
development costs to increase in the future as we add staff and
expand our research initiatives in response to market
opportunities.
Net Loss
Loss
from operations during Fiscal 2020 increased by $
4,463,121
when compared to Fiscal 2019,
resulting primarily from increased operating costs due to increased
personnel, marketing and selling and supporting
activities.
Liquidity and Capital Resources
Overview
We have experienced net losses and negative cash flows from
operations since our inception. As of December 31, 2020, we had
cash and cash equivalents of $16,646,811, short-term investments of
$24,994,360, positive working capital of $44,586,395 and had
sustained cumulative losses attributable to stockholders of
$25,310,033. We believe that our cash on hand and short-term
investments will sustain our operations for at least the next
twelve months from the date of this Report.
-35-
During Fiscal 2020 we received $11,667,206 of net proceeds
resulting from the consummation of a registered offering of our
Common Stock in June 2020, $25,879,188 of net proceeds from the
exercise of previously issued warrants and stock options and
obtained $414,362 in proceeds from the PPP Loan.
Our primary source of liquidity to date has been funding from our
stockholders from the sale of equity securities and the exercise of
derivative securities, consisting of options and warrants. We
expect our primary source of future liquidity will be from the sale
of products, exercise of stock options and warrants and if required
from future equity or debt financings.
Capital Requirements
Due in part to the volatility caused by COVID-19, we do not have a
high degree of confidence in our estimates for our future liquidity
requirements or future capital needs, which will depend on, among
other things, capital required to introduce our products and the
staffing and support requirements, as well as the timing and amount
of future revenue and product costs. We anticipate that demands for
operating and working capital may grow depending on decisions on
staffing, development, production, marketing, training and other
functions and based on other factors outside of our control. We
believe we have sufficient capital to sustain our operations for
the next twelve months.
Our future capital requirements, cash flows and results of
operations could be affected by, and will depend on, many factors,
some of which are currently unknown to us, including, among other
things:
●
The
impact and effects of the global outbreak of the COVID-19 pandemic,
and other potential pandemics or contagious diseases or fear of
such outbreaks;
●
Decisions
regarding staffing, development, production, marketing and other
functions;
●
The timing and
extent of market acceptance of our products;
●
Costs, timing and
outcome of planned production and required customer and regulatory
compliance of our products;
●
Costs of preparing,
filing and prosecuting our patent applications and defending any
future intellectual property-related claims;
●
Costs and timing of
additional product development;
●
Costs, timing and
outcome of any future warranty claims or litigation against us
associated with any of our products;
●
Ability to collect
accounts receivable; and
●
Timing and costs
associated with any new financing.
Principal
factors that could affect our ability to obtain cash from external
sources including from exercise of outstanding warrants and options
include:
●
Volatility in the
capital markets; and
●
Market price and
trading volume of our common stock.
Off-Balance Sheet Arrangements
We have no off-balance sheet arrangements.
Cash Flow
Operating Activities
During Fiscal 2020, net cash used in operating activities was
$12,186,924.
The net loss of $12,580,209 was
decreased
by non-cash expense of $
2,079,882
consisting primarily of
share-based compensation expense of $
2,236,743 less debt forgiveness income of $416,683
related to the PPP loan
. Other major component changes using
operating cash included an increase of $
1,685,727
in accounts receivable, an
increase in inventories of $342,741, a $
341,629
decrease in customer deposits and a
$
508,498
increase in prepaid
expenses and other current assets. An increase of $
825,382
in accounts payable and an increase
of $
492,564
in accrued
liabilities reduced the cash used in operating
activities.
-36-
During Fiscal 2019, net cash used in operating activities was
$8,485,637.
The net loss of $8,325,488 was
decreased by
non-cash expense of $1,585,699 consisting primarily of share-based
compensation expense of $1,536,096. Other major component changes
using operating cash included a $1,892,768 increase in inventories,
an increase of $190,951 in accounts receivable, a $136,084 increase
in prepaid expenses and other current assets and a $96,000
reduction in deferred compensation. An increase of $286,398 in
accounts payable and accrued liabilities and new customer deposits
of $343,724 reduced the cash used in operating
activities.
Investing Activities
During Fiscal 2020, we used $34,979,511 of cash to purchase
short-term investments and we had proceeds from maturities of
short-term investments of $10,000,000. We had no short-term
investment activity in 2019.
We used $248,897 and $256,742 of cash for the purchase of property
and equipment during Fiscal 2020 and 2019, respectively. We
invested $128,914 and $114,274 in patents during the Fiscal 2020
and 2019, respectively. During Fiscal 2020, we purchased $543,563
of indefinite life intangible assets and software and paid $210,000
for the first installment of the NSENA acquisition.
Financing Activities
During the year ended December 31, 2020, we received $11,667,206 of
net proceeds resulting from a registered offering of our Common
Stock in June 2020, $25,879,188 of net proceeds from the exercise
of previously issued warrants and stock options and $414,362 in
proceeds from a PPP Loan.
During the year ended December 31, 2019, w
e received
$11,351,214 of net proceeds from the June 2019 Follow-On Offering
and obtained $2,141,576 of net proceeds from the exercise of
previously issued warrants and stock options
.
Contractual Obligations and Commitments
Pursuant to that certain exclusive Amended and Restated
Intellectual Property License Agreement dated September 30, 2016,
by and between the Company and Syzygy Licensing, LLC
(“
Syzygy
”), we are obligated to pay to Syzygy a 4%
royalty fee on future product sales up to an aggregate amount of
$1.0 million in royalty payments
or until September 30,
2026, whichever occurs earlier
.
We are committed to aggregate lease payments on facility leases of
$94,011 in 2021 and $56,006 in 2022.
At
December 31, 2020 the Company was committed for approximately $2.2
million for future component deliveries and contract services that
are generally subject to modification or rescheduling in the normal
course of business.
Pursuant
to the NSENA Asset Purchase Agreement dated December 14, 2020
we are obligated to pay to NSENA cash
consideration of $100,000 on March 15, 2021, $100,000 on June 15,
2021 and $75,000 on September 15, 2021. In addition, Wrap Reality
assumed $15,000 of liabilities related to funds received by NSENA
but unearned on existing revenue related contract arrangements. As
additional earn-out consideration Wrap Reality has agreed to pay
NSENA 10% of net revenues (or a lesser amount equal to 50% of
direct profit) from specific identified prospects that become
revenue customers before September 30, 2021 but only on amounts
collected between Closing and June 30, 2022.
Effects of Inflation
We do
not believe that inflation has had a material impact on our
business, revenue or operating results during the periods
presented.
Recent Accounting Pronouncements
There have been no recent accounting pronouncements or changes in
accounting pronouncements during the year ended December 31, 2020,
or subsequently thereto, that we believe are of potential
significance to our financial statements.
ITEM 7A. Q
UANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT
MARKET RISK
Not applicable.
-37-
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The Financial Statements of the Company required to be included in
this Item 8 are set forth in a separate section of this report
following Item 15 commencing on Page F-1.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING
AND FINANCIAL DISCLOSURE
There have been no disagreements or any reportable events requiring
disclosure under Item 304(b) of Regulation S-K.
ITEM 9A. CONTROLS AND PROCEDURES.
We are required to maintain disclosure controls and procedures
designed to ensure that material information related to us, is
recorded, processed, summarized and reported within the time
periods specified in the SEC rules and forms.
Evaluation of Disclosure Controls and Procedures
We maintain disclosure controls and procedures (as defined in Rules
13a-15(e) and 15d-15(e) under the Exchange Act) that are designed
to ensure that information required to be disclosed in our Exchange
Act reports is recorded, processed, summarized and reported within
the time periods specified in the SEC’s rules and forms. Our
disclosure controls and procedures are also designed to ensure that
information required to be disclosed in our Exchange Act reports is
accumulated and communicated to management, including our interim
Chief Executive Officer and Chief Financial Officer, to allow
timely decisions regarding required disclosures. In designing and
evaluating the disclosure controls and procedures, management
recognizes that any controls and procedures, no matter how well
designed and operated, can provide only reasonable assurance of
achieving the desired control objectives, and management is
required to apply its judgment in evaluating the cost-benefit
relationship of possible controls and procedures.
Our management, with the participation of our interim Chief
Executive Officer and Chief Financial Officer, evaluated the
effectiveness of our disclosure controls and procedures as of
December 31, 2020 and, based on this evaluation, our interim Chief
Executive Officer and Chief Financial Officer concluded that, as of
the end of the period covered by this report, our disclosure
controls and procedures
were
effective at the reasonable assurance level.
Management’s Report on Internal Control Over Financial
Reporting
This Annual Report does not include a report of management's
assessment regarding internal control over financial reporting or
an attestation report of the Company’s registered public
accounting firm because the Company is an “emerging growth
company” under the JOBS Act. An attestation report of the
Company’s independent registered public accounting firm
regarding internal control over financial reporting is also not
required for smaller reporting companies.
Changes in Internal Controls
There
have been no changes in our internal control over financial
reporting during the fiscal quarter ended December 31, 2020, that
have materially affected, or are reasonably likely to materially
affect, our internal control over financial reporting. Our process
for evaluating controls and procedures is continuous and
encompasses constant improvement of the design and effectiveness of
established controls and procedures and the remediation of any
deficiencies, which may be identified during this
process.
ITEM 9B. OTHER INFORMATION
None.
-38-
PA
RT III
Certain
information required by this Part III is omitted from this report
and is incorporated by reference to our Definitive Proxy Statement
to be filed with the SEC in connection with the Annual Meeting of
Stockholders to be held in 2021 (the “
Proxy Statement
”), which must be
filed no later than 120 days
after the
close of the fiscal year ended December 31, 2020, pursuant to
Regulation 14A
.
ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE
GOVERNANCE.
The information required by this item will be incorporated by
reference from the Company’s definitive proxy statement, to
be filed with the SEC on or before April 30, 2021.
ITEM 11. EXECUTIVE COMPENSATION.
The information required by this item will be incorporated by
reference from the Company’s definitive proxy statement, to
be filed with the SEC on or before April 30, 2021.
ITEM 12. SECURITY
OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT AND RELATED STOCKHOLDER MATTERS.
The information required by this item will be incorporated by
reference from the Company’s definitive proxy statement, to
be filed with the Securities and Exchange Commission on or before
April 30, 2021.
ITEM 13. CERTAIN
RELATIONSHIPS AND RELATED TRANSACTIONS AND
DIRECTOR INDEPENDENCE.
The information required by this item will be incorporated by
reference from the Company’s definitive proxy statement, to
be filed with the SEC on or before April 30, 2021.
ITEM 14. PRINCIPAL ACCOUNTING FEES AND SERVICES.
The information required by this item will be incorporated by
reference from the Company’s definitive proxy statement, to
be filed with the SEC on or before April 30, 2021.
-39-
PA
RT IV
ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
|
(a)
List of documents filed as a part of this
report:
|
|
|
|
(1)
Index to
Financial Statements
|
|
|
|
Report
of Independent Registered Public Accounting Firm
|
|
F-2
|
|
Balance
Sheets as of December 31, 2020 and 2019
|
|
F-3
|
|
Statements
of Operations for the Years Ended December 31, 2020 and
2019
|
|
F-4
|
|
Statements
of Stockholders’ Equity for the Years Ended December 31, 2020
and 2019
|
|
F-5
|
|
Statements
of Cash Flows for the Years Ended December 31, 2020 and
2019
|
|
F-6
|
|
Notes
to Financial Statements
|
|
F-7
|
|
|
|
|
|
(2)
Financial
Statement Schedules
|
|
|
|
All
schedules have been omitted because the information is not
applicable, is not material or because the information required is
included in the financial statements or the notes
thereto.
|
||
|
(3)
Index to
Exhibits
|
|
|
|
The
exhibits listed on the accompanying index to exhibits immediately
following the financial statements are filed as part of, or hereby
incorporated by reference into, this Form 10-K.
|
||
|
Exhibit Number
|
Description
|
|
Stock
Purchase Agreement, dated March 22, 2017, by and between Wrap
Technologies, LLC, Petro River Oil Corp., and Megawest Energy
Montana Corp. Incorporated by reference to Exhibit 2.1 to the
Registration Statement on Form S-1, filed on April 17,
2017.
|
|
|
Merger
Agreement between Wrap Technologies, LLC and Megawest Energy
Montana Corp., dated March 30, 2017. Incorporated by reference to
Exhibit 2.2 to the Registration Statement on Form S-1, filed on
April 17, 2017.
|
|
|
Amended
and Restated Certificate of Incorporation of the Registrant.
Incorporated by reference to Exhibit 3.1 to the Registration
Statement on Form S-1, filed on April 17, 2017.
|
|
|
Bylaws
of the Registrant. Incorporated by reference to Exhibit 3.2 to the
Registration Statement on Form S-1, filed on April 17,
2017.
|
|
|
Form of
Common Stock Certificate. Incorporated by reference to Exhibit 4.1
to Amendment No. 1 to the Registration Statement on Form S-1, filed
on May 30, 2017.
|
|
|
Form of
Investor Warrant, dated October 30, 2018. Incorporated by reference
to Exhibit 4.1 to the Current Report on Form 8-K, filed on November
5, 2018.
|
|
|
Form of
Placement Agent Warrant, dated October 30, 2018. Incorporated by
reference to Exhibit 4.2 to the Current Report on Form 8-K, filed
on November 5, 2018.
|
|
|
Form of Investor Warrant, dated June 18, 2019.
Incorporated by reference to Exhibit 4.1 to the
Current Report on Form 8-K, filed on June 18,
2019.
|
|
|
Form of
Offering Agent Warrant, dated June 18, 2019.
Incorporated by reference to Exhibit 4.1 to the
Current Report on Form 8-K, filed on June 18,
2019.
|
|
|
Form of Warrant Agreement. Incorporated by reference to Exhibit 4.2
to the Current Report on Form 8-K, filed on June 2,
2020.
|
|
|
Amended
and Restated Intellectual Property License Agreement, dated
September 30, 2016, by and between Wrap Technologies, LLC and
Syzygy Licensing LLC. Incorporated by reference to Exhibit 10.1 to
the Registration Statement on Form S-1, filed on April 17,
2017.
|
|
|
2017
Equity Compensation Plan. Incorporated by reference to Exhibit 10.2
to the Registration Statement on Form S-1, filed on April 17,
2017.
|
|
|
Form of Placement Agent Agreement, dated October 30, 2018.
Incorporated by reference to Exhibit 10.1 to the Current Report on
Form 8-K, filed on November 5, 2018.
|
|
|
Form of Registration Rights Agreement, dated October 30, 2018.
Incorporated by reference to Exhibit 10.2 to the Current Report on
Form 8-K, filed on November 5, 2018.
|
|
|
Supplemental
Engagement Letter by and between Wrap Technologies, Inc. and
Katalyst Securities LLC, dated June 7, 2019.
Incorporated by reference to Exhibit 10.1 to the
Current Report on Form 8-K, filed on June 13,
2019.
|
|
|
Engagement Letter by and between Wrap Technologies, Inc., Dinosaur
Financial Group, LLC and Katalyst Securities LLC, dated June 12 ,
2019.
Incorporated by reference
to Exhibit 10.2 to the Current Report on Form 8-K, filed on June
18, 2019.
|
|
|
Amended 2017 Equity Compensation Plan.
Incorporated by
reference to Exhibit 10.1 to the Registration Statement on Form
S-8, filed on June 24, 2019.
|
|
|
Industrial Real Estate Lease, dated May 10, 2019, by and between
Wrap Technologies, Inc. and JM Sky Harbor Properties LLC.
Incorporated by reference from Exhibit 10.1 to the Current Report
on Form 8-K, filed on June 6, 201
9.
|
|
|
Promissory
Note by and between Wrap Technologies, Inc. and Bank of America,
N.A. dated May 1, 2020. Incorporated by reference to Exhibit 10.1
to the Current Report on Form 8-K, filed on May 5,
2020.
|
|
|
Consulting
Agreement by and between the Company and V3, effective April 1,
2020. Incorporated by reference to Exhibit 10.1 to the Registration
Statement on Form S-8, filed on May 29, 2020.
|
|
|
Amendment No. 2 to the Wrap Technologies, Inc. 2017 Equity
Compensation Plan.
Incorporated by reference to Exhibit 10.1
to the Registration Statement on Form S-8, filed on June 17,
2020.
|
|
|
Form of Subscription Agreement. Incorporated by reference to
Exhibit 10.1 to the Current Report on Form 8-K, filed on June 2,
2020.
|
|
|
Employment
Agreement by and between Wrap Technologies, Inc., and Marc T.
Thomas, dated July 30, 2020.
Incorporated by reference to Exhibit 10.1 to the
Current Report on Form 8-K, filed on July 31,
2020.
|
|
|
At-Will
Employment, Confidential Information, Non-Compete/Non-Solicitation,
Invention Assignment, and Arbitration Agreement, dated September 9,
2020 between the Company and Thomas Smith.
Incorporated by reference to Exhibit 10.1 to the
Current Report on Form 8-K, filed on September 14,
2020.
|
|
|
Asset
Purchase Agreement between NSENA Inc. and Wrap Reality, Inc. dated
as of December 14, 2020. In accordance with the instructions to
Item 601(b)(2) of Regulation S-K, the schedules and exhibits to
the Asset Purchase Agreement are not filed
herewith. The Asset Purchase Agreement identifies
such schedules and exhibits, including the general nature of their
content. The Company undertakes to provide such
schedules and exhibits to the SEC upon request.
Incorporated by reference to Exhibit 2.1 to the
Current Report on Form 8-K, filed on September 14,
2020.
|
|
|
Form of
At-Will Employment, Confidential Information, Non-Compete/
Non-Solicitation, Invention Assignment, and Arbitration Agreement
between the Key Employees and the Company dated December 14, 2020.
Incorporated by reference to Exhibit
2.2 to the Current Report on Form 8-K, filed on September 14,
2020.
|
|
|
Code of Ethics of
the Registrant Applicable to Directors, Officers and
Employees.*
|
|
|
Subsidiaries of Wrap
Technologies, Inc.*
|
|
|
Consent of
Independent Registered Public Accounting Firm -
Rosenberg Rich Baker Berman, P.A.
*
|
|
|
Certification
pursuant to Rule 13a-14(a) under the Securities Exchange Act of
1934 *
|
|
|
Certification
pursuant to Rule 13a-14(a) under the Securities Exchange Act of
1934 *
|
|
|
|
Certifications
pursuant to 18 U.S.C. Section 1350. This certification is being
furnished solely to accompany this Annual Report on Form 10-K and
is not being filed for purposes of Section 18 of the Securities
Exchange Act of 1934, as amended, and is not to be incorporated by
reference into any filing of the Company.*
|
|
|
Extensible Business Reporting Language (XBRL)
Exhibits*
|
|
101.INS
|
XBRL Instance Document.
|
|
101.SCH
|
XBRL Taxonomy Extension Schema.
|
|
101.CAL
|
XBRL Taxonomy Extension Calculation Linkbase.
|
|
101.DEF
|
XBRL Taxonomy Extension Definition Linkbase.
|
|
101.LAB
|
XBRL Taxonomy Extension Labels Linkbase.
|
|
101.PRE
|
XBRL Taxonomy Extension Presentation Linkbase.
|
*
Filed herewith.
+
Management contract or compensatory plan or
arrangement.
-40-
WRAP TECHNOLOGIES, INC.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
|
|
|
Page
|
|
|
|
|
|
Audited Consolidated Financial Statements:
|
|
|
|
|
|
|
|
Report of Independent Registered Public Accounting
Firm
|
F-2
|
|
|
|
|
|
|
Consolidated Balance Sheets as of December 31, 2020 and
2019
|
F-3
|
|
|
|
|
|
|
Consolidated Statements of Operations for the Years Ended December
31, 2020 and 2019
|
F-4
|
|
|
|
|
|
|
Consolidated Statements of Stockholders’ Equity for Years
Ended December 31, 2020 and 2019
|
F-5
|
|
|
|
|
|
|
Consolidated Statements of Cash Flows for the Years Ended December
31, 2020 and 2019
|
F-6
|
|
|
|
|
|
|
Notes to Consolidated Financial Statements
|
F-7
|
|
F-
1
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING
FIRM
To the
Board of Directors and
Stockholders
of Wrap Technologies, Inc.
Opinion on the Financial Statements
We have
audited the accompanying balance sheets of Wrap Technologies, Inc.
(the Company) as of December 31, 2020 and 2019, and the related
statements of operations and comprehensive loss,
stockholders’ equity, and cash flows for each of the years in
the two year period ended December 31, 2020, and the related notes
(collectively referred to as the financial statements). In our
opinion, the financial statements present fairly, in all material
respects, the financial position of the Company as of December 31,
2020 and 2019, and the results of its operations and its cash flows
for each of the years in the two year period ended December 31,
2020, in conformity with accounting principles generally accepted
in the United States of America.
Basis for Opinion
These
financial statements are the responsibility of the Company’s
management. Our responsibility is to express an opinion on the
Company’s financial statements based on our audits. We are a
public accounting firm registered with the Public Company
Accounting Oversight Board (United States) (PCAOB) and are required
to be independent with respect to the Company in accordance with
the U.S. federal securities laws and the applicable rules and
regulations of the Securities and Exchange Commission and the
PCAOB.
We
conducted our audits in accordance with the standards of the PCAOB.
Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements
are free of material misstatement, whether due to error or fraud.
The Company is not required to have, nor were we engaged to
perform, an audit of its internal control over financial reporting.
As part of our audits, we are required to obtain an understanding
of internal control over financial reporting, but not for the
purpose of expressing an opinion on the effectiveness of the
Company’s internal control over financial reporting.
Accordingly, we express no such opinion.
Our
audits included performing procedures to assess the risks of
material misstatement of the financial statements, whether due to
error or fraud, and performing procedures that respond to those
risks. Such procedures included examining, on a test basis,
evidence regarding the amounts and disclosures in the financial
statements. Our audits also included evaluating the accounting
principles used and significant estimates made by management, as
well as evaluating the overall presentation of the financial
statements. We believe that our audits provide a reasonable basis
for our opinion.
|
/s/
Rosenberg Rich Baker Berman P.A.
|
|
|
|
|
|
We have
served as the Company’s auditor since 2016.
|
|
|
|
|
|
Somerset,
New Jersey
|
|
|
|
|
|
March
4, 2021
|
|
F-
2
Wrap Technologies, Inc.
Consolidated Balance Sheets
|
|
December
31,
|
|
|
|
2020
|
2019
|
|
ASSETS
|
|
|
|
Current
assets:
|
|
|
|
Cash and cash
equivalents
|
$
16,646,811
|
$
16,983,864
|
|
Short-term
investments
|
24,994,360
|
-
|
|
Accounts
receivable, net
|
1,870,934
|
195,347
|
|
Inventories,
net
|
2,655,390
|
2,244,541
|
|
Prepaid expenses
and other current assets
|
759,445
|
250,947
|
|
Total
current assets
|
46,926,940
|
19,674,699
|
|
Property
and equipment, net
|
357,287
|
242,876
|
|
Operating
lease right-of-use asset, net
|
139,088
|
260,931
|
|
Intangible
assets, net
|
1,396,484
|
230,283
|
|
Other
assets
|
12,681
|
12,681
|
|
Total
assets
|
$
48,832,480
|
$
20,421,470
|
|
|
|
|
|
LIABILITIES
AND STOCKHOLDERS' EQUITY
|
|
|
|
Current
liabilities:
|
|
|
|
Accounts
payable
|
$
1,232,349
|
$
406,967
|
|
Accrued
liabilities
|
721,075
|
194,294
|
|
Customer
deposits
|
2,095
|
343,724
|
|
Deferred
revenue
|
16,015
|
2,684
|
|
Operating lease
liability - short term
|
94,011
|
128,131
|
|
Business
acquisition liability - short term
|
275,000
|
-
|
|
Total
current liabilities
|
2,340,545
|
1,075,800
|
|
|
|
|
|
Long-term
liabilities:
|
|
|
|
Operating Lease
Liability - long term
|
56,006
|
150,018
|
|
Business
acquisition liability - long term
|
22,500
|
-
|
|
Total
long-term liabilities
|
78,506
|
150,018
|
|
Total
liabilities
|
2,419,051
|
1,225,818
|
|
|
|
|
|
Commitments
and contingencies (Note 13)
|
|
|
|
|
|
|
|
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; 37,554,162 and
29,829,916 shares issued and outstanding each period,
respectively
|
3,756
|
2,983
|
|
Additional
paid-in capital
|
71,704,857
|
31,922,493
|
|
Accumulated
deficit
|
(25,310,033
)
|
(12,729,824
)
|
|
Accumulated
other comprehensive income
|
14,849
|
-
|
|
Total
stockholders' equity
|
46,413,429
|
19,195,652
|
|
Total
liabilities and stockholders' equity
|
$
48,832,480
|
$
20,421,470
|
See
accompanying notes to consolidated financial
statements.
F-
3
Wrap Technologies, Inc.
Consolidated Statements of Operations and Comprehensive
Loss
|
|
Year Ended
December 31,
|
|
|
|
2020
|
2019
|
|
Revenues:
|
|
|
|
Product
sales
|
$
3,868,384
|
$
656,071
|
|
Other
revenue
|
75,673
|
40,719
|
|
Total
revenues
|
3,944,057
|
696,790
|
|
Cost of
revenues
|
2,601,323
|
420,016
|
|
Gross
profit
|
1,342,734
|
276,774
|
|
|
|
|
|
Operating
expenses:
|
|
|
|
Selling,
general and administrative
|
11,630,644
|
6,653,465
|
|
Research
and development
|
2,788,887
|
2,236,985
|
|
Total operating
expenses
|
14,419,531
|
8,890,450
|
|
Loss from
operations
|
(13,076,797
)
|
(8,613,676
)
|
|
|
|
|
|
Other
income (expense):
|
|
|
|
Interest
income
|
83,272
|
291,494
|
|
Debt
forgiveness income
|
416,683
|
-
|
|
Other
|
(3,367
)
|
(3,306
)
|
|
|
496,588
|
288,188
|
|
Net
loss
|
$
(12,580,209
)
|
$
(8,325,488
)
|
|
|
|
|
|
Net loss per basic
and diluted common share
|
$
(0.37
)
|
$
(0.29
)
|
|
Weighted average
common shares used to compute net loss per basic and diluted common
share
|
33,846,338
|
28,652,625
|
|
|
|
|
|
Comprehensive
loss:
|
|
|
|
Net
loss
|
$
(12,580,209
)
|
$
(8,325,488
)
|
|
Net
unrealized gain on short-term investments
|
14,849
|
-
|
|
Comprehensive
loss
|
$
(12,565,360
)
|
$
(8,325,488
)
|
See
accompanying notes to consolidated financial
statements.
F-
4
Wrap Technologies, Inc.
Consolidated Statements of Stockholders' Equity
|
|
|
|
|
|
Accumulated
|
|
|
|
|
|
Additional
|
|
Other
|
Total
|
|
|
Common
Stock
|
|
Paid-In
|
Accumulated
|
Comprehensive
|
Stockholders'
|
|
|
Shares
|
Amount
|
Capital
|
Deficit
|
Income
|
Equity
|
|
Balance
at December 31, 2018
|
27,364,607
|
$
2,736
|
$
16,791,254
|
$
(4,404,336
)
|
$
-
|
$
12,389,654
|
|
Sale of
Common Stock and warrants at $6.50 per share and placement agent
warrants in public offering, net of issuance costs
|
1,923,076
|
192
|
11,351,022
|
-
|
-
|
11,351,214
|
|
Common shares
issued upon exercise of warrants at $3.00 per share
|
127,649
|
13
|
382,934
|
-
|
-
|
382,947
|
|
Common shares
issued upon exercise of warrants at $5.00 per share
|
345,834
|
35
|
1,700,469
|
-
|
-
|
1,700,504
|
|
Common shares
issued upon exercise of stock options
|
38,750
|
4
|
58,121
|
-
|
-
|
58,125
|
|
Share-based
compensation expense
|
|
|
1,536,096
|
-
|
-
|
1,536,096
|
|
Common shares
issued for services
|
30,000
|
3
|
102,597
|
-
|
-
|
102,600
|
|
Net loss for
the period
|
-
|
-
|
-
|
(8,325,488
)
|
-
|
(8,325,488
)
|
|
Balance
at December 31, 2019
|
29,829,916
|
$
2,983
|
$
31,922,493
|
$
(12,729,824
)
|
$
-
|
$
19,195,652
|
|
Sale of
Common Stock and warrants at $6.00 per share in public offering,
net of issuance costs
|
2,066,667
|
207
|
11,666,999
|
-
|
-
|
11,667,206
|
|
Common shares
issued upon exercise of warrants at $3.00 per share, net of
issuance costs
|
328,458
|
33
|
960,993
|
-
|
-
|
961,026
|
|
Common shares
issued upon exercise of warrants at $5.00 per share, net of
issuance costs
|
3,890,839
|
389
|
18,718,605
|
-
|
-
|
18,718,994
|
|
Common shares
issued upon exercise of warrants at $6.00 per share, net of
issuance costs
|
675,000
|
68
|
3,847,432
|
-
|
-
|
3,847,500
|
|
Common shares
issued upon exercise of warrants at $6.50 per share, net of
issuance costs
|
261,679
|
26
|
1,646,292
|
-
|
-
|
1,646,318
|
|
Common shares
issued upon exercise of stock options
|
371,000
|
37
|
705,313
|
-
|
-
|
705,350
|
|
Common shares
issued upon vesting of restricted stock units
|
130,603
|
13
|
(13
)
|
-
|
-
|
-
|
|
Share-based
compensation expense
|
-
|
-
|
2,236,743
|
-
|
-
|
2,236,743
|
|
Net
unrealized gain on short-term investments
|
-
|
-
|
-
|
-
|
14,849
|
14,849
|
|
Net loss for
the period
|
-
|
-
|
-
|
(12,580,209
)
|
-
|
(12,580,209
)
|
|
Balance
at December 31, 2020
|
37,554,162
|
$
3,756
|
$
71,704,857
|
$
(25,310,033
)
|
$
14,849
|
$
46,413,429
|
See
accompanying notes to consolidated financial
statements.
F-
5
Wrap Technologies, Inc.
Consolidated Statements of Cash Flows
|
|
Year Ended
December 31,
|
|
|
|
2020
|
2019
|
|
Cash
Flows From Operating Activities:
|
|
|
|
Net
loss
|
$
(12,580,209
)
|
$
(8,325,488
)
|
|
Adjustments to
reconcile net loss to net cash
|
|
|
|
used
in operating activities:
|
|
|
|
Depreciation
and amortization
|
163,262
|
46,945
|
|
Warranty
provision
|
30,364
|
13,495
|
|
Inventory
obsolescence
|
(68,108
)
|
(193,506
)
|
|
Non-cash
lease expense
|
121,843
|
80,069
|
|
Share-based
compensation
|
2,236,743
|
1,536,096
|
|
Debt
forgiveness income
|
(416,683
)
|
-
|
|
Non-cash
interest expense
|
2,321
|
-
|
|
Common
shares issued for services
|
-
|
102,600
|
|
Provision
for doubtful accounts
|
10,140
|
-
|
|
Changes
in assets and liabilities:
|
|
|
|
Accounts
receivable
|
(1,685,727
)
|
(190,951
)
|
|
Inventories
|
(342,741
)
|
(1,892,768
)
|
|
Prepaid
expenses and other current assets
|
(508,498
)
|
(136,084
)
|
|
Accounts
payable
|
825,382
|
174,052
|
|
Operating
lease liability
|
(128,132
)
|
(62,851
)
|
|
Customer
deposits
|
(341,629
)
|
343,724
|
|
Accrued
liabilities and other
|
492,564
|
112,346
|
|
Deferred
compensation
|
-
|
(96,000
)
|
|
Warranty
settlement
|
3,853
|
-
|
|
Deferred
revenue
|
(1,669
)
|
2,684
|
|
Net cash used in
operating activities
|
(12,186,924
)
|
(8,485,637
)
|
|
|
|
|
|
Cash
Flows From Investing Activities:
|
|
|
|
Purchase of
short-term investments
|
(34,979,511
)
|
-
|
|
Proceeds from
maturities of short-term investments
|
10,000,000
|
-
|
|
Capital
expenditures for property and equipment
|
(248,897
)
|
(256,742
)
|
|
Investment in
patents and trademarks
|
(128,914
)
|
(114,274
)
|
|
Purchase of
intangible assets
|
(543,563
)
|
-
|
|
Business
acquisition
|
(210,000
)
|
-
|
|
Long-term
deposits
|
-
|
(11,169
)
|
|
Net cash used in
investing activities
|
(26,110,885
)
|
(382,185
)
|
|
|
|
|
|
Cash
Flows From Financing Activities:
|
|
|
|
Sale of common
stock and warrants
|
12,400,002
|
12,499,994
|
|
Offering costs paid
on sale of common stock and warrants
|
(732,796
)
|
(1,148,780
)
|
|
Proceeds from
exercise of warrants
|
26,190,483
|
2,112,117
|
|
Offering costs paid
on exercise of warrants
|
(1,016,645
)
|
(28,666
)
|
|
Proceeds from
exercise of stock options
|
705,350
|
58,125
|
|
Proceeds from bank
note
|
414,362
|
-
|
|
Net cash provided
by financing activities
|
37,960,756
|
13,492,790
|
|
|
|
|
|
Net
increase (decrease) in cash and cash equivalents
|
(337,053
)
|
4,624,968
|
|
Cash
and cash equivalents, beginning of period
|
16,983,864
|
12,358,896
|
|
Cash
and cash equivalents, end of period
|
$
16,646,811
|
$
16,983,864
|
|
|
|
|
|
Supplemental
Disclosure of Non-Cash Investing
|
|
|
|
and
Financing Activities:
|
|
|
|
Business
acquisition liability
|
$
297,500
|
$
-
|
|
Business
acquisition cost in deferred revenue
|
$
15,000
|
$
-
|
|
Change in
unrealized gain on short-term investments
|
$
14,849
|
$
-
|
|
Right-of-use assets
and liabilities recorded during period
|
$
-
|
$
341,000
|
|
Issuance costs
relating to warrants issued to public offering selling
agent
|
$
-
|
$
205,894
|
See
accompanying notes to consolidated financial
statements.
F-
6
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.
Principles of Consolidation
The
Company has one wholly-owned subsidiary, Wrap Reality, Inc. formed
in December 2020 (see Note 3) and has commenced selling its virtual
reality training system primarily targeting law enforcement
agencies. The consolidated financial statements include the
accounts of this subsidiary after elimination of intercompany
transactions and accounts.
Basis of Presentation and Use of Estimates
The
accompanying financial statements have been prepared in conformity
with accounting principles generally accepted in the United States
of America (“
U.S.
GAAP
”).
The preparation
of financial statements in conformity with accounting principles
generally accepted in the United States of America requires
management to make estimates and assumptions
(e.g.,
share-based compensation valuation, allowance for doubtful
accounts, valuation of inventory and intangible assets, warranty
reserve, accrued costs, valuation allowance related to deferred tax
assets and
recognition and measurement
of contingencies) that affect the reported amounts of assets and
liabilities, and disclosure of contingent assets and liabilities at
the date of the financial statements and affect the reported
amounts of revenues and expenses during the reporting period.
Actual results could materially differ from those
estimates.
Concentrations of Risk
Credit Risk
– Financial instruments that potentially
subject the Company to concentration of credit risk consisted
primarily of cash, cash equivalents,
U.S. treasury bills
and accounts receivable
from customers. The Company maintains its cash and cash equivalent
deposits at two domestic financial institutions. The Company is
exposed to credit risk in the event of default by a financial
institution to the extent that cash and cash equivalents are in
excess of the amount insured by the Federal Deposit Insurance
Corporation. The Company places its cash and cash equivalents with
high-credit quality financial institutions and are managed within
established guidelines to mitigate risks. To date, the Company has
not experienced any losses on its cash and cash
equivalents.
Concentrations of Accounts Receivable and Revenue
–
T
he Company has a limited number of
domestic and international customers
. The Company may
experience concentrations in both accounts receivable and revenue
due to the timing of sales and collections of related payments (see
Note 16).
Concentration of Suppliers
– The Company relies on a
limited number of component suppliers and contract suppliers. In
particular, a single supplier is currently the sole manufacturer of
the Company’s laser assembly with some parts sole sourced
from other suppliers. If supplier shortages occur, or quality
problems arise, production schedules could be significantly delayed
or costs significantly increased, which could in turn have a
material adverse effect on the Company’s financial condition,
results of operation and cash flows.
Impact of COVID-19
–
In December 2019,
a novel strain of coronavirus
(“COVID-19
”)
emerged in China.
In March
2020, the World Health Organization declared the outbreak of a
novel coronavirus (“
COVID-19
”) as a pandemic.
While initially the
outbreak was largely concentrated in China and caused significant
disruptions to its economy, it spread to other countries and
infections have been reported globally. The extent to which the
coronavirus impacts our operations will continue to depend on
future developments, which are highly uncertain and cannot be
predicted with confidence, including the duration of the outbreak,
new information which may emerge concerning the severity of the
coronavirus and the actions to contain the coronavirus or treat its
impact, among others. In particular, the continued spread of the
coronavirus globally or emergence of new strains could adversely
impact our operations, including our manufacturing and supply
chain. Our operations could be negatively affected if employees are
quarantined as the result of exposure to a contagious illness.
Similarly, travel restrictions resulting from the rapid spread of
contagious illnesses may have a material adverse effect on our
business and results of operations.
F-
7
Cash and Cash Equivalents
The Company considers all highly liquid investments purchased with
original maturities of three months or less from the purchase date
to be cash equivalents. Cash equivalents consist primarily of
amounts invested in Money Market Funds and United States
(“
U.S.
”) Treasury bills and are stated at fair
value.
Short-Term Investments
The Company’s short-term investments consist of U.S. Treasury
bills with original maturities beyond three months at the date of
purchase and one year or less from the balance sheet date. As of
December 31, 2020, all of the Company’s short-term
investments were classified as available-for-sale and are carried
at estimated fair value with any unrealized gains and losses,
unrelated to credit loss factors, included in other comprehensive
income in our consolidated statements of stockholders’
equity.
We adopted
Accounting
Standards Codification (“
ASC
”)
Topic 326 issued by
the
Financial Accounting
Standards Board (“
FASB
”)
effective January 1,
2020, and applied the credit loss guidance related to short-term
investments prospectively as we had no historical short-term
investments
. Because we do not
have any history of losses for our short-term investments,
o
ur
expected loss allowance methodology is developed using published or
estimated credit default rates for similar investments and current
and future economic and market conditions.
Any unrealized losses related to credit loss
factors are recorded through an allowance for credit losses in
other (expense) income, in our consolidated statements of
operations, rather than as a reduction to the amortized cost basis
in other comprehensive (loss) income, when a decline in fair value
has resulted from a credit loss. We determine realized gains or
losses on the sale of investments on a specific identification
method, and record such gains or losses as other (expense) income,
in our consolidated statements of
operations.
We did not record a
credit loss reserve for short-term investments during the year
ended December 31, 2020.
Share-Based Compensation
The
Company follows the fair value recognition provisions issued by the
Financial Accounting Standards Board (“
FASB
”) in Accounting Standards
Codification (“
ASC
”) Topic 718, Stock
Compensation (“
ASC
718
”) and has adopted Accounting Standards Update
(“
ASU
”) 2018-07
for share-based transactions with non-employees. Share-based
compensation expense recognized during 2020 and 2019 includes stock
option and restricted stock unit compensation expense.
The grant date fair
value of stock options is determined using the Black-Scholes
option-pricing model.
The grant date is the date at which an
employer and employee or non-employee reach a mutual understanding
of the key terms and conditions of a share-based payment award.
The
Black-Scholes option-pricing model requires inputs including the
market price of the Company’s Common Stock on the date of
grant, the term that the stock options are expected to be
outstanding, the implied stock volatilities of several
publicly-traded peers over the expected term of stock options,
risk-free interest rate and expected dividend. Each of these inputs
is subjective and generally requires significant judgment to
determine.
The grant date fair value of restricted stock
units is based upon the market price of the Company’s Common
Stock on the date of the grant. We determine the amount of
share-based compensation expense based on awards that we ultimately
expect to vest and account for forfeitures as they occur. The
fair value of share-based compensation is amortized to compensation
expense over the vesting term.
Loss per Share
Basic loss per common share is computed by dividing net loss for
the period by the weighted-average number of shares of Common Stock
outstanding during the period. Diluted net loss per common share
reflects the potential dilution of securities that could share in
the earnings of an entity. The Company’s losses for the
periods presented cause the inclusion of potential Common Stock
instruments outstanding to be antidilutive. Stock options,
restricted stock units and warrants exercisable or issuable for a
total of 7,566,502 and 9,857,457 shares of Common Stock were
outstanding at December 31, 2020 and 2019, respectively. 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.
F-
8
Accounts Receivable and Allowance for Doubtful
Accounts
The
Company carries accounts receivable at historical cost, less an
allowance for doubtful accounts. On a periodic basis, the Company
evaluates accounts receivable and establishes an allowance for
doubtful accounts for estimated losses.
The Company’s expected loss allowance
methodology for accounts receivable is developed using historical
collection experience, when available any published or estimated
credit default rates for entities that represent our customer base,
current and future economic and market conditions and a review of
the current status of customers' trade accounts receivables.
Additionally, specific allowance amounts are established to record
the appropriate provision for customers that have a higher
probability of default. Our monitoring activities include account
reconciliation, dispute resolution, payment confirmation,
consideration of customers' financial condition and macroeconomic
conditions. Balances are written off when determined to be
uncollectible.
At December 31, 2020 the Company had an allowance of $10,140
resulting in part from global uncertainty resulting from the
COVID-19 virus
.
There was no allowance for doubtful accounts
recorded at December 31, 2019
. If a major customer’s
creditworthiness deteriorates, or actual defaults exceed our
historical experience, such estimates could change and impact our
future reported financial results.
Inventories
Inventories are valued 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. Inventory is comprised of
raw materials, assemblies and finished products intended for sale
to customers
.
The Company evaluates
the need for reserves for excess and obsolete inventories
determined primarily based upon estimates of future demand for the
Company’s products.
At December 31, 2020 and 2019 the Company had no reserve for
obsolescence.
Contract Manufacturers
The
Company employs contract manufacturers for production of certain
components and sub-assemblies. The Company may provide parts and
components to such parties from time to time, but recognizes no
revenue or markup on such transactions. During 2020 and 2019, the
Company performed assembly of products in-house using components
and sub-assemblies from a variety of contract manufacturers and
suppliers.
Property, Equipment and Depreciation
Property and equipment is stated at cost. Depreciation on property
and equipment is computed over the estimated useful lives of three
years using the straight-line method. The Company intends, on any
retirement or disposition of property and equipment, that the
related cost and accumulated depreciation or amortization will be
removed and a gain or loss recorded.
Business Combinations
Transactions in which the Company obtains control of a business are
accounted for according to the acquisition method as described in
ASC 805, Business Combinations. The assets acquired and
liabilities assumed are recognized and measured at their fair
values as of the date control is obtained.
The Company
measures goodwill as the excess of consideration transferred, which
the Company also measures at fair value, over the net of the
acquisition date amounts of the identifiable assets acquired and
liabilities assumed.
Acquisition
related costs in connection with a business combination are
expensed as incurred. Contingent consideration is recognized and
measured at fair value at the acquisition date and until paid is
re-measured on a recurring basis and classified as a
liability.
Intangible Assets
Intangible
assets consisted of (a) capitalized legal fees and filing costs
related to obtaining patents and trademarks, (b) customer
agreements, tradenames, software, non-solicitation and non-compete
agreements acquired in business combinations and valued at fair
value at the acquisition date, and (c) the purchase cost of
indefinite-lived website domains. The estimated useful lives of
identifiable intangible assets with definite useful lives have been
estimated to be between one and twenty years. Purchased website
domain costs with an indefinite useful life are not subject to
amortization, but are subject to an annual impairment test, by
comparing their carrying amount with their corresponding fair
value. For any given intangible asset with an indefinite useful
life, if its fair value exceeds its carrying amount no impairment
loss shall be recognized.
The
carrying value of intangibles is periodically reviewed and
impairments, if any, are recognized when the future undiscounted
cash flows realized from the assets is less than its carrying
value.
F-
9
Impairment of Long-Lived Assets
Long-lived assets and identifiable intangibles held for use are
reviewed for impairment whenever events or changes in circumstances
indicate that the carrying amount may not be recoverable. If the
sum of undiscounted expected future cash flows is less than the
carrying amount of the asset or if changes in facts and
circumstances indicate, an impairment loss is recognized and
measured using the asset’s fair value. The Company did not
recognize any impairment loss during the years ended December 31,
2020 and 2019.
Classification and Valuation of Warrants
The Company accounts for warrants as either equity or liabilities
based upon the characteristics and provisions of each particular
instrument. Warrants valued and classified as equity are recorded
as additional paid-in capital based on the issue date fair value
and no further adjustment to valuation is made. As of December 31,
2020, the Company has no warrants or other derivative financial
instruments that require separate accounting as liabilities and
periodic revaluation.
Advertising and Promotion Costs
Advertising
costs are charged to expense as incurred and were $287,266 and
$165,119 for the years ended December 31, 2020 and 2019,
respectively. The Company also incurred product promotion costs for
demonstration products delivered to prospective customers of
$747,443 and $433,172 for the years ended December 31, 2020 and
2019, respectively. Advertising and promotion costs are included in
selling, general and administrative expenses in the accompanying
statements of operations.
Demonstration and Training Costs
The Company maintains a demonstration and training department as a
part of its sales and marketing activities and does not charge for
product demonstrations or training. Training is not a condition or
requirement of sale as most sales are made through distributors to
their end customers. The Company conducts local and regional
in-person, webinar and on-line demonstrations and use of force and
escalation training to support law enforcement agencies with no
purchase requirement. Such training, when provided, may occur
before or after initial or subsequent purchase or field deployment
of the Company’s products. The Company believes that law
enforcement trainers and officers that have seen demonstrations or
have been trained about its products are more supportive of their
departments purchase and deployment of product.
Research and Development Costs
Research and development costs consist primarily of contract
development costs and experimental work materials and certain
startup costs. Research and development costs with no alternative
use are expensed as incurred.
Leases
At the commencement date of a lease,
the Company recognizes a liability to make lease payments and an
asset representing the right to use the underlying asset during the
lease term. The lease liability is measured at the present value of
lease payments over the lease term. As its leases typically do not
provide an implicit rate and due to lack of borrowing history or
ability, the Company uses as its incremental borrowing rate a
low-grade debt rate published by the Federal Reserve Bank. The
right-of-use (“
ROU
”) asset is measured at cost, which includes
the initial measurement of the lease liability and initial direct
costs incurred by the Company and excludes lease incentives.
Lease liabilities are recorded as a current liability for
the portion due within one year with the balance as a long-term
liability. ROU assets are recorded as operating lease
right-of-use asset, net.
Revenue Recognition
In May 2014, the FASB issued ASU 2014-09, Revenue from Contracts
with Customers (“
ASU
2014-09
”) and ASC Subtopic 340-40, Other Assets and
Deferred Costs - Contracts with Customers (“
ASC 340-40
”), (collectively,
“
Topic 606
”).
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. ASU 2014-09 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. See Note 2 for additional
information.
F-
10
Shipping and Handling Costs
Shipping and handling costs are included in cost of revenues.
Shipping and handling costs invoiced to customers are included in
revenue. Actual shipping and handling costs were $75,106 and
$22,177 for the years ended December 31, 2020 and 2019,
respectively. Actual revenues from shipping and handling were
$62,679 and $21,414 for the years ended December 31, 2020 and 2019,
respectively
.
Warranty Reserves
The
Company warrants its products and accessories to be free from
defects in materials and workmanship for a period of one year from
the date of purchase. The warranty is generally limited. The
Company currently provides direct warranty service. International
market warranties are generally similar to the U.S.
market.
The
Company establishes a warranty reserve based on anticipated
warranty claims at the time product revenues are recognized.
Factors affecting warranty reserve levels include the number of
units sold, anticipated cost of warranty repairs and anticipated
rates of warranty claims. The Company evaluates the adequacy of the
provision for warranty costs each reporting period. The warranty
reserve was $48,140 and $13,923 at December 31, 2020 and 2019.
Actual warranty costs could differ from estimates.
Segment Information
ASC Topic 280, “Segment Reporting,” requires use of the
“management approach” model for segment reporting. The
management approach model is based on the way a company’s
management organizes segments within the company for making
operating decisions and assessing performance. The Company operates
as a single segment and will evaluate additional segment disclosure
requirements as it expands its operations.
Income Taxes
No
income tax expense was recorded for the periods ended December 31,
2020 and 2019 due to losses incurred. Deferred tax assets and
liabilities are determined based on temporary differences between
the bases of certain assets and liabilities for income tax and
financial reporting purposes.
The
Company maintains a valuation allowance with respect to deferred
tax assets. The Company establishes a valuation allowance based
upon the potential likelihood of realizing the deferred tax asset
and taking into consideration the Company’s financial
position and results of operations for the current period. Future
realization of the deferred tax benefit depends on the existence of
sufficient taxable income within the carry-forward period under the
Federal tax laws. Changes in circumstances, such as the Company
generating taxable income, could cause a change in judgment about
the realizability of the related deferred tax asset. Any change in
the valuation allowance will be included in income in the year of
the change in estimates.
Subsequent Events
Management
has evaluated events subsequent to December 31, 2020 through the
date the accompanying financial statements were filed with the
Securities and Exchange Commission and noted that there have been
no events or transactions which would affect the Company’s
financial statements for the year ended December 31,
2020.
Recently Issued Accounting Guidance
Adopted First Quarter of 2020:
In August 2018, the FASB issued ASU No. 2018-13, Fair Value
Measurement (“
Topic 820
”): Disclosure Framework Changes to the
Disclosure Requirements for Fair Value Measurement. The ASU
modifies the disclosure requirements in Topic 820, Fair Value
Measurement, to improve the effectiveness of fair value measurement
disclosures by removing or modifying certain disclosure
requirements and adding other requirements. This ASU is effective
for public companies for annual reporting periods and interim
periods within those annual periods beginning after December 15,
2019. The adoption of this standard in the first quarter ended
March 31, 2020 had no impact on the Company’s financial
statements or disclosures.
In June 2016, the FASB issued ASU No. 2016-13, Financial
Instruments - Credit Losses
(“Topic
326”):
Measurement
of Credit Losses on Financial Instruments which was further updated
and clarified by the FASB through issuance of additional related
ASUs
.
Under ASU 2016-13, existing guidance on
reporting credit losses for trade and other receivables and
available for sale debt securities have been replaced with a new
forward-looking “expected loss” model that has resulted
in the earlier recognition of allowances for losses. The adoption
of these standards in the first quarter ended March 31, 2020 had no
impact on the Company’s financial statements or disclosures.
As part of our assessment of the adequacy of our allowances for
credit losses, we consider a number of factors including, but not
limited to, customer credit ratings, bankruptcy filings, published
or estimated credit default rates, age of receivables, expected
loss rates and collateral exposures.
F-
11
Other Guidance:
In December 2019, the FASB
issued Accounting Standards Update 2019-12, Income Taxes
(“
Topic 740
”):
Simplifying the Accounting for Income
Taxes (“
ASU 2019-12
”),
which is intended to simplify various aspects related to accounting
for income taxes. ASU 2019-12 removes certain exceptions
to the general principles in Topic 740 and also clarifies and
amends existing guidance to improve consistent application.
ASU 2019-12 is effective for fiscal years beginning
after December 15, 2020, with early adoption permitted.
We do not expect that the adoption of this ASU will have a
significant impact on our financial
statements.
In August 2020, the FASB issued ASU No.
2020-06,
Debt—Debt with
Conversion and Other Options (“Subtopic 470-20”) and
Derivatives and Hedging—Contracts in Entity’s Own
Equity “(Subtopic 815-40”): Accounting for Convertible
Instruments and Contracts in an Entity’s Own
Equity
, which simplifies
accounting for convertible instruments by removing major separation
models required under current U.S. GAAP. The ASU removes certain
settlement conditions that are required for equity contracts to
qualify for the derivative scope exception and it also simplifies
the diluted earnings per share calculation in certain areas. This
guidance is effective for fiscal years, and interim periods within
those fiscal years, beginning after December 15, 2021, with early
adoption permitted. The Company is currently evaluating the impact
of this standard on its financial statements and related
disclosures.
The
Company has reviewed other recently issued, but not yet effective,
accounting pronouncements and does not believe the future adoptions
of any such pronouncements will be expected to cause a material
impact on its financial condition or the results of
operations.
2.
REVENUE
AND PRODUCT COSTS
The
Company enters into contracts that include various combinations of
products, accessories. software and services, each of which are
generally distinct and are accounted for as separate performance
obligations.
A
performance obligation is a promise in a contract to transfer a
distinct good or service to a customer, and is the unit of account
in Topic 606.
For contracts with a
single performance obligation, the entire transaction price is
allocated to the single performance obligation.
For
contracts with multiple performance obligations, the Company
allocates the contract transaction price to each performance
obligation using the Company’s estimate of the standalone
selling price (“
SSP
”) of each distinct good or
service in a contract.
The Company
determines standalone selling prices based on the price at which
the performance obligation is sold separately. If the standalone
selling price is not observable through past transactions, the
Company estimates the standalone selling price 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.
F-
12
Time-based virtual reality system contracts generally include
setup, training and the use of software and hardware for a fixed
term, generally one to five years and support and upgrade services
during the same period. The Company does not sell time-based
arrangements without setup, training and support services and
therefore revenues for the entire arrangement are recognized on a
straight-line basis over the term. When hardware is bundled and not
sold separately the
Company allocates the contract
transaction price to each performance obligation using the SSP of
each distinct good and service in the contract.
The
timing of revenue recognition may differ from the timing of
invoicing to customers. The Company generally has an unconditional
right to consideration when customers are invoiced and a receivable
is recorded. A contract asset is recognized when revenue is
recognized prior to invoicing, or a contract liability (deferred
revenue) when revenue will be recognized subsequent to invoicing.
At December 31, 2020 the Company’s deferred revenue totaled
$16,015, of which $14,125 related to virtual reality training and
$1,890 related to extended warranties. At December 31, 2019 the
Company had deferred revenue of $2,684 related to future training
contracted as part of a sale.
The Company may also receive consideration, per terms of a
contract, from customers prior to transferring goods to the
customer. The Company records customer deposits as a contract
liability.
The
Company recognizes an asset if there are incremental costs of
obtaining a contract with a customer such as commissions. These
costs are ascribed to or allocated to the underlying performance
obligations in the contract and amortized consistent with the
recognition timing of the revenue for any such underlying
performance obligations. The Company had no such assets at December
31, 2020 and December 31, 2019. 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 one-year warranty are
charged to cost of products sold when revenue is recorded for the
related product. Royalties are also charged to cost of products
sold.
3.
ACQUISITION
On December 14, 2020, the Company, through a new wholly-owned
subsidiary, Wrap Reality, Inc., entered into an Asset Purchase
Agreement with NSENA Inc, a Delaware corporation, to acquire all of
NSENA’s tangible and intangible assets, properties, and
rights held for use in connection with NSENA’s virtual
reality training business. The acquisition enhances the
Company’s training services primarily targeting law
enforcement agencies.
The Company paid to NSENA cash consideration of $210,000 and
recorded a short-term business acquisition liability of $275,000.
The liability is payable $100,000 on March 15, 2021, $100,000 on
June 15, 2021 and $75,000 on September 15, 2021. In addition, the
Company assumed a $15,000 liability for unearned revenues. As
additional earn-out consideration, the Company agreed to pay NSENA
10% of net revenues (or a lesser amount equal to 50% of direct
profit) from specific identified prospects that become revenue
customers before September 30, 2021 but only on amounts collected
between Closing and June 30, 2022.
The fair value of contingent consideration
determined as $22,500 is included as a long-term business
acquisition liability on our consolidated balance
sheet.
The acquisition was accounted for under the acquisition method of
accounting. Under acquisition accounting, the acquired tangible and
intangible assets and liabilities of NSENA have been recorded at
their respective fair values. The following table summarizes the
estimates of fair value of the assets acquired and liabilities
assumed on December 14, 2020:
|
Equipment
|
$
10,250
|
|
Software
|
460,250
|
|
Customer
contracts
|
40,000
|
|
Tradenames
|
2,000
|
|
Noncompete
agreements
|
10,000
|
|
Deferred
revenue
|
(15,000
)
|
|
Total
consideration
|
$
507,500
|
F-
13
A
portion of the fair value of the consideration transferred has been
assigned to identifiable intangible assets as follows:
|
Description
|
Useful life in years
|
Fair Value
|
|
Software
|
5
|
$
460,250
|
|
Customer
contracts
|
1
|
40,000
|
|
Tradenames
|
1
|
2,000
|
|
Noncompete
agreements
|
2
|
10,000
|
|
Total
acquired intangible assets
|
|
$
512,250
|
All
assets acquired were determined to be finite-lived intangible
assets and are being amortized on a straight-line basis over its
estimated useful life with no residual value.
4.
FINANCIAL
INSTRUMENTS
Assets and liabilities recorded at fair value on a recurring basis
in the 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 1 because they are valued using quoted
market prices.
The following table shows the Company’s cash and cash
equivalents, Money Market Funds and short-term investments by
significant investment category as of December 31, 2020. The
Company only had cash and cash equivalents, including Money Market
Funds of $16,618,498 at December 31, 2019 all which were considered
Level 1.
|
|
As of December
31, 2020
|
|||
|
|
Adjusted
|
Unrealized
|
Unrealized
|
Market
|
|
|
Cost
|
Gains
|
Losses
|
Value
|
|
Level
1:
|
|
|
|
|
|
Money Market
Funds
|
$
6,034,757
|
$
-
|
$
-
|
$
6,034,757
|
|
U.S. Treasury
securities considered cash equivalents
|
9,997,812
|
-
|
-
|
9,997,812
|
|
U.S. Treasury
securities in short-term investments
|
24,979,511
|
14,849
|
|
24,994,360
|
|
Total Financial
Assets
|
$
41,012,080
|
$
14,849
|
$
-
|
$
41,026,929
|
F-
14
Unrealized gains or losses resulting from our short-term
investments are recorded in accumulated other comprehensive gain or
loss. As of December 31, 2020,
$14,849
was recorded to accumulated other comprehensive
gain.
Our
financial instruments also include accounts receivable, accounts
payable, accrued liabilities and business acquisition liabilities.
Due to the short-term nature of these instruments, their fair
values approximate their carrying values on the balance
sheet.
5.
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:
|
|
December
31,
|
December
31,
|
|
|
2020
|
2019
|
|
Finished
goods
|
$
1,248,893
|
$
653,323
|
|
Work in
process
|
64,451
|
413
|
|
Raw
materials
|
1,342,046
|
1,590,805
|
|
Inventories,
net
|
$
2,655,390
|
$
2,244,541
|
During
the years ended December 31, 2020 and 2019 the Company wrote off
$68,108 and $193,506, respectively, of raw material and scrap parts
primarily due to startup production, model changes and
improvements.
6.
PROPERTY
AND EQUIPMENT, NET
Property
and equipment consisted of the following:
|
|
December
31,
|
December
31,
|
|
|
2020
|
2019
|
|
Production and lab
equipment
|
$
147,781
|
$
44,454
|
|
Tooling
|
80,936
|
59,004
|
|
Computer
equipment
|
180,573
|
83,368
|
|
Furniture, fixtures
and improvements
|
165,465
|
128,782
|
|
|
574,755
|
315,608
|
|
Accumulated
depreciation
|
(217,468
)
|
(72,732
)
|
|
Property and
equipment, net
|
$
357,287
|
$
242,876
|
Depreciation
expense was $144,736 and $44,239 for the years ended December 31,
2020 and 2019, respectively.
F-
15
7.
INTANGIBLE
ASSETS, NET
Intangible
assets consisted of the following:
|
|
December
31,
|
December
31,
|
|
|
2020
|
2019
|
|
Amortizable
intangible assets:
|
|
|
|
Patents
|
$
279,294
|
$
176,425
|
|
Trademarks
|
83,964
|
57,919
|
|
Purchased
software
|
662,250
|
-
|
|
Other
|
50,000
|
-
|
|
|
1,075,508
|
234,344
|
|
Accumulated
amortization
|
(22,587
)
|
(4,061
)
|
|
Total
amortizable
|
1,052,921
|
230,283
|
|
Indefinite life
assets (non-amortizable)
|
343,563
|
-
|
|
Total intangible
assets-net
|
$
1,396,484
|
$
230,283
|
Amortization expense was $18,526 and $2,706 for the years ended
December 31, 2020 and 2019, respectively.
At
December 31, 2020, annual amortization of intangible assets, based
upon the Company’s existing intangible assets and current
useful lives, is estimated to be the following:
|
2021
|
$
186,266
|
|
2022
|
150,766
|
|
2023
|
145,766
|
|
2024
|
145,766
|
|
2025
|
145,766
|
|
Thereafter
|
278,591
|
|
Total estimated
amortization expense
|
$
1,052,921
|
8.
ACCOUNTS
PAYABLE AND ACCRUED LIABILITIES
Accounts
payable includes $52,950 due to related party Syzygy Licensing, LLC
(“
Syzygy
”) as
of December 31, 2020.
Accounts payable
at December 31, 2020 also included $10,000 due to related party V3
Capital Partners, LLC
(see Note 14).
Accrued
liabilities consist of the following:
|
|
December
31,
|
December
31,
|
|
|
2020
|
2019
|
|
Patent and legal
costs
|
$
64,800
|
$
9,851
|
|
Accrued
compensation
|
562,792
|
144,193
|
|
Warranty
costs
|
48,140
|
13,923
|
|
Consulting
costs
|
2,083
|
7,500
|
|
Taxes and
other
|
43,260
|
18,827
|
|
Accrued
liabilities
|
$
721,075
|
$
194,294
|
Accrued
compensation includes $555,000 in bonuses and $7,792 in commissions
payable at December 31, 2020.
F-
16
9.
LEASES
The
Company adopted ASU 2016-02, Leases (“
Topic 842
”) on January 1, 2019
using the modified retrospective approach. The Company has elected
not to apply ASC Topic 842 to arrangements with lease terms of 12
months or less. The adoption of the standard resulted in the
recognition of a ROU asset and lease liability of $12,900 for one
operating lease as of January 1, 2019, with no impact to retained
earnings. Prior year amounts have not been restated. That lease is
for 1,890 square feet of improved office and warehouse space in Las
Vegas, Nevada. In January 2019, the Company recorded an additional
$17,101 ROU remeasurement asset and liability from an extension of
the facility lease to December 31, 2020. In March 2019, the Company
recorded a $57,587 ROU asset and liability for a two-year facility
operating lease for 1,906 square feet of improved office and
warehouse space in Lake Forest, California expiring in February
2021. In June 2019, the Company recorded a $253,412 ROU asset and
liability for a 38-month facility operating lease for 11,256 square
feet of improved office, assembly, training and warehouse space in
Tempe, Arizona expiring in July 2022.
Amortization
of ROU operating lease assets was $121,844 and $80,069 for the
years ended December 31, 2020 and 2019, respectively.
Operating
lease expense for capitalized operating leases included in
operating activities was $137,228 and $94,599 for the years ended
December 31, 2020 and 2019, respectively. Operating lease
obligations recorded on the balance sheet at December 31, 2020
are:
|
Operating lease
liability- short term
|
$
94,011
|
|
Operating lease
liability - long term
|
56,006
|
|
Total Operating
Lease Liability
|
$
150,017
|
Future
lease payments included in the measurement of lease liabilities on
the balance sheet at December 31, 2020 for future periods are as
follows:
|
2021
|
101,406
|
|
2022
|
57,328
|
|
Total future
minimum lease payments
|
158,734
|
|
Less imputed
interest
|
(8,717
)
|
|
Total
|
$
150,017
|
The
weighted average remaining lease term is 1.54 years and the
weighted average discount rate is 7.0%.
The
Company did not have any short-term lease expense during the years
ended December 31, 2020 and December 31, 2019. The Company does not
have any finance leases.
10.
DEBT
The Company’s debt at December 31, 2020 included operating
lease liabilities (see Note 9) and business acquisition liabilities
(see Note 3). Debt at December 31, 2019 consisted of operating
lease liabilities.
On May 1, 2020, the Company received loan proceeds of $414,362 from
Bank of America, N.A. (the “
Lender
”), as a potentially forgivable loan (the
“
PPP
Loan
”) from the U.S.
Small Business Administration pursuant to the Paycheck Protection
Program (the “
PPP
”) enacted by Congress under Division A,
Title 1 of the Coronavirus Aid, Relief, and Economic Security Act
(15 U.S.C. 636(a)(36)) (the “
CARES Act
”), which was enacted March 27, 2020. The
PPP Loan was in the form of a two-year Promissory Note dated May 1,
2020 payable to the Lender (the “
PPP Note
”), bearing interest at a rate of 1% per
annum.
Under the terms of the CARES Act, the Company subsequently applied
for and in December 2020 was granted forgiveness for the PPP Loan
plus interest. The Company’s PPP Loan in the amount of
$414,362 and accrued interest was forgiven in full by the Small
Business Administration. The Company recognized $416,683 in debt
forgiveness income as a result of the forgiveness.
11.
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
”).
F-
17
2019 Follow-On Public Offering
On June 18, 2019, the Company
consummated the June 2019 Follow-On Offering, pursuant to which a
total of 1,923,076 Units were offered and sold at the public
offering price of $6.50 per Unit. Each Unit sold consisted of
one
share of Common Stock and
one detachable two-year warrant to purchase one share of Common
Stock at an exercise price of $6.50 per share. The offering
resulted in the Company’s receipt of gross cash proceeds of
$12.5 million, or net cash proceeds of $11.35 million after
deduction of commissions and offering
costs.
In
connection with the June 2019 Follow-On Offering, the Company also
issued placement agent warrants exercisable for 153,846 shares of
Common Stock for two years at an exercise price of $8.125 per
share. The estimated fair value of these warrants was $205,894, as
determined using the Black-Scholes methodology (assuming estimated
volatility of 49%, risk-free interest rate of 1.86%, and expected
dividend yield of 0.0%). This amount was recorded as both an
increase to additional paid in capital and as a non-cash issuance
cost of the offering.
2020 Follow-On Public Offering
On June 2, 2020, the Company consummated a follow-on public
offering (the “
Unit
Offering
”) whereby the
Company offered and sold certain securities consisting of one share
of Common Stock and one detachable two-year warrant to purchase one
share of Common Stock at an exercise price of $6.00 per share (a
“Unit”) at the public offering price of $6.00 per Unit.
Pursuant to the Unit Offering, the Company sold 2,066,667 Units,
resulting in the Company’s receipt of gross cash proceeds of
$12.4 million and net cash proceeds of $11.67 million after
deduction of commissions and offering costs.
Summary of Stock Purchase Warrants
The
following table summarizes warrant activity during the years ended
December 31, 2020 and 2019:
|
|
Number
|
Average
Purchase
Price Per
Share
|
|
Shares purchasable
under outstanding warrants at December 31, 2018
|
5,017,181
|
$
4.82
|
|
Stock purchase
warrants issued
|
2,076,922
|
$
6.62
|
|
Stock purchase
warrants exercised
|
(473,483
)
|
$
4.46
|
|
Shares purchasable
under outstanding warrants at December 31, 2019
|
6,620,620
|
$
5.41
|
|
Stock purchase
warrants issued
|
2,066,667
|
$
6.00
|
|
Stock purchase
warrants exercised
|
(5,155,976
)
|
$
5.08
|
|
Stock purchase
warrants cancelled
|
(324,401
)
|
$
5.00
|
|
Shares purchasable
under outstanding warrants at December 31, 2020
|
3,206,910
|
$
6.36
|
During
the year ended December 31, 2020 the Company received gross
proceeds of $26,190,483 from the exercise of 5,155,976 warrants and
paid $1,016,645 as an agent fee to facilitate exercise of certain
warrants resulting in net proceeds of $25,173,838. Company officer
Elwood Norris exercised 333,334 of these warrants at $5.00 per
share for cash of $1,666,670.
During
the year ended December 31, 2019 the Company received gross
proceeds of $2,112,117 from the exercise of 2,076,922 warrants and
paid an agent fee of $28,666 for net proceeds of
$2,083,451.
F-
18
The
Company has outstanding Common Stock purchase warrants as of
December 31, 2020 as follows:
|
|
Number of
|
Exercise Price
|
|
|
Description
|
Common Shares
|
Per Share
|
Expiration Date
|
|
Purchase
Warrants
|
1,661,397
|
$
6.50
|
June
18, 2021
|
|
Agent
Warrants
|
153,846
|
$
8.125
|
June
18, 2021
|
|
Purchase
Warrants
|
1,391,667
|
$
6.00
|
June
1, 2022
|
|
|
3,206,910
|
|
|
F-19
12.
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 (“
RSUs
”) to employees, directors or
consultants.
In May 2019, the
stockholders ratified an increase in the Plan authorizing an
additional 2,100,000 shares of Common Stock and in June 2020
ratified a further authorization of 1,900,000 shares of Common
Stock for a total of 6,000,000 shares subject to the
Plan
.
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.
Stock Options
The
following table summarizes stock option activity for the years
ended December 31, 2019 and 2020:
|
|
|
Weighted
Average
|
|
|
|
|
Options
on
|
|
Remaining
|
Aggregate
|
|
|
Common
|
Exercise
|
Contractual
|
Intrinsic
|
|
|
Shares
|
Price
|
Term
|
Value
|
|
Outstanding
December 31, 2018
|
2,067,500
|
$
1.68
|
4.44
|
|
|
Granted
|
1,000,000
|
$
5.41
|
-
|
|
|
Exercised
|
(38,750
)
|
$
1.50
|
-
|
|
|
Forfeited,
cancelled, expired
|
(100,000
)
|
$
1.50
|
-
|
|
|
Outstanding
December 31, 2019
|
2,928,750
|
$
2.96
|
3.71
|
|
|
Granted
|
1,423,836
|
$
6.66
|
-
|
|
|
Exercised
|
(371,000
)
|
$
1.90
|
-
|
|
|
Forfeited,
cancelled, expired
|
(50,000
)
|
$
3.00
|
-
|
|
|
Outstanding
December 31, 2020
|
3,931,586
|
$
4.41
|
4.89
|
$
5,176,337
|
|
Vested and
exercisable at December 31, 2020
|
2,091,084
|
$
2.68
|
2.60
|
$
4,965,155
|
In connection with the NSENA acquisition in December 2020 the
Company granted 190,000 service-based options and 100,000
performance-based options for future services as employees and
consultants at an exercise price of $5.46 per share. Other than the
100,000 performance-based options, all outstanding options at
December 31, 2020 are service-based options.
Subsequent
to December 31, 2020 a total of 58,500 options were exercised for
cash proceeds of $87,750.
The
Company uses the Black-Scholes option pricing model to determine
the fair value of the options granted. The following table
summarizes the assumptions used to compute the fair value of
options granted to employees and non-employees:
F-
20
|
|
For the Year
Ended
|
|
|
|
December
31,
|
|
|
|
2020
|
2019
|
|
Expected stock
price volatility
|
47
%
|
49
%
|
|
Risk-free interest
rate
|
0.38
%
|
2.41
%
|
|
Forfeiture
rate
|
0
%
|
0
%
|
|
Expected dividend
yield
|
0
%
|
0
%
|
|
Expected life of
options - years
|
5.64
|
3.50
|
|
Weighted-average
fair value of options granted
|
$
2.90
|
$
2.06
|
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
following table summarizes information about stock options
outstanding at December 31, 2020:
|
|
|
Weighted
|
|
|
|
|
|
|
Average
|
Weighted
|
|
Weighted
|
|
|
|
Remaining
|
Average
|
|
Average
|
|
Range
of
|
Number
|
Contractual
|
Exercise
|
Number
|
Exercise
|
|
Exercise
Prices
|
Outstanding
|
Life
(Years)
|
Price
|
Exercisable
|
Price
|
|
$
1.50
|
1,422,750
|
2.39
|
$
1.50
|
1,422,750
|
$
1.50
|
|
$
3.15 - $3.61
|
85,000
|
2.86
|
$
3.75
|
85,000
|
$
3.75
|
|
$
4.26 - $6.58
|
2,073,836
|
5.89
|
$
5.29
|
583,334
|
$
5.41
|
|
$
11.22
|
350,000
|
9.58
|
$
11.22
|
-
|
-
|
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. In January
2019 the Company granted 263,087 service-based RSUs to officers and
employees vesting over a period of three years. In August and
September 2019, the Company granted 45,000 service-based RSUs to
employees vesting over a period of three years. In January 2020 the
Company granted 73,992 service-based RSUs to officers and directors
vesting over a period of three years. In April 2020 the Company
granted 122,222 service-based RSUs to employees vesting over a
period of three years. Also, in April 2020 the Company granted an
officer 35,211 performance-based RSUs. During the period July 2020
to December 2020 the Company granted 114,660 service-based
RSU’s to employees vesting over three and four
years.
F-
21
The following table summarizes RSU activity under the Plan for the
years ended December 31, 2019 and 2020:
|
|
|
Weighted
Average
|
Weighted
Average
|
|
|
Service-Based
|
Grant
Date
|
Vesting
|
|
|
RSU's
|
Fair
Value
|
Period
|
|
Unvested at
December 31, 2018
|
-
|
-
|
|
|
Granted
- service based
|
308,087
|
$
6.77
|
3.00
Years
|
|
Unvested at
December 31, 2019
|
308,087
|
$
6.77
|
|
|
Granted
- service based
|
310,874
|
$
6.02
|
3.02
Years
|
|
Granted
- performance based
|
35,211
|
$
4.26
|
|
|
Vested
|
(144,687
)
|
$
5.17
|
|
|
Forfeited
and cancelled
|
(81,479
)
|
$
6.47
|
|
|
Unvested at
December 31, 2020
|
428,006
|
$
6.13
|
2.27
Years
|
Share-Based Compensation Expense
The Company recorded share-based compensation in its statements of
operations for the relevant periods for options and RSUs as
follows:
|
|
For the Year
Ended
|
|
|
|
December
31,
|
|
|
|
2020
|
2019
|
|
Selling, general
and administrative
|
$
1,956,818
|
$
1,410,095
|
|
Research and
development
|
279,925
|
126,001
|
|
Total share-based
expense
|
$
2,236,743
|
$
1,536,096
|
As of
December 31, 2020, total estimated compensation cost of stock
options granted and outstanding but not yet vested was $4.6 million
which is expected to be recognized over the weighted average period
of 2.8 years. As of December 31, 2020, total estimated compensation
cost of RSUs granted and outstanding but not yet vested was $2.2
million which is expected to be recognized over the weighted
average period of 2.3 years.
13.
COMMITMENTS AND CONTINGENCIES
Facility Leases
See
Note 9.
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 stockholders/officers Mr.
Elwood Norris and Mr. James Barnes. The agreement provides for
royalty payments of 4% of revenue from products employing the
licensed ensnarement device technology up to an aggregate of
$1,000,000 in royalties or until September 30, 2026, whichever
occurs earlier. The Company recorded $143,390 and $23,297 for
royalties incurred during the years ended December 31, 2020 and
2019, respectively.
Purchase Commitments
At
December 31, 2020 the Company was committed for approximately $2.2
million for future component deliveries and contract services that
are generally subject to modification or rescheduling in the normal
course of business.
Indemnifications and Guarantees
Our
officers and directors are indemnified as to personal liability as
provided by the Delaware law and the Company’s articles and
bylaws. The Company may also undertake indemnification obligations
in the ordinary course of business related to its operations. The
Company is unable to estimate with any reasonable accuracy the
liability that may be incurred pursuant to any such indemnification
obligations now or in the future. Because of the uncertainty
surrounding these circumstances, the Company’s current or
future indemnification obligations could range from immaterial to
having a material adverse impact on its financial position and its
ability to continue in the ordinary course of business. The Company
has no liabilities recorded for such indemnities.
F-
22
Regulatory Agencies
The
Company may be subject to oversight from regulatory agencies
regarding firearms that arise in the ordinary course of its
business.
Litigation
Securities Litigation
On September 23, 2020, Carone Cobden filed a putative class action
complaint against the Company, former Chief Executive Officer David
Norris (“
Norris
”), Chief Financial Officer, James A. Barnes
(“
Barnes
”), and President, Thomas Smith
(“
Smith
”) in the United States District Court for
the Central District of California, docketed as Case No.
2-20-cv-08760-DMG-PVCx (the “
Cobden
Complaint
”). The
Cobden Complaint alleges that the named defendants, in their
capacities as officers of the Company, knowingly made false or
misleading statements or omissions regarding trials of the
Company’s BolaWrap product conducted by the Los Angeles
Police Department (the “
BolaWrap Pilot
Program
”). The
Cobden Complaint also alleges that the conduct of the named
defendants artificially inflated the price of the Company’s
traded securities, and that the disclosure of certain adverse
information to the public led to a decline in the market value of
the Company’s securities. The Cobden Complaint
further alleges violations of Sections 10(b) and 20(a) of the
Exchange Act, and Rule 10b-5 promulgated thereunder, and defines
the class period as July 31, 2020 through September 23,
2020.
On October 1, 2020, Joseph Mercurio filed a second putative class
action complaint against the Company, Norris, Smith, and Barnes in
the same court, which contains substantially the same factual
allegations and legal claims as set forth in the Cobden Complaint,
and is docketed as Case No. 2-20-cv-09030-DMG-PVCx (the
“
Mercurio
Complaint
”). On October 15, 2020, Paula
Earley filed a third putative class action complaint against the
Company, Smith, Norris, Barnes, Chief Strategy Officer Mike Rothans
(“Rothans”), and former Chief Executive Officer, Marc
Thomas (“
Thomas
”) in the same court, which contains many of
the same factual allegations and legal claims as set forth in the
Cobden and Mercurio Complaints, but defines the class period as
April 29, 2020 through September 23, 2020, and alleges additional
false or misleading statements in connection with BolaWrap and the
BolaWrap Pilot Program (the “
Earley
Complaint
”). The
Earley Complaint is docketed as Case No.
2-20-cv-09444-DMG-PVCx.
On November 3, 2020, the Hon. Dolly M. Gee consolidated
the three above-mentioned cases under the
caption
In re Wrap Technologies, Inc.
Securities Exchange Act Litigation
, Case No. 20-8760-DMG (“
PVCx
”) (the “
Securities
Action
”). On
January 7, 2021, the Court appointed a lead plaintiff in the
Securities Action, who designated its attorneys as lead
counsel. On January 21, 2021, Judge Gee ordered that a
consolidated amended complaint be filed in the Securities Action on
or before March 12, 2021, with defendants’ motion to dismiss
to be filed on or before April 26, 2021, and a hearing on the
motion to dismiss to be held on July 23, 2021. The Company
believes that the complaints underlying the Securities Action are
without merit and intends to vigorously defend against the claims
raised therein.
Shareholder Derivative Litigation
On November 13, 2020, Naresh Rammohan filed a shareholder
derivative action in the United States District Court for the
Central District of California against Smith, Barnes, Rothans,
Thomas, Norris, and Messrs. Scot Cohen, Patrick Kinsella, Michael
Parris, and Wayne Walker, alleging unjust enrichment, breach of
fiduciary duty, waste of corporate assets, and contribution claims
under the Securities Exchange Act of 1934, docketed as Case No.
2:20-cv-10444-DMG-PVCx (the “
Rammohan
Complaint
”). The
Rammohan Complaint names the Company as a nominal defendant and
recites many of the allegations set forth in the Securities Action
relating to the BolaWrap Pilot Program. On January 20, 2021,
Ray Westerman filed a second derivative complaint in the same court
against the same parties, alleging breach of fiduciary duty and
contribution claims under the Securities Exchange Act of 1934,
docketed as Case No. 2:21-cv-00550-DMG-PVCx (the
“
Westerman
Complaint
”). On
January 22, 2021, Jesse Lowe filed a third derivative complaint in
the same court against the same parties, alleging breach of
fiduciary duty and asserting various claims under the Securities
Exchange Act of 1934, docketed as Case No. 2:21-cv-00597-DMG-PVCx
(the “
Lowe
Complaint
”).
The above-mentioned derivative cases (collectively, the
“
Derivative
Actions
”) each been have
been transferred to Judge Gee as cases related to the Securities
Action. On January 27, 2021, the Judge Gee issued an order to
show cause why the Derivative Actions should not be consolidated
under the caption
In re Wrap Technologies, Inc.
Shareholder Derivative Litigation
, Case No. 2:20-10444-DMG-PVCx and stayed pending
the resolution of the anticipated motion to dismiss in the
Securities Action. On February 5, 2021, the parties in the
Derivative Actions responded jointly to the order to show cause,
stipulating that the case should be consolidated and stayed as
suggested by the Court. We believe that the Derivative
Actions will be consolidated and stayed by the Court. As with
the Securities Action, the Company believes that the Derivative
Actions are without merit and intends to vigorously defend against
the claims raised therein.
F-
23
14.
RELATED
PARTY TRANSACTIONS
Commencing in October 2017 the Company began reimbursing Mr. Elwood
Norris, an officer and stockholder of the Company, $1,500 per month
on a month-to-month basis for laboratory facility costs, for an
aggregate of $18,000 during the year ended December 31, 2020 and
2019, respectively.
From April 2020 through December 2020 the Company engaged V3
Capital Partners, LLC (“
V3
”), a company owned and controlled by Scot
Cohen, the Company’s Executive Chairman, to provide certain
investor, shareholder and marketing services, in consideration for
the payment to V3 of $10,000 per month on a month-to-month basis
for an aggregate of $90,000 during the year ended December 31,
2020. In addition, the Company paid V3 a bonus of $175,000 for
assistance in a financing that was consummated in July
2020.
See Notes 8, 11 and 13 for additional information on related party
transactions and obligations.
15.
INCOME TAXES
Until
its reverse recapitalization on March 31, 2017, the Company was
treated as a partnership for federal and state income tax purposes
and did not incur income taxes. The Company accounts for income
taxes under ASC 740. Deferred income tax assets and liabilities are
determined based upon differences between the financial reporting
and tax bases of assets and liabilities and are measured using the
enacted tax rates and laws that will be in effect when the
differences are expected to reverse. Accounting standards require
the consideration of a valuation allowance for deferred tax assets
if it is "more likely than not" that some component or all of the
benefits of deferred tax assets will not be realized.
The
Company did not provide any current or deferred U.S. federal income
tax provision or benefit for the periods presented because of
operating losses since inception. As of December 31, 2020, the
Company has federal net operating loss carryforwards of
approximately $24,449,000 to reduce future taxable income that will
expire beginning in 2038. Certain changes in stock ownership can
result in a limitation on the amount of net operating loss and tax
credit carryovers that can be utilized each year. As of December
31, 2020, management has not determined the extent of any such
limitations, if any.
The
Company provided a full valuation allowance on the net deferred tax
asset, consisting primarily of net operating loss carry forwards,
because management has determined that it is more likely than not
that the Company will not earn income sufficient to realize the
deferred tax assets during the carry forward period. As a result of
the change in future Federal statutory tax rates due to the passing
of the Tax Cuts and Jobs Act of 2017, management determined that
the deferred tax assets and liabilities should be valued at a
federal statutory rate of 21%.
The
Company has not taken a tax position that, if challenged, would
have a material effect on the financial statements for the periods
ended December 31, 2020 and 2019 applicable under FASB ASC 740. The
Company did not recognize any adjustment to the liability for
uncertain tax position and therefore did not record any adjustment
to the beginning balance of accumulated deficit on the balance
sheet. All tax returns for the Company remain open.
F-
24
The
provision for (benefit from) income taxes consist of the
following:
|
|
Year Ended
December 31,
|
|
|
|
2020
|
2019
|
|
Current
tax benefit
|
$
-
|
$
-
|
|
Deferred
tax benefit
|
3,158,000
|
1,800,000
|
|
Change
in valuation allowance
|
(3,158,000
)
|
(1,800,000
)
|
|
Income tax benefit
(provision)
|
$
-
|
$
-
|
A
reconciliation of the provision for income taxes at the federal
statutory rate of 21% to the Company’s provision for income
tax is as follows:
|
|
Year Ended
December 31,
|
|
|
|
2020
|
2019
|
|
Income
taxes benefit computed at federal statutory rate
|
$
2,642,000
|
$
1,748,000
|
|
State
income taxes, net of federal effect
|
216,000
|
114,000
|
|
Permanent
differences and other
|
300,000
|
(62,000
)
|
|
Change
in valuation allowance
|
(3,158,000
)
|
(1,800,000
)
|
|
Income tax benefit
(provision)
|
$
-
|
$
-
|
Deferred
income taxes reflect the net tax effects of temporary differences
between the carrying amounts of assets and liabilities for
financial reporting purposes and the amounts used for income tax
purposes. The following table presents the significant components
of the Company’s deferred tax assets and liabilities for the
periods presented:
|
|
December
31,
|
|
|
|
2020
|
2019
|
|
Deferred tax
assets:
|
|
|
|
Net operating
losses
|
$
5,444,000
|
$
2,430,000
|
|
Research tax
credits
|
45,000
|
26,000
|
|
Stock
compensation
|
542,000
|
239,000
|
|
Accruals and
other
|
169,000
|
9,000
|
|
|
6,200,000
|
2,704,000
|
|
Deferred tax
liabilities:
|
|
|
|
Depreciation and
other
|
396,000
|
58,000
|
|
|
396,000
|
58,000
|
|
Net deferred tax
assets
|
5,804,000
|
2,646,000
|
|
Less valuation
allowance
|
(5,804,000
)
|
(2,646,000
)
|
|
Net deferred taxes
after valuation allowance
|
$
-
|
$
-
|
In accordance with ASU 2016-09,
Compensation-Stock
Compensation (Topic 718) Improvements to Employee Share-Based
Payment Accounting
, the Company recognizes windfall tax
benefits associated with the exercise of stock options as a
component of tax expense (rather than equity).
Accordingly, our federal and state operating loss
carryforwards include net windfall tax deductions from stock option
exercises and RSU vesting of approximately $720,000 and $144,000
during the years ended
December 31, 2020 and 2019,
respectively.
16.
MAJOR CUSTOMERS AND RELATED INFORMATION
Major Customers
For the
year ended December 31, 2020, revenues from two distributors
accounted for approximately 17% and 16% of revenues with no other
single customer accounting for more than 10% of total revenues.
These distributors accounted for 28% and 26% of accounts receivable
at December 31, 2020.
For the year
ended December 31, 2019, revenues from one distributor accounted
for 22% revenues with no other single customer accounting for more
than 10% of total revenues. This customer accounted for 54% of
accounts receivable at December 31, 2019.
F-
25
The
following table summarizes revenues by geographic region. Revenues
are attributed to countries based on customer’s delivery
location.
|
|
For the
Year
|
|
|
|
Ended December
31,
|
|
|
|
2020
|
2019
|
|
Americas
|
$
1,442,822
|
$
481,622
|
|
Europe, Middle East
and Africa
|
1,046,499
|
116,547
|
|
Asia
Pacific
|
1,454,736
|
98,621
|
|
|
$
3,944,057
|
$
696,790
|
See
Note 1 –
Concentrations of
Risks
for information on reliance on suppliers.
F-
26
SIGNATURES
Pursuant
to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to
be signed on its behalf by the undersigned, thereunto duly
authorized, in the City of Tempe, State of Arizona, on the 4th day
of March 2021.
|
|
WRAP TECHNOLOGIES, INC
|
|
|
|
|
|
|
|
|
Date: March 4,
2021
|
By:
|
/s/
Thomas Smith
|
|
|
|
|
Thomas
Smith
|
|
|
|
|
Interim Chief
Executive Officer
|
|
I
n accordance with the
Exchange Act, this report has been signed below by the following
persons on behalf of the registrant and in the capacities and on
the dates indicated.
|
Name
|
|
Position
|
|
Date
|
|
|
|
|
|
|
|
/s/
THOMAS SMITH
|
|
Interim
Chief Executive Officer
|
|
March
4
, 2021
|
|
Thomas
Smith
|
|
(Principal
Executive Officer)
|
|
|
|
|
|
|
|
|
|
/s/
JAMES A. BARNES
|
|
Chief
Financial Officer, Secretary and Treasurer
|
|
March
4
, 2021
|
|
James
A. Barnes
|
|
(Principal
Accounting Officer)
|
|
|
|
|
|
|
|
|
|
/s/
SCOT COHEN
|
|
Executive
Chair of Board
|
|
March
4
, 2021
|
|
Scot
Cohen
|
|
|
|
|
|
/s/DAVID
G. NORRIS
|
|
Director
|
|
March
4
, 2021
|
|
David
G. Norris
|
|
|
|
|
|
/s/PATRICK
KINSELLA
|
|
Director
|
|
March
4
, 2021
|
|
Patrick
Kinsella
|
|
|
|
|
|
/s/MICHAEL
PARRIS
|
|
Director
|
|
March
4
, 2021
|
|
Michael
Parris
|
|
|
|
|
|
|
|
|
|
|
|
/s/WAYNE
R. WALKER
|
|
Director
|
|
March
4
, 2021
|
|
Wayne
R. Walker
|
|
|
|
|
F-
27
TABLE OF CONTENTS
Part IItem 1. BusinessItem 1A. Risk FactorsItem 1A. RiItem 1B. Unresolved Staff CommentsItem 1B. UItem 2. PropertiesItem 3. Legal ProceedingsItem 4. Mine Safety DisclosuresPart IIItem 5. Market For Common Equity and Related Stockholder Matters and Issuer Purchases Of Equity SecuritiesItem 6. Selected Financial DataItem 7. Management's Discussion and Analysis Of Financial Condition and Results Of OperationsItem 7A. Quantitative and Qualitative Disclosures About Market RiskItem 7A. QItem 8. Financial Statements and Supplementary DataItem 9. Changes in and Disagreements with Accountants on Accounting and Financial DisclosureItem 9A. Controls and ProceduresItem 9B. Other InformationPart IIIItem 10. Directors, Executive Officers and Corporate GovernanceItem 11. Executive CompensationItem 12. Security Ownership Of Certain Beneficial Owners and Management and Related Stockholder MattersItem 12. SecurityItem 13. Certain Relationships and Related Transactions and Director IndependenceItem 13. CertainItem 14. Principal Accounting Fees and ServicesPart IVItem 15. Exhibits and Financial Statement Schedules