WRAP TECHNOLOGIES, INC.
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
QUARTERLY
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2019
Commission
File Number: 000-55838
Wrap Technologies, Inc.
(Exact
name of registrant as specified in its charter)
|
Delaware
|
|
98-0551945
|
|
(State
or other jurisdiction of
incorporation
or organization)
|
|
(I.R.S.
Employer
Identification
Number)
|
1817 W
4
th
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:
|
Title of each
class
|
Trading
Symbol(s)
|
Name of each
exchange on which registered
|
|
Common
Stock, par value $0.0001 per share
|
WRTC
|
Nasdaq
Capital Market
|
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 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, a smaller reporting
company, or an emerging growth company. See the definitions of
“large accelerated filer,” “accelerated
filer,” “smaller reporting company” and
“emerging growth company” in Rule 12b-2 of the Exchange
Act.
|
Large
Accelerated Filer [
]
|
|
Accelerated
filer
[ ]
|
|
Non-accelerated
filer
[X]
|
|
Smaller reporting company
[X]
|
|
|
|
Emerging growth company [X]
|
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 is a shell company (as defined
in Rule 12b-2 of the Act). Yes [ ] No [ X]
As of
October 30, 2019 a total of 29,669,000 shares of the
Registrant’s common stock, par value $0.0001,
(“
Common
Stock
”) were issued and outstanding.
W
R
AP TECHNOLOGIES, INC.
INDEX
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1
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2
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3
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4
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5
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14
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21
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21
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22
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22
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22
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22
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22
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22
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22
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23
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PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Wrap Technologies, Inc.
Condensed
B
alance
Sheets
|
|
September 30,
2019
|
December 31,
|
|
|
(unaudited)
|
2018
|
|
ASSETS
|
|
|
|
Current assets:
|
|
|
|
Cash
and cash equivalents
|
$
19,261,830
|
$
12,358,896
|
|
Accounts
receivable
|
95,505
|
4,396
|
|
Inventories,
net
|
1,973,917
|
158,267
|
|
Prepaid
expenses and other current assets
|
85,158
|
114,863
|
|
Total current assets
|
21,416,410
|
12,636,422
|
|
Property and equipment, net
|
207,885
|
30,373
|
|
Operating lease right-of-use asset, net
|
290,043
|
-
|
|
Intangible assets, net
|
213,663
|
118,715
|
|
Other assets, net
|
12,681
|
1,512
|
|
Total assets
|
$
22,140,682
|
$
12,787,022
|
|
|
|
|
|
LIABILITIES AND STOCKHOLDERS' EQUITY
|
|
|
|
Current liabilities:
|
|
|
|
Accounts
payable
|
$
741,372
|
$
232,915
|
|
Accrued
liabilities
|
155,898
|
68,453
|
|
Customer
deposits
|
238,510
|
-
|
|
Deferred
revenue
|
2,288
|
-
|
|
Operating
lease liability- short term
|
123,778
|
-
|
|
Deferred
and accrued officer compensation
|
-
|
96,000
|
|
Total current liabilities
|
1,261,846
|
397,368
|
|
|
|
|
|
Operating Lease Liability - Long Term
|
183,187
|
-
|
|
Total liabilities
|
1,445,033
|
397,368
|
|
|
|
|
|
Commitments and contingencies (Note 10)
|
|
|
|
|
|
|
|
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;
29,669,000 and 27,364,607 shares issued and outstanding each
period, respectively
|
2,967
|
2,736
|
|
Additional
paid-in capital
|
30,879,077
|
16,791,254
|
|
Accumulated
deficit
|
(10,186,395
)
|
(4,404,336
)
|
|
Total stockholders' equity
|
20,695,649
|
12,389,654
|
|
Total liabilities and stockholders' equity
|
$
22,140,682
|
$
12,787,022
|
See accompanying notes to condensed interim financial
statements.
Wrap Technologies, Inc.
Condensed Statements of
O
perations
(unaudited)
|
|
Three Months
|
Nine Months
|
||
|
|
Ended September 30,
|
Ended September 30,
|
||
|
|
2019
|
2018
|
2019
|
2018
|
|
Revenues:
|
|
|
|
|
|
Product sales
|
$
255,973
|
$
1,890
|
$
418,874
|
$
1,890
|
|
Other revenue
|
12,790
|
-
|
27,144
|
-
|
|
Total
revenues
|
268,763
|
1,890
|
446,018
|
1,890
|
|
Cost
of revenues
|
157,786
|
1,607
|
254,701
|
1,607
|
|
Gross profit
|
110,977
|
283
|
191,317
|
283
|
|
|
|
|
|
|
|
Operating expenses:
|
|
|
|
|
|
Selling, general and administrative
|
1,878,152
|
665,910
|
4,547,215
|
1,586,652
|
|
Research and development
|
729,788
|
168,432
|
1,620,820
|
458,046
|
|
Total
operating expenses
|
2,607,940
|
834,342
|
6,168,035
|
2,044,698
|
|
Loss
from operations
|
(2,496,963
)
|
(834,059
)
|
(5,976,718
)
|
(2,044,415
)
|
|
|
|
|
|
|
|
Other income (expense):
|
|
|
|
|
|
Interest income
|
108,922
|
527
|
196,109
|
1,285
|
|
Other
|
837
|
(352
)
|
(1,450
)
|
(1,674
)
|
|
|
109,759
|
175
|
194,659
|
(389
)
|
|
Net loss
|
$
(2,387,204
)
|
$
(833,884
)
|
$
(5,782,059
)
|
$
(2,044,804
)
|
|
|
|
|
|
|
|
Net
loss per basic common share
|
$
(0.08
)
|
$
(0.04
)
|
$
(0.20
)
|
$
(0.09
)
|
|
Weighted
average common shares used to compute net loss per basic common
share
|
29,662,403
|
22,803,533
|
28,301,725
|
22,803,533
|
See accompanying notes to condensed interim financial
statements.
Wrap Technologies, Inc.
Condensed Statements of Stockholders'
E
quity
(unaudited)
|
|
Three Months Ended September 30, 2019
|
||||
|
|
Common Stock
|
Additional
Paid-In
|
Accumulated
|
Total
Stockholders'
|
|
|
|
Shares
|
Amount
|
Capital
|
Deficit
|
Equity
|
|
Balance at June 30, 2019
|
29,640,250
|
$
2,964
|
$
30,324,798
|
$
(7,799,191
)
|
$
22,528,571
|
|
Common
shares issued upon exercise of warrants at $3.00 per
share
|
25,000
|
2
|
74,998
|
|
75,000
|
|
Common
shares issued upon exercise of stock options
|
3,750
|
1
|
5,624
|
|
5,625
|
|
Share-based
compensation expense
|
473,657
|
|
473,657
|
||
|
Net
loss for the period
|
-
|
-
|
-
|
(2,387,204
)
|
(2,387,204
)
|
|
Balance at September 30, 2019
|
29,669,000
|
$
2,967
|
$
30,879,077
|
$
(10,186,395
)
|
$
20,695,649
|
|
|
Nine Months Ended September 30, 2019
|
||||
|
|
Common Stock
|
Additional
Paid-In
|
Accumulated
|
Total
Stockholders'
|
|
|
|
Shares
|
Amount
|
Capital
|
Deficit
|
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
|
87,150
|
9
|
261,441
|
|
261,450
|
|
Common
shares issued upon exercise of warrants at $5.00 per
share
|
274,167
|
28
|
1,370,807
|
|
1,370,835
|
|
Common
shares issued upon exercise of stock options
|
20,000
|
2
|
29,998
|
|
30,000
|
|
Share-based
compensation expense
|
1,074,555
|
|
1,074,555
|
||
|
Net
loss for the period
|
-
|
-
|
-
|
(5,782,059
)
|
(5,782,059
)
|
|
Balance at September 30, 2019
|
29,669,000
|
$
2,967
|
$
30,879,077
|
$
(10,186,395
)
|
$
20,695,649
|
|
|
Three Months Ended September 30, 2018
|
||||
|
|
Common Stock
|
Additional
Paid-In
|
Accumulated
|
Total
Stockholders'
|
|
|
|
Shares
|
Amount
|
Capital
|
Deficit
|
Equity
|
|
Balance at June 30, 2018
|
22,803,533
|
$
2,280
|
$
4,310,909
|
$
(2,278,821
)
|
$
2,034,368
|
|
Share-based
compensation expense
|
149,838
|
|
149,838
|
||
|
Net
loss for the period
|
-
|
-
|
-
|
(833,884
)
|
(833,884
)
|
|
Balance at September 30, 2018
|
22,803,533
|
$
2,280
|
$
4,460,747
|
$
(3,112,705
)
|
$
1,350,322
|
|
|
Nine Months Ended September 30, 2018
|
||||
|
|
Common Stock
|
Additional
Paid-In
|
Accumulated
|
Total
Stockholders'
|
|
|
|
Shares
|
Amount
|
Capital
|
Deficit
|
Equity
|
|
Balance at December 31, 2017
|
22,803,533
|
$
2,280
|
$
4,137,936
|
$
(1,067,901
)
|
$
3,072,315
|
|
Share-based
compensation expense
|
322,811
|
|
322,811
|
||
|
Net
loss for the period
|
-
|
-
|
-
|
(2,044,804
)
|
(2,044,804
)
|
|
Balance at September 30, 2018
|
22,803,533
|
$
2,280
|
$
4,460,747
|
$
(3,112,705
)
|
$
1,350,322
|
See
accompanying notes to condensed interim financial
statements.
Wrap Technologies, Inc.
(unaudited)
|
|
Nine Months
|
|
|
|
Ended September 30,
|
|
|
|
2019
|
2018
|
|
Cash Flows From Operating Activities:
|
|
|
|
Net
loss
|
$
(5,782,059
)
|
$
(2,044,804
)
|
|
Adjustments to reconcile net loss to net
cash
used
in operating activities:
|
|
|
|
Depreciation
and amortization
|
20,949
|
8,073
|
|
Warranty
provision
|
10,776
|
-
|
|
Inventory
write-off
|
(130,591
)
|
-
|
|
Non-cash
lease expense
|
50,957
|
-
|
|
Share-based
compensation
|
1,074,555
|
322,811
|
|
Changes
in assets and liabilities:
|
|
|
|
Accounts
receivable
|
(91,109
)
|
-
|
|
Inventories
|
(1,685,059
)
|
5,903
|
|
Prepaid
expenses and other current assets
|
29,705
|
32,227
|
|
Accounts
payable
|
508,457
|
40,317
|
|
Operating
lease liability
|
(34,035
)
|
-
|
|
Customer
deposits
|
238,510
|
-
|
|
Accrued
liabilities and other
|
76,669
|
4,592
|
|
Deferred
compensation
|
(96,000
)
|
-
|
|
Deferred
revenue
|
2,288
|
-
|
|
Net
cash used in operating activities
|
(5,805,987
)
|
(1,630,881
)
|
|
|
|
|
|
Cash Flows From Investing Activities:
|
|
|
|
Capital
expenditures for property and equipment
|
(197,873
)
|
(8,015
)
|
|
Investment
in patents and trademarks
|
(95,536
)
|
(48,226
)
|
|
Long-term
deposits
|
(11,169
)
|
-
|
|
Net
cash used in investing activities
|
(304,578
)
|
(56,241
)
|
|
|
|
|
|
Cash Flows From Financing Activities:
|
|
|
|
Sale
of common stock and warrants
|
11,351,214
|
-
|
|
Proceeds
from exercise of warrants
|
1,632,285
|
-
|
|
Proceeds
from exercise of stock options
|
30,000
|
-
|
|
Payment
of notes payable
|
-
|
(31,359
)
|
|
Net
cash provided by financing activities
|
13,013,499
|
(31,359
)
|
|
|
|
|
|
Net increase (decrease) in cash and cash equivalents
|
6,902,934
|
(1,718,481
)
|
|
Cash and cash equivalents, beginning of period
|
12,358,896
|
3,083,976
|
|
Cash and cash equivalents, end of period
|
$
19,261,830
|
$
1,365,495
|
|
|
|
|
|
Supplemental Disclosure of Non-Cash Investing
and
Financing Activities:
|
|
|
|
Prepaid
insurance financed with note payable
|
$
-
|
$
39,435
|
|
Right-of-use
assets and liabilites recorded during period
|
$
341,000
|
$
-
|
|
Issuance
costs relating to warrants issued to public offering selling
agent
|
$
205,894
|
$
-
|
See
accompanying notes to condensed interim financial
statements.
-4-
Organization and Business Description
Wrap
Technologies, Inc., a Delaware corporation (the “
Company
”), is a publicly traded
company listed on the Nasdaq Capital Market (“
Nasdaq
”) under the trading symbol
“WRTC”. The Company is a developer of security products
designed for use by law enforcement and security personnel. The
Company’s first product is the BolaWrap® 100 remote
restraint device that discharges an eight-foot bola style
Kevlar® tether to entangle a subject at a range of 10-25 feet.
Since the entrance into the market of the BolaWrap in January 2018,
hundreds of law enforcement agencies, private security companies,
and distributors have requested demonstrations, training and the
purchase of this product.
Basis of Presentation and Use of Estimates
The
Company’s unaudited interim financial statements and
related notes included herein have been prepared in accordance with
accounting principles generally accepted in the United States of
America (“
US
GAAP
”) for interim financial information and in
accordance with Article 8 of Regulation S-X and the rules and
regulations of the Securities and Exchange Commission
(“
SEC
”). The
condensed balance sheet at December 31, 2018 was derived from
audited financial statements but certain information and footnote
disclosures normally included in financial statements prepared in
accordance with U.S. generally accepted accounting principles have
been condensed or omitted pursuant to such rules and regulations.
In management’s opinion, the accompanying statements reflect
adjustments necessary to present fairly the financial position,
results of operations, and cash flows for the periods indicated,
and contain adequate disclosure to make the information presented
not misleading. Adjustments included herein are of a normal,
recurring nature unless otherwise disclosed in the footnotes. The
interim financial statements and notes thereto should be read in
conjunction with the Company’s audited financial statements
and notes thereto for the year ended December 31, 2018. Results of
operations for interim periods are not necessarily indicative of
the results of operations for a full year.
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.,
recognition and measurement of contingencies and accrued costs)
that affect the reported amounts of assets and liabilities, and
disclosure of contingent assets and liabilities at the date of the
financial statements and affect the reported amounts of revenue and
expense during the reporting period. Actual results could
materially differ from those estimates.
Concentrations of Risk
Credit Risk
– Financial
instruments that potentially subject the Company to concentration
of credit risk consisted primarily of cash and cash equivalents and
accounts receivable from customers. The Company maintains its cash
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. To date, the Company
has not experienced any losses on its cash and cash
equivalents.
Concentrations of Accounts Receivable and
Revenue
– The Company has recently commenced sales
activities with a limited number of customers. The Company may
experience concentrations in both accounts receivable and revenue
due to the timing of sales and collections of related
payments.
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, then 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.
-5-
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 the nine months ended September 30, 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. The fair value of share-based compensation is amortized to
compensation expense over the vesting term.
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.
Accounts Receivable
Accounts
receivable, net consists of trade accounts receivables from
customers, net of allowance for doubtful accounts if deemed
necessary. Accounts receivables are recorded at the invoiced
amount. The Company does not require collateral or other security
for accounts receivable. The Company periodically evaluates the
collectability of its accounts receivable and provides an allowance
for potential credit losses, based on the historical experience. At
September 30, 2019 and December 31, 2018, the Company did not have
an allowance for potential credit losses as there were no estimated
credit losses.
Net 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 10,013,373 shares of Common Stock were outstanding at
September 30, 2019. 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.
Income Taxes
Until
its conversion to a corporation on March 31, 2017, the Company was
treated as a partnership for federal and state income tax purposes
and did not incur income taxes. Instead, its losses were included
in the income tax returns of the member partners. No income tax
expense was recorded for period ended September 30, 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.
-6-
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.
Recent Issued Accounting Guidance
Recently Adopted Accounting Pronouncement:
In
February 2016, the FASB issued ASU 2016-02, Leases (Topic 842),
which is intended to increase transparency and comparability among
organizations by requiring the recognition of right-of-use
(“
ROU
”) assets
and lease liabilities on the balance sheet. In July 2018, the FASB
issued additional guidance which provided an additional transition
method for adopting the updated guidance. Under the additional
transition method, entities may elect to recognize a
cumulative-effect adjustment to the opening balance of retained
earnings in the year of adoption. The Company adopted this standard
on January 1, 2019 using this modified retrospective approach. The
adoption of the standard resulted in the recognition of a ROU asset
and lease liability of approximately $12,900 for one operating
lease as of January 1, 2019, with no impact to retained
earnings.
Effective the 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 Company is currently evaluating the effect, if any, that
ASU 2018-13 will have on its financial
statements.
Other Pronouncements:
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 and services, such as training, 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.
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. The Company has elected to recognize
shipping costs as an expense in cost of revenue when control has
transferred to the customer. The revenue and cost of training are
recognized when the training is completed, generally following
delivery of related products.
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, 2018 the Company had no contract assets and no
deferred revenue related to products or training for product
delivered during the year. At September 30, 2019 the Company had
deferred revenue of $2,288 related to future training.
-7-
We may
also receive consideration, per terms of a contract, from customers
prior to transferring goods to the customer. We record 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
September 30, 2019 and December 31, 2018. 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.
|
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 weighted average cost method. Inventories consisted of the
following:
|
|
September 30,
|
December 31,
|
|
|
2019
|
2018
|
|
Finished
goods
|
$
360,676
|
$
82,313
|
|
Work
in process
|
6,639
|
12,695
|
|
Raw
materials
|
1,606,602
|
63,259
|
|
|
$
1,973,917
|
$
158,267
|
During
the three and nine months ended September 30, 2019 the Company
wrote off $65,579 and $130,591, respectively, of raw material parts
primarily due to model changes and improvements.
|
4.
|
PROPERTY AND EQUIPMENT, NET
|
Property and
equipment consisted of the following:
|
|
September 30,
|
December 31,
|
|
|
2019
|
2018
|
|
Laboratory
equipment
|
$
40,545
|
$
13,980
|
|
Tooling
|
59,003
|
22,683
|
|
Computer
equipment
|
37,290
|
12,608
|
|
Furniture,
fixtures and improvements
|
119,901
|
9,595
|
|
|
256,739
|
58,866
|
|
Accumulated
depreciation
|
(48,854
)
|
(28,493
)
|
|
|
$
207,885
|
$
30,373
|
Depreciation
expense was $8,175 and $20,361 for the three and nine months ended
September 30, 2019 and was $3,227 and $8,073 for the three and nine
months ended September 30, 2018, respectively.
-8-
|
5.
|
INTANGIBLE ASSETS, NET
|
Intangible assets
consisted of the following:
|
|
September 30,
|
December 31,
|
|
|
2019
|
2018
|
|
|
|
|
|
Patents
|
$
163,555
|
$
111,160
|
|
Trademarks
|
52,051
|
8,910
|
|
|
215,606
|
120,070
|
|
Accumulated
amortization
|
(1,943
)
|
(1,355
)
|
|
|
$
213,663
|
$
118,715
|
The
costs related to issued patents will be amortized using the
straight-line method over the estimated remaining lives of issued
patents which is 20 years from the initial filing.
An impairment charge is recognized if the carrying
amount is not recoverable and the carrying amount exceeds the fair
value of the intangible assets as determined by projected
discounted net future cash flows.
Amortization
expense was $201 and $588 for the three and nine months ended
September 30, 2019. There was no amortization for the three or nine
months ended September 30, 2018.
|
6.
|
ACCOUNTS PAYABLE AND ACCRUED LIABILITIES
|
Accounts payable
includes $17,505 due to related party Syzygy Licensing, LLC
(“
Syzygy
”). See
Note 10.
Accrued
liabilities consist of the following:
|
|
September 30,
|
December 31,
|
|
|
2019
|
2018
|
|
Patent
costs
|
$
7,500
|
$
11,600
|
|
Accrued
compensation
|
129,694
|
55,493
|
|
Warranty
costs
|
11,204
|
428
|
|
Other
|
7,500
|
932
|
|
|
$
155,898
|
$
68,453
|
|
7.
|
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, assembly 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
operating 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, assembly and warehouse space in Lake Forest,
California expiring in February 2021.
-9-
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.
Due to
lack of borrowing history or ability the Company used as its
incremental borrowing rate a low-grade debt rate published by the
Federal Reserve Bank and determined a discount rate of 7.5% for the
remeasurement in January 2019, 6.8% for the March 2019 operating
lease and 7.0% for the June 2019 operating lease. Management
determined these are reasonable borrowing rates.
Amortization of ROU
operating lease assets was $28,746 and $50,957 for the three and
nine months ended September 30, 2019.
Operating lease
expense for capitalized operating leases included in operating
activities was $34,682 and $60,278 for the three and nine months
ended September 30, 2019. Operating lease obligations recorded on
the balance sheet at September 30, 2019 are:
|
Operating
lease liability- short term
|
$
123,778
|
|
Operating
lease liability - long term
|
183,187
|
|
Total
Operating Lease Liability
|
$
306,965
|
Future
lease payments included in the measurement of lease liabilities on
the balance sheet at September 30, 2019 for future periods are as
follows:
|
Remainder
of 2019 (three months)
|
$
34,507
|
|
2020
|
143,574
|
|
2021
|
101,406
|
|
2022
|
57,328
|
|
Total
future minimum lease payments
|
336,815
|
|
Less
imputed interest
|
(29,850
)
|
|
Total
|
$
306,965
|
The
weighted average remaining lease term is 2.5 years and the weighted
average discount rate is 7.0%.
The
Company does not have any finance leases.
|
8.
|
DEFERRED AND ACCRUED COMPENSATION
|
From
March 2016 through February 2017, the Company accrued monthly
compensation for the services of two officers in the aggregate
amount of $7,000 per month payable to Syzygy. In March 2017 the
Company accrued and deferred $6,000 compensation to each of the two
officers. The balance payable to Syzygy of $84,000 and deferred
compensation of an aggregate of $12,000 was paid in August 2019
without interest.
|
9.
|
STOCKHOLDERS’ EQUITY AND SHARE-BASED
COMPENSATION
|
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
”).
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.
-10-
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.
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 March 2019, the Board of the Company approved and
in May 2019, the stockholders ratified, an increase in the Plan
authorizing an additional 2,100,000 shares of Common Stock for a
total of 4,100,000 shares.
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.
The
following table summarizes stock option activity under the Plan for
the nine months ended September 30, 2019:
|
|
|
Weighted Average
|
|
|
|
|
Options on
|
|
Remaining
|
Aggregate
|
|
|
Common
|
Exercise
|
Contractual
|
Intrinsic
|
|
|
Shares
|
Price
|
Term
|
Value
|
|
Outstanding
January 1, 2019
|
2,067,500
|
$
1.68
|
4.44
|
$
3,063,375
|
|
Granted
|
1,000,000
|
5.41
|
5.00
|
-
|
|
Exercised
|
(20,000
)
|
1.50
|
-
|
-
|
|
Forfeited,
cancelled, expired
|
(75,000
)
|
1.50
|
-
|
-
|
|
Outstanding
September 30, 2019
|
2,972,500
|
$
2.94
|
3.95
|
$
4,708,850
|
|
Vested
and exercisable at September 30, 2019
|
1,389,999
|
$
1.59
|
3.67
|
$
3,461,821
|
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 nonemployees:
|
|
Nine Months
|
|
|
Ended
|
|
|
September 30,
|
|
|
2019
|
|
Expected
stock price volatility
|
49
%
|
|
Risk-free
interest rate
|
2.41
%
|
|
Forfeiture
rate
|
0
%
|
|
Expected
dividend yield
|
0
%
|
|
Expected
life of options - years
|
3.50
|
|
Weighted-average
fair value of options granted
|
$
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, as it only recently commenced trading.
-11-
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.
On May
23, 2019 the Company granted a total of 263,087 and during the
quarter ended September 30, 2019 granted an additional 45,000 of
service-based RSUs to employees and consultants vesting over three
years that convert to Common Stock as vesting occurs. A summary is
set forth below:
|
|
Weighted Average
|
||
|
|
Service-Based
|
Grant Date
|
Vesting
|
|
|
RSU's
|
Fair Value
|
Period
|
|
Unvested
at January 1, 2019
|
-
|
|
|
|
Granted
|
308,087
|
$
6.77
|
3
Years
|
|
Vested
|
-
|
|
|
|
Forfeited
and cancelled
|
-
|
|
|
|
Unvested
at September 30, 2019
|
308,087
|
|
|
The
Company recorded stock-based compensation in its statements of
operations for the relevant periods as follows:
|
|
For the Three Months
|
For the Nine Months
|
||
|
|
Ended September 30,
|
Ended September 30,
|
||
|
|
2019
|
2018
|
2019
|
2018
|
|
Selling,
general and administrative
|
$
438,834
|
$
125,467
|
$
987,251
|
$
251,345
|
|
Research
and development
|
34,823
|
24,371
|
87,304
|
71,466
|
|
Total
stock-based expense
|
$
473,657
|
$
149,838
|
$
1,074,555
|
$
322,811
|
As of
September 30, 2019, total estimated compensation cost of stock
options and RSUs granted but not yet vested was $3.99 million which
is expected to be recognized over the weighted average period of
2.3 years.
Warrants
The
following table summarizes warrant activity during the nine months
ended September 30, 2019:
|
|
Number
|
Average Purchase Price Per Share
|
|
Shares
purchasable under outstanding warrants at January 1,
2019
|
5,017,181
|
$
4.82
|
|
Stock
purchase warrants issued
|
2,076,922
|
$
6.62
|
|
Stock
purchase warrants exercised
|
(361,317
)
|
$
4.52
|
|
Shares
purchasable under outstanding warrants at September 30,
2019
|
6,732,786
|
$
5.39
|
The
Company determined that the warrants issued in connection with the
June 2019 Follow-On Offering should be classified as equity in
accordance with ASC 480. However, changes in director and officer
ownership or other factors in future periods could require
reclassification of outstanding warrants as a liability with
changes in value thereafter reflected in the statement of
operations.
-12-
The
Company has outstanding Common Stock purchase warrants as of
September 30, 2019 as follows:
|
|
Number of
|
Exercise Price
|
|
|
Description
|
Common Shares
|
Per Share
|
Expiration Date
|
|
Purchase
Warrants
(1)
|
4,286,907
|
$
5.00
|
October
30, 2020
|
|
Agent
Warrants
|
368,957
|
$
3.00
|
October
30, 2020
|
|
Purchase
Warrants
|
1,923,076
|
$
6.50
|
June
18, 2021
|
|
Agent
Warrants
|
153,846
|
$
8.125
|
June
18, 2021
|
(1)
333,334
warrants are held by a family trust of officer Elwood G.
Norris.
|
10.
|
COMMITMENTS AND CONTINGENCIES
|
Facility Leases
See
Note 7.
Related Party Technology License Agreement
The
Company is obligated to pay royalties and pay 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 $9,915 and
$16,634 for royalties incurred during the three and nine months
ended September 30, 2019, respectively.
Purchase Commitments
At
September 30, 2019 the Company was committed for approximately
$540,000 for future component deliveries that are generally subject
to modification or rescheduling in the normal course of
business.
|
11.
|
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
$13,500 during the nine months ended September, 2019 and
2018.
See
Notes 1, 6, and 8 and 10 for information on related party
transactions and information.
|
12.
|
SUBSEQUENT EVENTS
|
The
Company evaluated subsequent events for their potential impact on
the financial statements and disclosures through the date the
financial statements were available to be issued, and determined
that, except as disclosed herein, no subsequent events occurred
that were reasonably expected to impact the financial statements
presented herein.
Item 2. Man
a
gement's Discussion and
Analysis of Financial Condition and Results of
Operations
You should read the following discussion in conjunction with the
financial statements and other financial information included
elsewhere in this Quarterly Report on Form 10-Q and with our
audited financial statements and other information presented in our
Annual Report on Form 10-K for the year ended December 31, 2018.
The following discussion may contain forward-looking statements
that reflect our plans, estimates and beliefs. Words such as
“expect,” “anticipate,”
“intend,” “plan,” “believe,”
“seek,” “estimate,” “continue,”
“may,” “will,” “could,”
“would,” or the negative or plural of such words 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. Such forward-looking
statements are subject to a number of risks, uncertainties,
assumptions and other factors that could cause actual results and
the timing of certain events to differ materially from future
results expressed or implied by the forward-looking statements.
Factors that could cause or contribute to these differences
include, but are not limited to, those discussed below and
elsewhere in this Quarterly Report on Form 10-Q and in our other
SEC filings, including particularly matters set forth under Part I,
Item 1A (Risk Factors) of our Annual Report on Form 10-K.
Furthermore, such forward-looking statements speak only as of the
date of this Quarterly Report. Except as required by law, we
undertake no obligation to update any forward-looking statements to
reflect events or circumstances after the date of such
statements.
We are
a security technology company organized in March 2016 focused on
delivering modern policing solutions to customers, primarily
consisting of law enforcement and security personnel.
Business Highlights, Outlook and Challenges
In June 2019, we completed a follow-on public offering
under
our effective shelf registration statement on Form S-3 (File No.
333-228974) (the “
June 2019
Follow-On Offering
”)
,
which offering resulted in net cash proceeds to the Company of
approximately $11.35 million after deduction of commissions and
offering costs, and, at September 30, 2019, we had cash and cash
equivalents of $19.2 million. We are rapidly growing business
functions, including production, marketing, sales, distribution,
service and administration. Until we generate additional revenue
and net cash flow from operations, we still expect to have limited
personnel to accomplish these functions and will primarily rely on
our executives along with outside consultants, contractors and
suppliers for production and certain other services. Given our
limited personnel, substantial risk and uncertainty exists with
respect to whether we can timely execute our business plan and
achieve our operating objectives, including obtaining orders from
customers and introducing new products in the
future.
We
currently have five U.S. patents issued and nine U.S. patents
pending on our remote restraint device and technology. In September
2018 we commenced filing our first foreign patent applications,
targeting the European Union (17 countries) and 17 other countries.
We have additional patents being drafted as part of our strategy to
protect our innovations in the U.S. and in targeted countries
internationally.
We
began demonstrations of our first product, the BolaWrap 100 remote
restraint device, in November 2017 and
in 2018 developed initial production
capability
.
We have
demonstrated our BolaWrap 100 product to over 170 agencies across
the country, often with media in attendance, resulting in dozens of
media reports including television and print that have driven
hundreds of inquiries from domestic and international prospects.
Over 110 law enforcement agencies and 20 distributors took delivery
of the BolaWrap 100 devices during 2018 and the first nine months
of 2019. In addition to sales to domestic and international
agencies and distributors, we delivered through September 2019 over
460 test and evaluation devices at no cost to strategic agencies
for evaluation and feedback. Our product is gaining important
worldwide awareness and recognition through media exposure, trade
show participations, product demonstrations and word of mouth as a
result of positive responses to our product. We believe we are
establishing a global brand and the product foundation for business
growth. We believe we have strong market opportunities for our
restraint product offering within the law enforcement, military and
homeland security business sectors domestically and
internationally.
In March 2019, we welcomed less-lethal industry pioneer and 25-year
veteran Thomas Smith as our President. He is responsible for
scaling our domestic and international sales. We have accelerated
our focus on international distribution and began to engage with
domestic distributors to address the over 1,100 product inquiries
from domestic law enforcement agencies. While our strategy includes
a combination of both direct and distributor sales we are adding
distributors to sell products especially targeting smaller law
enforcement agencies. At September 30, 2019 we had distribution
agreements with 11 domestic distributors representing 45 states and
15 international distributors representing 25
countries.
To support our increased sales and distribution activities we have
expanded our training and product support functions with the
addition of less-lethal industry veterans and engagement of
professional regional trainers. At September 30, 2019, in addition
to our internal training executives, we had 23 contract regional
Master Instructors. As of September 30, 2019, over 95 agencies had
received BolaWrap 100 training with approximately 450 training
officers at those agencies certified as BolaWrap 100 instructors
qualified to train the rest of their departments.
In late May 2019, we began shipping an updated version of our
BolaWrap 100 remote restraint device featuring a green line laser
to strategic police departments and international distributors. In
June 2019 we also leased and occupied a 11,000 square foot facility
in Tempe, Arizona that we expect to provide additional assembly,
warehouse and training space for future growth.
We obtained
our ATF facility license in August and began to manufacture
BolaWrap devices and cartridges at the facility in September
2019.
In July 2019, we announced our first large international
distributor order valued at over $1 million and secured three
additional international orders and our first five domestic
distributor orders.
We believe we can accelerate orders in
2019 but
orders and sales may be
sporadic as we grow our distributor and customer base
. There
can be no assurance of the timing or quantity of orders or sales in
future periods.
The
focus of our sales strategy is the immediate addressable domestic
market of approximately 701,000 full-time sworn law enforcement
officers
in 15,300 federal, state and
local
law enforcement agencies
while also beginning to explore other markets,
including military and border patrol. We are also aggressively
addressing international markets. According to
Statistics
MRC, we participate in a segment of the non-lethal products market
expected to grow to $11.85 billion by 2023.
At
September 30, 2019, we had $238,510 of customer deposits on orders
and had backlog of approximately $1.3 million expected to be
delivered in the next nine months. Distributor and customer orders
for future deliveries are generally subject to modification,
rescheduling or in some instances 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.
Although we believe that we have adequate financial
resources to sustain our operations for the next year, no
assurances can be given, and we
may
need additional capital for future operations and to market and
further develop our products and introduce new
products.
We face significant challenges in operating and growing our
business. We expect that we will need to continue to innovate new
applications for our security technology, develop new products and
technologies to meet diverse customer requirements and identify and
develop new markets for our products.
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 will be 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.
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, operating
lease liabilities, warranty liabilities, impairments and valuation
of intangible assets.
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 training. Our customers do not have the
right to return product unless the product is found to be
defective.
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 nine months
ended September 30, 2019.
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. However,
in the near term, we expect our research and development expense to
increase in absolute dollars as we increase our research and
development headcount and increase new product development
activities.
The
actual level of future 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 noncash share-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
Three Months Ended September 30, 2019 Compared to Three Months
Ended September 30, 2018
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
condensed financial statements and notes contained elsewhere in
this
Quarterly Report on Form 10-Q
(the “
Report
”)
.
|
|
Three Months
|
|
|
|
|
|
Ended September 30,
|
Change
|
||
|
|
2019
|
2018
|
$
|
%
|
|
Revenues:
|
|
|
|
|
|
Product
sales
|
$
255,973
|
$
1,890
|
$
254,083
|
|
|
Other
revenue
|
12,790
|
-
|
12,790
|
|
|
Total
revenues
|
268,763
|
1,890
|
266,873
|
|
|
Cost
of revenues
|
157,786
|
1,607
|
156,179
|
|
|
Gross profit
|
110,977
|
283
|
110,694
|
|
|
|
|
|
|
|
|
Operating expenses:
|
|
|
|
|
|
Selling,
general and administrative
|
1,878,152
|
665,910
|
1,212,242
|
182
%
|
|
Research
and development
|
729,788
|
168,432
|
561,356
|
333
%
|
|
Total
operating expenses
|
2,607,940
|
834,342
|
1,773,598
|
213
%
|
|
Loss
from operations
|
$
(2,496,963
)
|
$
(834,059
)
|
$
(1,662,904
)
|
199
%
|
|
|
|
|
|
|
Revenue
We
reported revenue of $268,763 for the three months ended September
30, 2019. We had minimal revenue for the three months ended
September 30, 2018 as we had only commenced product sales. Our
recent marketing and selling efforts have focused on creating
demand for our improved generation of BolaWrap 100® product
with our green line laser. Initial deliveries of the improved
product began in late May 2019. We incurred product promotional
costs of $153,539 during the three months ended September 30, 2019
related to the cost of demonstration products and accessories
delivered to law enforcement agencies that were expensed as
marketing costs. A total of $87,075 of such product marketing costs
were incurred during the three months ended September 30,
2018.
We had
$2,288 of deferred revenue at September 30, 2019 related to
products sold for which the training revenue component had not been
completed.
We
believe we can accelerate sales in future quarters but
sales may be sporadic as we grow both our domestic
and international distributor and customer
base
.
At
September 30, 2019 we had $238,510 of customer deposits on orders
and had backlog of approximately $1.3 million expected to be
delivered in the next nine months. Distributor and customer orders
for future deliveries are generally subject to modification,
rescheduling or in some instances, cancellation in the normal
course of business.
Gross Profit
Our
cost of revenue for the three months ended September 30, 2019 was
$157,786 resulting in a gross margin of 41%. Due to our history of
minimal revenue and the changes being made to our product as we
establish volume manufacturing such margin may not be indicative of
future margins.
In addition, our
margins vary based on the sales channels through which our products
are sold. We continue to implement product updates and changes,
including raw material and component changes that may impact
product costs. With such product updates and changes we have
limited warranty cost experience and estimated future warranty
costs can impact our gross margins. We do not believe that
historical gross profit margins should be relied upon as an
indicator of future gross profit margins.
In September 2019 we relocated manufacturing operations and
commenced production to our new facility in Tempe, Arizona. While
this significantly increases our capacity, we expect that larger
allocations of overhead and costs associated with start-up and
training may have a negative impact on product margins until and if
production volume increases in future quarters.
Selling, General and Administrative Expense
Selling,
general and administrative expense for the three months ended
September 30, 2019 increased by $1,212,242 when compared to the
three months ended September 30, 2018. We incurred a $313,367
increase in non-cash share-based compensation expense allocated to
selling, general and administrative expense from $438,834 in the
three months ended September 30, 2019 compared to $125,467 in the
three months ended September 30, 2018. Other increases included a
$314,634 increase in cash compensation costs from an increase in
headcount since September 30, 2018 and a $111,048 increase in
travel costs. Marketing and promotion costs increased $227,528 due
primarily to promotional products. Occupancy costs increased
$89,802 due to the addition of office, training, assembly and
warehouse space in Tempe, Arizona, and public company costs
increased $67,165 due to Nasdaq fees and related public company
costs incurred in 2019.
In the
near term we expect to expend additional resources on the marketing
and selling of our products, training distributors and customers
and administratively supporting our operations.
Research and Development Expense
Research
and development expense increased $561,356 during the three months
ended September 30, 2019, when compared to the comparable period in
2018. We incurred a $10,452 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 the 2019 period, when compared
to the comparable period in 2018, included a $237,900 increase in
cash compensation costs resulting from an increase in headcount
primarily associated with production development. Prototype related
costs increased $116,205 in the 2019 period, primarily related to
developing the updated version of the BolaWrap 100 product and
effect of model and component changes. Consulting costs increased
$119,997 in the 2019 period related to developing systems for
monitoring research and production. Travel costs increased $37,416
due primarily to setting up the new Arizona facility. We expect our
research and development costs will vary depending on specific
research projects and levels of internal and external staffing and
prototype costs.
Net Loss
Loss
from operations during the three months ended September 30, 2019
increased by $1,662,904 when compared to the three months ended
September 30, 2018, resulting, primarily, from increased operating
costs due to increased personnel and marketing and selling and
supporting activities.
Nine Months Ended September 30, 2019 Compared to Nine Months Ended
September 30, 2018
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
condensed financial statements and notes contained in this
Report.
|
|
Nine Months
|
|
|
|
|
|
Ended September 30,
|
Change
|
||
|
|
2019
|
2018
|
$
|
%
|
|
Revenues:
|
|
|
|
|
|
Product
sales
|
$
418,874
|
$
1,890
|
$
416,984
|
|
|
Other
revenue
|
27,144
|
-
|
27,144
|
|
|
Total
revenues
|
446,018
|
1,890
|
444,128
|
|
|
Cost
of revenues
|
254,701
|
1,607
|
253,094
|
|
|
Gross profit
|
191,317
|
283
|
191,034
|
|
|
|
|
|
|
|
|
Operating expenses:
|
|
|
|
|
|
Selling,
general and administrative
|
4,547,215
|
1,586,652
|
2,960,563
|
187
%
|
|
Research
and development
|
1,620,820
|
458,046
|
1,162,774
|
254
%
|
|
Total
operating expenses
|
6,168,035
|
2,044,698
|
4,123,337
|
202
%
|
|
Loss
from operations
|
$
(5,976,718
)
|
$
(2,044,415
)
|
$
(3,932,303
)
|
192
%
|
Revenue
We
reported revenue of $418,874 for the nine months ended September
30, 2019. We had minimal revenue for the nine months ended
September 30, 2018 as we only commenced product sales in late 2018.
Our recent marketing and selling efforts have focused on creating
demand for our improved generation BolaWrap 100 product with our
green line laser. Initial deliveries of the improved product began
in late May 2019. We incurred product promotional costs of $288,599
for the nine months ended September 30, 2019 related to the cost of
demonstration products and accessories delivered to law enforcement
agencies that were expensed as marketing costs. A total of $146,346
such product marketing costs was incurred during the nine months
ended September 30, 2018.
We had
$2,288 of deferred revenue at September 30, 2019 related to
products sold for which the training revenue component had not been
completed.
We
believe we can accelerate sales in the second half of 2019 but
sales may be sporadic as we grow our
distributor and customer base
.
At
September 30, 2019 we had $238,510 of customer deposits on orders
and had backlog of approximately $1.3 million expected to be
delivered in the next nine months. Distributor and customer orders
for future deliveries are generally subject to modification,
rescheduling or in some instances, cancellation in the normal
course of business.
Gross Profit
Our
cost of revenue for the nine months ended September 30, 2019 were
$254,701 resulting in a gross margin of 43%. Due to the minimal
revenue and the changes being made to our product as we establish
volume manufacturing such margin may not be indicative of future
margins.
In addition, our margins vary
based on the sales channels through which our products are sold. We
continue to implement product updates and changes, including raw
material and component changes that may impact product costs. With
such product updates and changes we have limited warranty cost
experience and estimated future warranty costs can impact our gross
margins. We do not believe that historical gross profit margins
should be relied upon as an indicator of future gross profit
margins.
In September 2019 we relocated manufacturing operations and
commenced production to our new facility in Tempe, Arizona. While
this significantly increases our capacity, we expect that larger
allocations of overhead and costs associated with start-up and
training may have a negative impact on product margins until and if
production volume increases in future quarters.
Selling, General and Administrative Expense
Selling,
general and administrative expense increased by $2,960,563 during
the nine months ended September 30, 2019, when compared to the nine
months ended September 30, 2018. During the nine months ended
September 30, 2019, we incurred a $735,906 increase in non-cash
share-based compensation expense allocated to selling, general and
administrative expense from $987,251 in the nine months ended
September 30, 2019 compared to $251,345 in the nine months ended
September 30, 2018. Other increases in the 2019 period included a
$857,463 increase in cash compensation costs from an increase in
headcount since September 30, 2018 and a $254,312 increase in
travel costs. Marketing and promotion costs increased $426,985 in
the 2019 period when compared to the 2018 period, due, primarily to
promotional products. Occupancy costs increased $175,379 due to the
addition of facilities in Lake Forest, California and Tempe,
Arizona, and public company costs increased $194,363 due to Nasdaq
fees, insurance and related public costs incurred in
2019.
In the
near term we expect to expend additional resources on the marketing
and selling of our products, training distributors and customers
and administratively supporting our operations.
Research and Development Expense
Research
and development expense increased $1,162,774 during the nine months
ended September 30, 2019, when compared to the nine months ended
September 30, 2018. We incurred a $15,838 period over period
increase in non-cash share-based compensation expense allocated to
research and development expense. Other increases in costs for the
2019 period, when compared to the 2018 period included a $485,052
increase in cash compensation costs from an increase in headcount
primarily associated with production development. Prototype related
costs increased $254,393 in the 2019 period, primarily related to
developing the updated version of the BolaWrap 100 product and
effect of model and component changes. Consulting costs during the
2019 period increased $282,465 related to developing systems for
monitoring research and production. Travel costs increased $88,397
due primarily to setting up the new Arizona facility. We expect our
research and development costs will vary depending on specific
research projects and levels of internal and external staffing and
prototype costs.
Net Loss
Loss
from operations during the nine months ended September 30, 2019
increased by $3,392,303 when compared to the nine months ended
September 30, 2018, resulting, primarily from increased operating
costs due to increased personnel and 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 September 30, 2019, we had
cash of $19,261,830 and positive working capital of $20,154,564,
and had sustained cumulative losses attributable to stockholders of
$10,186,395. We believe that our cash on hand will sustain our
operations for at least the next twelve months from the date of
this Report.
Our sole source of liquidity to date has been funding from our
stockholders and the sale and exercise of equity securities. 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
In December 2017, we completed our self-underwritten IPO, raising
gross proceeds of approximately $3.49 million from the sale of
2,328,533 shares of Common Stock at the public offering price of
$1.50 per share.
In October 2018, we received approximately $12.14 million in net
cash proceeds from the private sale of equity securities to certain
accredited investors.
In June
2019, we obtained net cash proceeds of approximately $11.35 million
from the June 2019 Follow-On Offering. During the nine months ended
September 30, 2019 we also obtained $1.66 million from the exercise
of previously issued warrants and stock options.
We cannot currently estimate 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 will grow as we are increasing 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, although no assurances can be given. Additionally,
no assurances can be provided that any future debt or equity
capital will be available to us under favorable terms, if at all.
Failure to quickly produce and sell products and timely obtain any
required additional capital in the future will have a material
adverse effect on the Company.
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:
●
decisions regarding
staffing, development, production, marketing and other
functions;
●
the
timing and extent of any market acceptance of our
products;
●
the
costs, timing and outcome of planned production and required
customer and regulatory compliance of our new
products;
●
the
costs of preparing, filing and prosecuting our patent applications
and defending any future intellectual property-related
claims;
●
the
costs and timing of additional product development;
●
the
costs, timing and outcome of any future warranty claims or
litigation against us associated with any of our products;
and
●
the
timing and costs associated with any new financing.
Off-Balance Sheet Arrangements
We have no off-balance sheet arrangements.
Cash Flow
Operating Activities.
During the nine months ended September 30, 2019, net cash used in
operating activities was $5,805,987.
The net loss of $5,782,059 was
decreased by
non-cash expense of $1,026,646 consisting primarily of share-based
compensation expense of $1,074,555. Other major component changes
using operating cash included a $1,685,059 increase in inventories,
an increase of $91,109 in accounts receivable and a $96,000
reduction in deferred compensation. An increase of $585,126 in
accounts payable and accrued liabilities and new customer deposits
of $238,510 reduced the cash used in operating
activities.
During the nine months ended September 30, 2018, net cash used in
operating activities was $1,630,881 consisting primarily of the net
loss of $2,044,804 reduced by non-cash share-based compensation of
$322,811.
Investing Activities.
We used $197,873 and $8,015 of cash for the purchase of property
and equipment during the nine months ended September 30, 2019 and
2018, respectively. We began capitalizing patent costs during
mid-2018 and invested $95,536 and $48,226 in patents during the
nine months ended September 30, 2019 and 2018,
respectively.
Financing Activities.
We
received $11,351,214 of net proceeds from the June 2019 Follow-On
Offering, and, during the nine months ended September 30, 2019
obtained $1,662,285 from the exercise of previously issued warrants
and stock options.
Other than a
$31,359 payment on an insurance financing note, there were no
financing activities for the nine months ended September 30,
2018.
Contractual Obligations and Commitments
We are obligated to pay to Syzygy Licensing, LLC
(“
Syzygy
”) a 4% royalty fee on future product sales
up to an aggregate amount of $1.0 million in royalties
or
until September 30, 2026, whichever occurs earlier
.
In January 2019 we extended our Las Vegas, Nevada corporate and
production facility lease through December 31, 2020. In February
2019 we entered into a two-year lease for an office and warehouse
space in Lake Forest, California. In June 2019 we entered into a
38-month lease for office, training, assembly and warehouse space
in Tempe, Arizona. We are committed to aggregate lease payments on
these leases of $34,507 for the balance of 2019, $143,574 in 2020,
$101,406 in 2021 and $57,328 in 2022.
At
September 30, 2019 we were committed to approximately $540,000 of
purchase commitments for product components. These purchase
commitments are generally subject to modification as to timing,
quantities and scheduling and in certain instances may be
cancelable without penalty.
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
Other
than our adoption of ASU 2016-02, Leases (Topic 842), there have
been no recent accounting pronouncements or changes in accounting
pronouncements during the period ended September 30, 2019, or
subsequently thereto, that we believe are of potential significance
to our financial statements.
Item 3. Quanti
t
ative and Qualitative
Disclosures about Market Risk.
Not
applicable.
Item 4. Con
t
rols and
Procedures.
We are
required to maintain disclosure controls and procedures designed to
ensure that material information related to us, including our
consolidated subsidiaries, is recorded, processed, summarized and
reported within the time periods specified in the SEC rules and
forms.
Conclusion Regarding the Effectiveness of Disclosure Controls and
Procedures
Under
the supervision and with the participation of our management,
including our principal executive officer and our principal
financial officer, as of September 30, 2019 we conducted an
evaluation of our disclosure controls and procedures as such term
is defined under Rules 13a-15(e) and 15d-15(e) promulgated under
the Securities Exchange Act of 1934, as amended. Based on this
evaluation, our principal executive officer and our principal
financial officer concluded that our disclosure controls and
procedures
were effective at the
reasonable assurance level.
Changes in Internal Control over Financial Reporting
There
have been no changes in our internal control over financial
reporting during our fiscal quarter ended September 30, 2019, 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.
Because of the inherent limitations of internal control over
financial reporting, including the possibility of collusion or
improper management override of controls, material misstatements
due to error or fraud may not be prevented or detected on a timely
basis. Also, projections of any evaluation of the effectiveness of
the internal control over financial reporting to future periods are
subject to the risk that the controls may become inadequate because
of changes in conditions, or that the degree of compliance with the
policies or procedures may deteriorate.
PART II. O
T
HER
INFORMATION
Item 1. Legal Proceedings
We may
at times become involved in litigation in the ordinary course of
business. We will also, from time to time, when appropriate in
management’s estimation, record adequate reserves in our
financial statements for pending litigation. Currently, there are
no pending material legal proceedings to which the Company is a
party or to which any of its property is subject.
Item 1A. Risk Factors
As a Smaller Reporting Company as defined by Rule 12b-2 of the
Exchange Act and in Item 10(f)(1) of Regulation S-K, we are
electing scaled disclosure reporting obligations and therefore are
not required to provide the information requested by this
item.
Item 2. Unregistered Sales of Equity Securities and Use of
Proceeds
No
unregistered securities were issued during the three months ended
September 30, 2019 that were not previously reported.
Item 3. Defa
ults Upon Senior Securities
None.
Item 4.
M
ine Safety
Disclosures
Not
Applicable.
Item 5. Other Information
None.
Item 6. Exhibits
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Certification of David Norris, Principal Executive Officer,
pursuant to Rule 13a-14(a) or 15d-14(a) of the Securities and
Exchange Act of 1934, as amended, as adopted pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002.*
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Certification of James A. Barnes, Principal Financial Officer,
pursuant to Rule 13a-14(a) or 15d-14(a) of the Securities and
Exchange Act of 1934, as amended, as adopted pursuant to
Section 302 of the Sarbanes-Oxley Act of 2002.*
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Certification pursuant to 18 U.S.C. Section 1350, as adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002,
executed by David Norris, Principal Executive Officer, and James A.
Barnes, Principal Financial Officer.*
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Extensible
Business Reporting Language (XBRL) Exhibits*
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101.INS
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XBRL
Instance Document*
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101.SCH
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XBRL
Taxonomy Extension Schema Document*
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101.CAL
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XBRL
Taxonomy Extension Calculation Linkbase Document*
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101.DEF
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XBRL
Taxonomy Extension Definition Linkbase Document*
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101.LAB
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XBRL
Taxonomy Extension Labels Linkbase Document*
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101.PRE
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XBRL
Taxonomy Extension Presentation Linkbase Document*
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* Filed
concurrently herewith
SIG
NATURES
Pursuant
to the requirements of the Securities Exchange Act of 1934, as
amended, the registrant has duly caused this report to be signed on
its behalf by the undersigned thereunto duly
authorized.
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October
31, 2019
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WRAP
TECHNOLOGIES, INC.
By:
/s/ JAMES A.
BARNES
James
A. Barnes
Chief
Financial Officer, Secretary and Treasurer
(Principal
Accounting Officer)
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TABLE OF CONTENTS
Part I. Financial InformationItem 1. Financial StatementsItem 2. Management's Discussion and Analysis Of Financial Condition and Results Of OperationsItem 3. Quantitative and Qualitative Disclosures About Market RiskItem 4. Controls and ProceduresPart II. Other InformationItem 1. Legal ProceedingsItem 1A. Risk FactorsItem 2. Unregistered Sales Of Equity Securities and Use Of ProceedsItem 3. Defaults Upon Senior SecuritiesItem 3. DefaItem 4. Mine Safety DisclosuresItem 5. Other InformationItem 6. Exhibits