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 March 31, 2020
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
April 28, 2020 a total of 30,123,599 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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13
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19
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19
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19
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20
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20
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20
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21
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PART I. FI
N
ANCIAL
INFORMATION
Item 1. Financial Statements
Wrap Technologies, Inc.
Condensed Balance Sheets
|
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March 31,
|
|
|
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2020
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December 31,
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|
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(unaudited)
|
2019
|
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ASSETS
|
|
|
|
Current assets:
|
|
|
|
Cash
and cash equivalents
|
$
15,492,784
|
$
16,983,864
|
|
Accounts
receivable, net
|
383,709
|
195,347
|
|
Inventories,
net
|
2,288,133
|
2,244,541
|
|
Prepaid
expenses and other current assets
|
345,246
|
250,947
|
|
Total current assets
|
18,509,872
|
19,674,699
|
|
Property and equipment, net
|
239,948
|
242,876
|
|
Operating lease right-of-use asset, net
|
231,303
|
260,931
|
|
Intangible assets, net
|
262,176
|
230,283
|
|
Other assets, net
|
12,681
|
12,681
|
|
Total assets
|
$
19,255,980
|
$
20,421,470
|
|
|
|
|
|
LIABILITIES AND STOCKHOLDERS' EQUITY
|
|
|
|
Current liabilities:
|
|
|
|
Accounts
payable
|
$
449,716
|
$
406,967
|
|
Accrued
liabilities
|
215,831
|
194,294
|
|
Customer
deposits
|
222,388
|
343,724
|
|
Deferred
revenue
|
2,484
|
2,684
|
|
Operating
lease liability- short term
|
123,676
|
128,131
|
|
Total current liabilities
|
1,014,095
|
1,075,800
|
|
|
|
|
|
Operating Lease Liability - Long Term
|
123,676
|
150,018
|
|
Total liabilities
|
1,137,771
|
1,225,818
|
|
|
|
|
|
Commitments and contingencies (Note 10)
|
|
|
|
|
|
|
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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;
30,073,724 and 29,829,916 shares issued and outstanding each
period, respectively
|
3,007
|
2,983
|
|
Additional
paid-in capital
|
33,191,001
|
31,922,493
|
|
Accumulated
deficit
|
(15,075,799
)
|
(12,729,824
)
|
|
Total stockholders' equity
|
18,118,209
|
19,195,652
|
|
Total liabilities and stockholders' equity
|
$
19,255,980
|
$
20,421,470
|
See
accompanying notes to condensed interim financial
statements.
|
Wrap Techn
o
logies, Inc.
|
||
|
Condensed Statements of Operations
|
||
|
(unaudited)
|
||
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For the Three Months
|
|
|
|
Ended March 31,
|
|
|
|
2020
|
2019
|
|
Revenues:
|
|
|
|
Product
sales
|
$
674,613
|
$
113,953
|
|
Other
revenue
|
14,824
|
3,858
|
|
Total
revenues
|
689,437
|
117,811
|
|
Cost
of revenues
|
405,812
|
61,220
|
|
Gross profit
|
283,625
|
56,591
|
|
|
|
|
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Operating expenses:
|
|
|
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Selling,
general and administrative
|
2,140,250
|
1,187,876
|
|
Research
and development
|
533,478
|
374,819
|
|
Total
operating expenses
|
2,673,728
|
1,562,695
|
|
Loss
from operations
|
(2,390,103
)
|
(1,506,104
)
|
|
|
|
|
|
Other income (expense):
|
|
|
|
Interest
income
|
44,518
|
25,410
|
|
Other
|
(390
)
|
(87
)
|
|
|
44,128
|
25,323
|
|
Net loss
|
$
(2,345,975
)
|
$
(1,480,781
)
|
|
|
|
|
|
Net
loss per basic and diluted common share
|
$
(0.08
)
|
$
(0.05
)
|
|
Weighted
average common shares used to compute net loss per basic and
diluted common share
|
29,976,825
|
27,364,607
|
See
accompanying notes to condensed interim financial
statements.
Wrap Tech
n
ologies,
Inc.
Statements of Stockholders' Equity
(unaudited)
|
|
|
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Additional
|
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Total
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|
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Common Stock
|
Paid-In
|
Accumulated
|
Stockholders'
|
|
|
|
Shares
|
Amount
|
Capital
|
Deficit
|
Equity
|
|
|
|
|
|
|
|
|
Balance at December 31, 2019
|
29,829,916
|
$
2,983
|
$
31,922,493
|
$
(12,729,824
)
|
$
19,195,652
|
|
|
|
|
|
|
|
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Common
shares issued upon exercise of warrants at $3.00 per
share
|
11,783
|
1
|
35,348
|
-
|
35,349
|
|
Common
shares issued upon exercise of warrants at $5.00 per
share
|
119,400
|
12
|
596,988
|
-
|
597,000
|
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Common
shares issued upon exercise of stock options
|
112,625
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11
|
168,926
|
-
|
168,937
|
|
Stock-based
compensation expense
|
-
|
-
|
467,246
|
-
|
467,246
|
|
Net
loss for the period
|
-
|
-
|
-
|
(2,345,975
)
|
(2,345,975
)
|
|
Balance at March 31, 2020
|
30,073,724
|
$
3,007
|
$
33,191,001
|
$
(15,075,799
)
|
$
18,118,209
|
|
|
|
|
|
|
|
|
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|
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Balance at December 31, 2018
|
27,364,607
|
$
2,736
|
$
16,791,254
|
$
(4,404,336
)
|
$
12,389,654
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|
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|
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|
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|
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Stock-based
compensation expense
|
-
|
-
|
227,047
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-
|
227,047
|
|
Net
loss for the period
|
-
|
-
|
-
|
(1,480,781
)
|
(1,480,781
)
|
|
Balance at March 31, 2019
|
27,364,607
|
$
2,736
|
$
17,018,301
|
$
(5,885,117
)
|
$
11,135,920
|
See
accompanying notes to condensed interim financial
statements.
Wra
p
Technologies, Inc.
Statements of Cash Flows
(unaudited)
|
|
For the Three Months
|
|
|
|
Ended March 31,
|
|
|
|
2020
|
2019
|
|
Cash Flows From Operating Activities:
|
|
|
|
Net
loss
|
$
(2,345,975
)
|
$
(1,480,781
)
|
|
Adjustments
to reconcile net loss to net cash
|
|
|
|
used
in operating activities:
|
|
|
|
Depreciation
and amortization
|
25,098
|
5,174
|
|
Warranty
provision
|
13,882
|
2,297
|
|
Inventory
write-off
|
-
|
(12,975
)
|
|
Non-cash
lease expense
|
29,628
|
5,852
|
|
Share-based
compensation
|
467,246
|
227,047
|
|
Provision
for doubtful accounts
|
10,140
|
-
|
|
Changes
in assets and liabilities:
|
|
|
|
Accounts
receivable
|
(198,502
)
|
(58,646
)
|
|
Inventories
|
(43,592
)
|
(521,449
)
|
|
Prepaid
expenses and other current assets
|
(94,299
)
|
(212,119
)
|
|
Accounts
payable
|
42,749
|
417,364
|
|
Operating
lease liability
|
(30,797
)
|
(5,120
)
|
|
Customer
deposits
|
(149,141
)
|
-
|
|
Accrued
liabilities and other
|
35,460
|
41,977
|
|
Deferred
revenue
|
(200
)
|
2,402
|
|
Net
cash used in operating activities
|
(2,238,303
)
|
(1,588,977
)
|
|
|
|
|
|
Cash Flows From Investing Activities:
|
|
|
|
Capital
expenditures for property and equipment
|
(19,569
)
|
(39,198
)
|
|
Investment
in patents and trademarks
|
(34,494
)
|
(34,437
)
|
|
Long-term
deposits
|
-
|
(2,805
)
|
|
Net
cash used in investing activities
|
(54,063
)
|
(76,440
)
|
|
|
|
|
|
Cash Flows From Financing Activities:
|
|
|
|
Proceeds
from exercise of warrants
|
632,349
|
-
|
|
Proceeds
from exercise of stock options
|
168,937
|
-
|
|
Net
cash provided by financing activities
|
801,286
|
-
|
|
|
|
|
|
Net decrease in cash and cash equivalents
|
(1,491,080
)
|
(1,665,417
)
|
|
Cash and cash equivalents, beginning of period
|
16,983,864
|
12,358,896
|
|
Cash and cash equivalents, end of period
|
$
15,492,784
|
$
10,693,479
|
|
|
|
|
|
Supplemental Disclosure of Non-Cash Investing
|
|
|
|
and Financing Activities:
|
|
|
|
Right-of-use
assets and liabilites recorded during period
|
$
-
|
$
87,588
|
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.
The principal markets for the Company’s proprietary products
are in North and South America, Europe, Middle East and
Asia.
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, 2019 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, 2019. 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.,
stock-based compensation valuation, allowance for doubtful
accounts, valuation of inventory and intangible assets, warranty
reserve, accrued costs 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.
Where
necessary, the prior year’s information has been reclassified
to conform to the current year presentation.
Concentrations of Risk and Uncertainties
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.
COVID-19
-
In March 2020, the World Health Organization
declared the outbreak of a novel coronavirus
(“
COVID-19
”) as a pandemic which continues to spread
throughout the United States and the World. The Company is
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 its employees. Due to the
rapid development and fluidity of this situation, the magnitude and
duration of the pandemic and its impact on the Company’s
operations and liquidity is uncertain as of the date of this
report. 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 could not be
determined.
-5-
Stock-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 stock-based transactions
with non-employees. Stock-based compensation expense recognized
during the three months ended March 31, 2020 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 stock-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 stock-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 and Allowance for Doubtful
Accounts
The
Company’s policy is to evaluate the collectability of
accounts receivable based on an assessment of the collectability of
specific customer accounts and then record an allowance for
doubtful accounts to reduce the receivables to an amount that
management reasonably estimates will be collected. There was no
allowance for doubtful accounts recorded at December 31, 2019. At
March 31, 2020 the Company established an allowance of $10,140
resulting in part from global uncertainty resulting from the
COVID-19 virus. Accounts that are deemed uncollectible will be
written off against the allowance for doubtful accounts. 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. Prior to
October 1, 2019 substantially all of the Company’s inventory
was determined by the weighted average cost method which
approximated the first in first out (FIFO) cost method.
Effective October 1, 2019, with the change to a new computerized
inventory system, the Company commenced identifying FIFO layers.
The Company believes this transition change to FIFO will improve
financial reporting by better reflecting the current value
of inventory on the balance sheet, more closely aligning the
flow of physical inventory with the accounting for
the inventory and providing better matching of revenues and
expenses. As the Company has only recently started selling
products, and had limited purchase and sales activity, the weighted
average method approximated FIFO and this change to FIFO had no
material effect on the prior balance sheet, statement of operations
or cash flows. Accordingly, no retrospective changes were
recorded.
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
March 31, 2020 and at December 31, 2019 the Company had no reserve
for obsolescence.
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 9,684,225 shares of Common Stock were outstanding at March
31, 2020. 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.
-6-
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 March 31, 2020 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.
Recent Issued Accounting Guidance
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 adoption of this standard in the first quarter ended
March 31, 2020 had no impact on the Company’s financial
statements or disclosures.
Other Pronouncements:
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.
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.
-7-
|
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
associated with a customer contract 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 March 31, 2020 the Company had deferred revenue of $2,484
related to future training and extended warranties.
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 March
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.
|
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:
|
|
March 31,
|
December 31,
|
|
|
2020
|
2019
|
|
Finished
goods
|
$
1,044,282
|
$
653,323
|
|
Work
in process
|
27,613
|
413
|
|
Raw
materials
|
1,216,238
|
1,590,805
|
|
|
$
2,288,133
|
$
2,244,541
|
-8-
|
4.
|
PROPERTY AND EQUIPMENT, NET
|
Property and
equipment consisted of the following:
|
|
March 31,
|
December 31,
|
|
|
2020
|
2019
|
|
Laboratory
equipment
|
$
51,126
|
$
44,454
|
|
Tooling
|
61,259
|
59,004
|
|
Computer
equipment
|
94,010
|
83,368
|
|
Furniture,
fixtures and improvements
|
128,782
|
128,782
|
|
|
335,177
|
315,608
|
|
Accumulated
depreciation
|
(95,229
)
|
(72,732
)
|
|
|
$
239,948
|
$
242,876
|
Depreciation
expense was
$22,497 and $4,990
for the three months ended March 31, 2020 and 2019,
respectively.
|
5.
|
INTANGIBLE ASSETS, NET
|
Intangible assets
consisted of the following:
|
|
March 31,
|
December 31,
|
|
|
2020
|
2019
|
|
|
|
|
|
Patents
|
$
199,783
|
$
176,425
|
|
Trademarks
|
69,055
|
57,919
|
|
|
268,838
|
234,344
|
|
Accumulated
amortization
|
(6,662
)
|
(4,061
)
|
|
|
$
262,176
|
$
230,283
|
Amortization
expense was $2,601 and $184 for the three months ended March 31,
2020 and 2109, respectively.
|
6.
|
ACCOUNTS PAYABLE AND ACCRUED LIABILITIES
|
Accounts payable
includes $31,649 and $18,809 due to related party Syzygy Licensing,
LLC (“
Syzygy
”)
as of March 31, 2020 and December 31, 2019, respectively. See Note
11.
Accrued
liabilities consist of the following:
|
|
March 31,
|
December 31,
|
|
|
2020
|
2019
|
|
Patent
costs
|
$
7,500
|
$
6,851
|
|
Accrued
compensation
|
170,026
|
144,193
|
|
Warranty
costs
|
27,805
|
13,923
|
|
Taxes
and other
|
10,500
|
29,327
|
|
|
$
215,831
|
$
194,294
|
|
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.
Amortization of ROU
operating lease assets was $29,628 and $5,852 for the three months
ended March 31, 2020 and 2019, respectively.
Operating lease
expense for capitalized operating leases included in operating
activities was $30,797 and $5,120 for the three months ended March
31, 2020 and 2019, respectively. Operating lease obligations
recorded on the balance sheet at March 31, 2020 are:
|
Operating
lease liability- short term
|
$
123,676
|
|
Operating
lease liability - long term
|
123,676
|
|
Total
Operating Lease Liability
|
$
247,352
|
-9-
Future
lease payments included in the measurement of lease liabilities on
the balance sheet at March 31, 2020 for future periods are as
follows:
|
Remainder
of 2020 (nine months)
|
$
115,802
|
|
2021
|
101,406
|
|
2022
|
57,328
|
|
Total
future minimum lease payments
|
274,536
|
|
Less
imputed interest
|
(27,184
)
|
|
Total
|
$
247,352
|
The
weighted average remaining lease term is 2.1 years and the weighted
average discount rate is 7.0%.
The
Company does not have any finance leases.
|
8.
|
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
”).
Summary of Stock Purchase Warrants
The
following table summarizes warrant activity during the three months
ended March 31, 2020:
|
|
Number
|
Average Purchase Price Per Share
|
|
Shares
purchasable under outstanding warrants at December 31,
2019
|
6,620,620
|
$
5.41
|
|
Stock
purchase warrants issued
|
-
|
-
|
|
Stock
purchase warrants exercised
|
(131,183
)
|
$
4.82
|
|
Shares
purchasable under outstanding warrants at March 31,
2020
|
6,489,437
|
$
5.42
|
The
Company has outstanding Common Stock purchase warrants as of March
31, 2020 as follows:
|
|
Number of
|
Exercise Price
|
|
|
Description
|
Common Shares
|
Per Share
|
Expiration Date
|
|
Purchase
Warrants (1)
|
4,095,840
|
$
5.00
|
October
30, 2020
|
|
Agent
Warrants
|
316,675
|
$
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) Warrants
to purchase 333,334 shares of common stock are held by a family
trust of Elwood G. Norris, the Company’s Chief Technology
Officer.
The
Company determined that the outstanding warrants issued in
connection with prior stock offerings 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.
|
9.
|
STOCK-BASED COMPENSATION
|
On
March 31, 2017, the Company adopted, and the stockholders approved
the 2017 Stock Incentive Plan (the “
Plan
”) authorizing 2,000,000
shares of Company Common Stock for issuance as stock options and
restricted stock units to employees, directors or consultants. In
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 to a total of 4,100,000
shares. In 2018 the Company granted options on 100,000 shares
outside of the Plan.
The
Company generally recognizes stock-based compensation expense on
the grant date and over the period of vesting or period that
services will be provided.
-10-
The
following table summarizes stock option activity for the three
months ended March 31, 2020:
|
|
|
Weighted Average
|
|
|
|
|
Options on
|
|
Remaining
|
Aggregate
|
|
|
Common
|
Exercise
|
Contractual
|
Intrinsic
|
|
|
Shares
|
Price
|
Term
|
Value
|
|
|
2,928,750
|
$
2.96
|
3.71
|
|
|
Granted
|
-
|
-
|
-
|
|
|
Exercised
|
(112,625
)
|
1.50
|
-
|
|
|
Forfeited,
cancelled, expired
|
-
|
-
|
-
|
|
|
Outstanding March
31, 2020
|
2,816,125
|
$
3.02
|
3.47
|
$
4,632,305
|
|
Vested and
exercisable at March 31, 2020
|
1,910,499
|
$
2.31
|
3.32
|
$
4,106,916
|
The
Company uses the Black-Scholes option pricing model to determine
the fair value of the options granted. No options were granted
during the three months ended March 31, 2020 requiring fair value
determination.
The
Plan provides for the grant of restricted rtock units (
RSUs
). On January 16, 2020 the Company
granted 73,392 of service based RSUs to officer and directors
vesting over three years that convert to Common Stock as vesting
occurs. The following table summarizes RSU activity under the Plan
for the three months ended March 31, 2020:
|
|
Weighted Average
|
||
|
|
Service-Based
|
Grant Date
|
Vesting
|
|
|
RSU's
|
Fair Value
|
Period
|
|
Unvested
at January 1, 2019
|
308,087
|
$
6.77
|
|
|
Granted
|
73,992
|
$
5.71
|
3
Years
|
|
Vested
|
-
|
-
|
|
|
Forfeited
and cancelled
|
(3,416
)
|
$
7.24
|
|
|
Unvested
at December 31, 2019
|
378,663
|
$
6.56
|
|
The
Company recorded stock-based compensation for options and RSUs in
its statements of operations for the relevant periods as
follows:
|
|
For the Three Months
|
|
|
|
Ended March 31,
|
|
|
|
2020
|
2019
|
|
Selling,
general and administrative
|
$
429,098
|
$
203,200
|
|
Research
and development
|
38,148
|
23,847
|
|
Total
stock-based expense
|
$
467,246
|
$
227,047
|
As of
March 31, 2020, total estimated compensation cost of stock options
and RSUs granted but not yet vested was $3.4 million which is
expected to be recognized over the weighted average period of 2.0
years.
|
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, both
of whom are stockholders and officers of the Company. 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 $24,986 and $4,488
for royalties incurred during the three months ended March 31, 2020
and 2019, respectively.
Purchase Commitments
At
March 31, 2020 the Company was committed for approximately $275,000
for future component deliveries and contract services that are
generally subject to modification or rescheduling in the normal
course of business.
-11-
|
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
$4,500 during the three months ended March 31, 2020 and 2019,
respectively.
See
Notes 6, 8 and 10 for information on related party
transactions.
|
12.
|
SUBSEQUENT EVENTS
|
On
April 1, 2020 the Company granted 306,336 of service-based stock
options to four executive officers. These stock options are
exercisable at $4.26 per share vesting over three years with a
ten-year term and subject to continued employment. The Company also
granted 35,211 of performance based RSUs to one executive officer
with performance based on 2020 objectives as determined by the
Board of Directors. The Company also granted 122,222 service based
RSUs to 16 employees vesting over three years. The RSUs had a grant
date value of $4.26 per share.
In
April 2020, the Board of the Company approved, subject to
stockholder ratification, an increase in the 2017 Stock Incentive
Plan authorizing an additional 1,900,000 shares of Common Stock to
a total of 6,000,000 shares.
On
March 27, 2020, the Coronavirus Aid, Relief and Economic Security
(CARES) Act was signed into law providing certain economic aid
packages for small business. The Company qualifies as a small
business under CARES and has submitted an application for funding
under the Paycheck Protection Program. There can be no assurance of
any future funding from this program.
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. Ma
n
agement'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, 2019.
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 and are
focused on delivering modern policing solutions to customers,
primarily consisting of law enforcement and security personnel. We
began demonstrations of our first product, the BolaWrap 100 remote
restraint device, in November 2017. We made various improvements
throughout 2018 as a result of feedback from early users of our
devices.
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.
The
immediate addressable domestic market 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, we participate in a segment of
the non-lethal products global market expected to grow to $11.85
billion by 2023.
Business Outlook and Challenges
Our
remote restraint solution continues to gain worldwide awareness and
recognition through 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
we have a recognized global brand, technology and an initial
product foundation with the BolaWrap 100.
We intend to expand our business in 2020 domestically and
internationally through both direct and distributor sales. We have
distribution agreements with 11 domestic distributors representing
45 states. 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 16 international
distributors representing 26 countries. 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.
We
are pursuing large business opportunities internationally and also
pursuing business with large domestic police agencies. 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 100. At
March 31, 2020, in addition to our internal training executives, we
have trained 51 contract regional Master Instructors. As of Match
31, 2020, 195 agencies had received BolaWrap 100 training with over
720 training officers at those agencies certified as BolaWrap 100
instructors qualified to train the rest of their
departments.
At
March 31, 2020, we had $222,388 of customer deposits on orders and
had backlog of approximately $1.4 million 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.
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 including challenges and uncertainty related to the
outbreak of the novel coronavirus (“
COVID-19
”) which continues to spread throughout the
United States and the World. The Company is 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 its employees. Due to the rapid development and
fluidity of this situation, the magnitude and duration of the
pandemic and its impact on the Company’s operations and
liquidity is uncertain as of the date of this report. While there
could ultimately be a material impact on operations and liquidity
of the Company, at the time of issuance, the impact could not be
determined.
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 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.
Some of
our accounting policies require higher degrees of judgment than
others in their application. These include stock-based compensation
and contingencies and areas such as revenue recognition, operating
lease liabilities, warranty liabilities, impairments and valuation
of intangible assets.
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 training. Our
customers do not have the right to return product unless the
product is found to be defective.
Stock 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 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 stock-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 stock-based compensation expense based on awards that we
ultimately expect to vest and account for forfeitures as they
occur.
The
fair value of stock-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 consist of
patents and trademarks that are amortized over their estimated
useful lives. 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.
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 three months
ended March 31, 2020.
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
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
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
Three Months Ended March 31, 2020 Compared to Three Months Ended
March 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
condensed financial statements and notes contained elsewhere in
this
Quarterly Report on Form 10-Q
(the “
Report
”)
.
|
|
Ended March 31,
|
Change
|
||
|
|
2020
|
2019
|
$
|
%
|
|
Revenues:
|
|
|
|
|
|
Product
sales
|
$
674,613
|
$
113,953
|
$
560,660
|
492
%
|
|
Other
revenue
|
14,824
|
3,858
|
10,966
|
284
%
|
|
Total
revenues
|
689,437
|
117,811
|
571,626
|
485
%
|
|
Cost
of revenues
|
405,812
|
61,220
|
344,592
|
563
%
|
|
Gross profit
|
283,625
|
56,591
|
227,034
|
401
%
|
|
|
|
|
|
|
|
Operating expenses:
|
|
|
|
|
|
Selling,
general and administrative
|
2,140,250
|
1,187,876
|
952,374
|
80
%
|
|
Research
and development
|
533,478
|
374,819
|
158,659
|
42
%
|
|
Total
operating expenses
|
2,673,728
|
1,562,695
|
1,111,033
|
71
%
|
|
Loss
from operations
|
$
(2,390,103
)
|
$
(1,506,104
)
|
$
(883,999
)
|
59
%
|
Revenue
We
reported revenue of $689,437 for the three months ended March 31,
2020. This was a significant increase from the first quarter of the
prior year when we had only commenced product sales. It is a 175%
increase over the immediately preceding quarter ended December 31,
2019 of $250,772. Our recent marketing and selling efforts have
focused on working with domestic and international distributors. We
are focusing on large orders from international customers. We
incurred product promotional costs of $186,906 during the three
months ended March 31, 2020 related to the cost of demonstration
products and accessories delivered to law enforcement agencies that
were expensed as marketing costs. A total of $67,495 of such
product marketing costs were incurred during the three months ended
March 31, 2019.
We had
$594 of deferred revenue at March 31, 2020 related to products sold
for which the training revenue component had not been completed and
$1,890 related to extended warranties.
We
believe we can accelerate sales in the future but the impact of the
COVID-19 coronavirus has created much uncertainty in the global
marketplace. We are unable to predict the impact on demand for our
products. We expect
sales may be
sporadic as we grow both our domestic and international distributor
and customer base
. There can be no assurance, especially
given the uncertainties of the COVID-19 crisis, that we can
increase quarterly revenues during 2020.
At
March 31, 2020 we had $222,388 of customer deposits on orders and
had backlog of approximately $1.4 million 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 instances, cancellation in the normal
course of business.
Gross Profit
Our
cost of revenue for the three months ended March 31, 2020 was
$283,625 resulting in a gross margin of 41%. Due to our history of
minimal revenue and changes 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 may have a negative impact on
product margins depending on production volume in future
quarters.
Selling, General and Administrative Expense
Selling,
general and administrative expense for the three months ended March
31, 2020 increased by $952,374 when compared to the three months
ended March 31, 2019. We incurred a $225,898 increase in non-cash
stock-based compensation expense allocated to selling, general and
administrative expense from $429,098 in the three months ended
March 31, 2020 compared to $203,200 in the three months ended March
31, 2019. Other increases included a $259,111 increase in cash
compensation costs from an increase in headcount since the prior
year and a $115,349 increase in travel costs related to increased
sales, demonstrations and training activity. Marketing and
promotion costs increased $165,108 due primarily to promotional
products. Consulting costs for sales, marketing and trainers
increased $61,840 primarily due to increased training and
demonstrations to agencies.
We
expect to expend comparable resources on the marketing and selling
of our products, training distributors and customers and
administratively supporting our operations during 2020 but amounts
could vary depending on sales levels, the impact of the COVID-19
crisis and
other factors outside of
our control.
Research and Development Expense
Research
and development expense increased $158,659 during the three months
ended March 31, 2020, when compared to the comparable period in
2019. We incurred a $14,301 period over period increase in non-cash
stock-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 2020 period, when compared
to the comparable period in 2019, included a $121,488 increase in
cash compensation costs resulting from an increase in headcount
primarily associated with product development. Prototype related
costs increased $77,730 in the 2020 period, primarily related to
developing activities to improve our BolaWrap 100 product and
develop new products. 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 March 31, 2020
increased by $883,999 when compared to the three months ended March
31, 2019, 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 March 31, 2020, we had cash
of $15,492,784 and positive working capital of $17,495,777 and had
sustained cumulative losses attributable to stockholders of
$15,075,799. 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
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 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, 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 would result in 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 three months ended March 31, 2020, net cash used in
operating activities was $2,238,303.
The net loss of $2,345,975 was
decreased by
non-cash expense of $545,994 consisting primarily of stock-based
compensation expense of $467,246. Other major component changes
using operating cash included a $43,592 increase in inventories, an
increase of $198,502 in accounts receivable, a $149,141 decrease in
customer deposits and a $94,299 increase in prepaid expenses and
other current assets. An increase of $78,209 in accounts payable
and accrued liabilities reduced the cash used in operating
activities.
During the three months ended March 31, 2019, net cash used in
operating activities was $1,588,977 consisting primarily of the net
loss of $1,480,781 reduced by non-cash stock-based compensation of
$227,047. Inventories increased $521,449 and prepaid expenses
increased $212,119 both changes using operating cash while a
$459,341 increase in accounts payable and accrued liabilities
reduced cash used in operations.
Investing Activities.
We used $19,569 and $39,198 of cash for the purchase of property
and equipment during the three months ended March 31, 2020 and
2019, respectively. We invested $34,494 and $34,437 in patents
during the three months ended March 31, 2020 and 2019,
respectively.
Financing Activities.
We
received $801,286 of net proceeds from the exercise of previously
issued warrants and stock options during the three months ended
March 31, 2020 with none in the comparable period of the prior
year.
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
.
We are committed to aggregate lease payments on facility leases of
$115,802 for the balance of 2020, $101,406 in 2021 and $57,328 in
2022.
At
March 31, 2020 we were committed to approximately $275,000 of
purchase commitments for product components and contract services.
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
There
have been no recent accounting pronouncements or changes in
accounting pronouncements during the period ended March 31, 2020,
or subsequently thereto, that we believe are of potential
significance to our financial statements.
Item 3. Q
u
antitative and Qualitative
Disclosures about Market Risk.
Not
applicable.
Item 4. Co
n
trols 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 March 31, 2020 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 March 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.
PART II. OT
H
ER
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. Ris
k
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.
Investors should carefully consider the risk factors included in
the “Risk Factors” section of our Annual Report on Form
10-K for our year ended December 31, 2019, as filed with SEC on
March 10, 2020. The Company’s business, operating results and
financial condition could be adversely affected due to any of those
risks including, but not limited to, the risk factor related to
business interruptions, including interruptions resulting from the
COVID-19 coronavirus. The extent to which the coronavirus impacts
our operations or those of our third-party partners will depend on
future developments, which are highly uncertain and cannot be
predicted with confidence, including the duration of the outbreak,
new information that may emerge concerning the severity of the
coronavirus and the actions to contain the coronavirus or treat its
impact, among others. Any losses or damages we incur could have a
material adverse effect on our financial results and our ability to
conduct business as expected
.
Additionally, the continued spread of COVID-19 and uncertain market
conditions may limit our ability to access capital and adversely
affect our business, financial condition and results of
operations.
Item 2. Un
r
egistered
Sales of Equity Securities and Use of Proceeds
No
unregistered securities were issued during the three months ended
March 31, 2020 that were not previously reported.
Item 3. Defa
ults Upon Senior Securities
None.
Item 4. Mine Safety Disclosures
Not
Applicable.
Item 5. Other Information
None.
Item 6. Exhibits
|
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.*
|
|
|
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.*
|
|
|
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.*
|
|
|
Extensible
Business Reporting Language (XBRL) Exhibits*
|
|
101.INS
|
XBRL
Instance Document*
|
|
101.SCH
|
XBRL
Taxonomy Extension Schema Document*
|
|
101.CAL
|
XBRL
Taxonomy Extension Calculation Linkbase Document*
|
|
101.DEF
|
XBRL
Taxonomy Extension Definition Linkbase Document*
|
|
101.LAB
|
XBRL
Taxonomy Extension Labels Linkbase Document*
|
|
101.PRE
|
XBRL
Taxonomy Extension Presentation Linkbase Document*
|
* 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.
|
April
29, 2020
|
WRAP
TECHNOLOGIES, INC.
By:
/s/ JAMES A.
BARNES
James
A. Barnes
Chief
Financial Officer, Secretary and Treasurer
(Principal
Accounting Officer)
|
-21-
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