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 June 30, 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
July 29, 2020 a total of 36,548,050 shares of the
Registrant’s common stock, par value $0.0001,
(“
Common
Stock
”) were issued and outstanding.
WRAP TECHNOLOGIES, INC.
I
NDEX
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6
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24
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24
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25
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Item
1. Financial Statements
Wrap
Technologies, Inc.
Condensed
Balance Sheets
|
|
June
30,
|
|
|
|
2020
|
December
31,
|
|
|
(unaudited)
|
2019
|
|
ASSETS
|
|
|
|
Current
assets:
|
|
|
|
Cash and cash
equivalents
|
$
35,385,246
|
$
16,983,864
|
|
Accounts
receivable, net
|
492,186
|
195,347
|
|
Inventories,
net
|
2,086,505
|
2,244,541
|
|
Prepaid expenses
and other current assets
|
280,270
|
250,947
|
|
Total
current assets
|
38,244,207
|
19,674,699
|
|
Property
and equipment, net
|
264,170
|
242,876
|
|
Operating
lease right-of-use asset, net
|
201,131
|
260,931
|
|
Intangible
assets, net
|
306,990
|
230,283
|
|
Other
assets, net
|
12,681
|
12,681
|
|
Total
assets
|
$
39,029,179
|
$
20,421,470
|
|
|
|
|
|
LIABILITIES
AND STOCKHOLDERS' EQUITY
|
|
|
|
Current
liabilities:
|
|
|
|
Accounts
payable
|
$
783,289
|
$
406,967
|
|
Accrued
liabilities
|
345,115
|
194,294
|
|
Customer
deposits
|
183,537
|
343,724
|
|
Deferred
revenue
|
2,484
|
2,684
|
|
Operating lease
liability - short term
|
113,954
|
128,131
|
|
Note payable to
bank - short term
|
159,815
|
-
|
|
Total
current liabilities
|
1,588,194
|
1,075,800
|
|
|
|
|
|
Long-term
liabilities:
|
|
|
|
Operating Lease
Liability - long term
|
101,826
|
150,018
|
|
Note payable to
bank - long term
|
255,228
|
-
|
|
Total
long-term liabilities
|
357,054
|
150,018
|
|
Total
liabilities
|
1,945,248
|
1,225,818
|
|
|
|
|
|
Commitments
and contingencies (Note 11)
|
|
|
|
|
|
|
|
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; 34,361,591 and
29,829,916 shares issued and outstanding each period,
respectively
|
3,436
|
2,983
|
|
Additional
paid-in capital
|
54,972,797
|
31,922,493
|
|
Accumulated
deficit
|
(17,892,302
)
|
(12,729,824
)
|
|
Total
stockholders' equity
|
37,083,931
|
19,195,652
|
|
Total
liabilities and stockholders' equity
|
$
39,029,179
|
$
20,421,470
|
See
accompanying notes to condensed interim financial
statements.
Wrap
Technologies, Inc.
Condensed
S
tatements of
Operations
(unaudited)
|
|
Three
Months
|
Six
Months
|
||
|
|
Ended
June 30,
|
Ended
June 30,
|
||
|
|
2020
|
2019
|
2020
|
2019
|
|
Revenues:
|
|
|
|
|
|
Product
sales
|
$
823,164
|
$
48,948
|
$
1,497,777
|
$
162,901
|
|
Other
revenue
|
9,428
|
10,496
|
24,252
|
14,354
|
|
Total
revenues
|
832,592
|
59,444
|
1,522,029
|
177,255
|
|
Cost of
revenues
|
564,970
|
35,695
|
970,782
|
96,915
|
|
Gross
profit
|
267,622
|
23,749
|
551,247
|
80,340
|
|
|
|
|
|
|
|
Operating
expenses:
|
|
|
|
|
|
Selling,
general and administrative
|
2,537,547
|
1,481,187
|
4,677,797
|
2,669,063
|
|
Research
and development
|
577,478
|
516,213
|
1,110,956
|
891,032
|
|
Total operating
expenses
|
3,115,025
|
1,997,400
|
5,788,753
|
3,560,095
|
|
Loss from
operations
|
(2,847,403
)
|
(1,973,651
)
|
(5,237,506
)
|
(3,479,755
)
|
|
|
|
|
|
|
|
Other
income (expense):
|
|
|
|
|
|
Interest
income
|
30,578
|
61,777
|
75,096
|
87,187
|
|
Other
|
322
|
(2,200
)
|
(68
)
|
(2,287
)
|
|
|
30,900
|
59,577
|
75,028
|
84,900
|
|
Net
loss
|
$
(2,816,503
)
|
$
(1,914,074
)
|
$
(5,162,478
)
|
$
(3,394,855
)
|
|
|
|
|
|
|
|
Net loss per basic
common share
|
$
(0.09
)
|
$
(0.07
)
|
$
(0.17
)
|
$
(0.12
)
|
|
Weighted average
common shares used to compute net loss per basic common
share
|
31,241,470
|
27,848,421
|
30,749,532
|
27,606,514
|
See
accompanying notes to condensed interim financial
statements.
Wrap
Technologies, Inc.
Statements
of
S
tockholders' Equity
(unaudited)
|
|
Three
Months Ended June 30, 2020
|
||||
|
|
|
|
Additional
|
|
Total
|
|
|
Common
Stock
|
|
Paid-In
|
Accumulated
|
Stockholders'
|
|
|
Shares
|
Amount
|
Capital
|
Deficit
|
Equity
|
|
Balance
at March 31, 2020
|
30,073,724
|
$
3,007
|
$
33,191,001
|
$
(15,075,799
)
|
$
18,118,209
|
|
Sale of
common stock and warrants at $6.00 per share in public offering,
net of issuance costs
|
2,066,667
|
207
|
11,666,999
|
-
|
11,667,206
|
|
Common shares
issued upon exercise of warrants at $3.00 per share, net of
issuance costs
|
138,721
|
14
|
404,625
|
-
|
404,639
|
|
Common shares
issued upon exercise of warrants at $5.00 per share, net of
issuance costs
|
1,731,603
|
173
|
8,271,275
|
-
|
8,271,448
|
|
Common shares
issued upon exercise of warrants at $6.50 per share
|
83,693
|
8
|
543,997
|
-
|
544,005
|
|
Common shares
issued upon exercise of stock options
|
180,625
|
18
|
345,920
|
-
|
345,938
|
|
Common shares
issued upon vesting of restricted stock units
|
86,558
|
9
|
(9
)
|
-
|
-
|
|
Stock-based
compensation expense
|
-
|
-
|
548,989
|
-
|
548,989
|
|
Net loss for
the period
|
-
|
-
|
-
|
(2,816,503
)
|
(2,816,503
)
|
|
Balance
at June 30, 2020
|
34,361,591
|
$
3,436
|
$
54,972,797
|
$
(17,892,302
)
|
$
37,083,931
|
|
|
Six
Months Ended June 30, 2020
|
||||
|
|
|
|
Additional
|
|
Total
|
|
|
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
|
|
Sale of
common stock and warrants at $6.00 per share in public offering,
net of issuance costs
|
2,066,667
|
207
|
11,666,999
|
-
|
11,667,206
|
|
Common shares
issued upon exercise of warrants at $3.00 per share, net of
issuance costs
|
150,504
|
15
|
439,973
|
-
|
439,988
|
|
Common shares
issued upon exercise of warrants at $5.00 per share, net of
issuance costs
|
1,851,003
|
185
|
8,868,263
|
-
|
8,868,448
|
|
Common shares
issued upon exercise of warrants at $6.50 per share
|
83,693
|
8
|
543,997
|
-
|
544,005
|
|
Common shares
issued upon exercise of stock options
|
293,250
|
29
|
514,846
|
-
|
514,875
|
|
Common shares
issued upon vesting of restricted stock units
|
86,558
|
9
|
(9
)
|
-
|
-
|
|
Share-based
compensation expense
|
-
|
-
|
1,016,235
|
-
|
1,016,235
|
|
Net loss for
the period
|
-
|
-
|
-
|
(5,162,478
)
|
(5,162,478
)
|
|
Balance
at June 30, 2020
|
34,361,591
|
$
3,436
|
$
54,972,797
|
$
(17,892,302
)
|
$
37,083,931
|
|
|
Three
Months Ended June 30, 2019
|
||||
|
|
|
|
Additional
|
|
Total
|
|
|
Common
Stock
|
|
Paid-In
|
Accumulated
|
Stockholders'
|
|
|
Shares
|
Amount
|
Capital
|
Deficit
|
Equity
|
|
Balance
at March 31, 2019
|
27,364,607
|
$
2,736
|
$
17,018,301
|
$
(5,885,117
)
|
$
11,135,920
|
|
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
|
62,150
|
6
|
186,444
|
-
|
186,450
|
|
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
|
16,250
|
2
|
24,373
|
-
|
24,375
|
|
Share-based
compensation expense
|
-
|
-
|
373,851
|
-
|
373,851
|
|
Net loss for
the period
|
-
|
-
|
-
|
(1,914,074
)
|
(1,914,074
)
|
|
Balance
at June 30, 2019
|
29,640,250
|
$
2,964
|
$
30,324,798
|
$
(7,799,191
)
|
$
22,528,571
|
|
|
Six
Months Ended June 30, 2019
|
||||
|
|
|
|
Additional
|
|
Total
|
|
|
Common
Stock
|
|
Paid-In
|
Accumulated
|
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
|
62,150
|
6
|
186,444
|
-
|
186,450
|
|
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
|
16,250
|
2
|
24,373
|
-
|
24,375
|
|
Share-based
compensation expense
|
-
|
-
|
600,898
|
-
|
600,898
|
|
Net loss for
the period
|
-
|
-
|
-
|
(3,394,855
)
|
(3,394,855
)
|
|
Balance
at June 30, 2019
|
29,640,250
|
$
2,964
|
$
30,324,798
|
$
(7,799,191
)
|
$
22,528,571
|
See
accompanying notes to condensed interim financial
statements.
Wrap
Technologies, Inc.
Statements
of
C
ash Flows
(unaudited)
|
|
For
the Six Months
|
|
|
|
Ended
June 30,
|
|
|
|
2020
|
2019
|
|
Cash
Flows From Operating Activities:
|
|
|
|
Net
loss
|
$
(5,162,478
)
|
$
(3,394,855
)
|
|
Adjustments to
reconcile net loss to net cash
|
|
|
|
used
in operating activities:
|
|
|
|
Depreciation
and amortization
|
52,586
|
12,573
|
|
Warranty
provision
|
18,909
|
3,503
|
|
Inventory
obsolescence
|
(48,000
)
|
(65,012
)
|
|
Non-cash
lease expense
|
59,800
|
22,211
|
|
Share-based
compensation
|
1,016,235
|
600,898
|
|
Provision
for doubtful accounts
|
10,140
|
-
|
|
Changes
in assets and liabilities:
|
|
|
|
Accounts
receivable
|
(306,979
)
|
(26,863
)
|
|
Inventories
|
206,036
|
(1,032,308
)
|
|
Prepaid
expenses and other current assets
|
(29,323
)
|
(71,182
)
|
|
Accounts
payable
|
376,322
|
183,478
|
|
Operating
lease liability
|
(62,369
)
|
(20,893
)
|
|
Customer
deposits
|
(193,019
)
|
-
|
|
Accrued
liabilities and other
|
165,425
|
59,416
|
|
Deferred
revenue
|
(200
)
|
3,357
|
|
Net cash used in
operating activities
|
(3,896,915
)
|
(3,725,677
)
|
|
|
|
|
|
Cash
Flows From Investing Activities:
|
|
|
|
Capital
expenditures for property and equipment
|
(68,584
)
|
(108,616
)
|
|
Investment in
patents and trademarks
|
(82,003
)
|
(68,501
)
|
|
Long-term
deposits
|
-
|
(11,169
)
|
|
Net cash used in
investing activities
|
(150,587
)
|
(188,286
)
|
|
|
|
|
|
Cash
Flows From Financing Activities:
|
|
|
|
Sale of common
stock and warrants
|
12,400,002
|
12,499,994
|
|
Offering costs paid
on sale of common stock and warrants
|
(732,796
)
|
(1,148,780
)
|
|
Proceeds from
exercise of warrants
|
10,250,532
|
1,557,285
|
|
Offering costs paid
on exercise of warrants
|
(398,091
)
|
-
|
|
Proceeds from
exercise of stock options
|
514,875
|
24,375
|
|
Proceeds from bank
note
|
414,362
|
-
|
|
Net cash provided
by financing activities
|
22,448,884
|
12,932,874
|
|
|
|
|
|
Net
decrease in cash and cash equivalents
|
18,401,382
|
9,018,911
|
|
Cash
and cash equivalents, beginning of period
|
16,983,864
|
12,358,896
|
|
Cash
and cash equivalents, end of period
|
$
35,385,246
|
$
21,377,807
|
|
|
|
|
|
Supplemental
Disclosure of Non-Cash Investing
|
|
|
|
and
Financing Activities:
|
|
|
|
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.
5
|
1.
|
O
RGANIZATION AND SUMMARY OF
SIGNIFICANT ACCOUNTING POLICIES
|
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.
6
Impact of 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 COVID-19 pandemic
has impacted and could further impact our operations and the
operations of our customers and suppliers as a result of
quarantines, facility closures, illnesses, and travel and logistics
restrictions. The extent to which the COVID-19 pandemic further
impacts our business, results of operations, and financial
condition will depend on future developments, which are highly
uncertain and cannot be predicted, including, but not limited to
the duration, spread, severity, and impact of the COVID-19
pandemic, the effects of the COVID-19 pandemic on our customers and
suppliers and the remedial actions and stimulus measures adopted by
federal, state, and local governments, and to what extent normal
economic and operating conditions can resume. Even after the
COVID-19 pandemic has subsided, the Company may continue to
experience adverse impacts to its business as a result of any
economic recession or depression that has occurred or may occur in
the future.
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 and six months
ended June 30, 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
June 30, 2020 the Company had 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.
The cost of substantially all the
Company’s inventory is determined by the FIFO cost method.
Inventory is comprised of raw
materials, assemblies and finished products intended for sale to
customers
.
The Company evaluates the need for reserves for
excess and obsolete inventories determined primarily based upon
estimates of future demand for the Company’s products. At
June 30, 2020 and the Company had a reserve for obsolescence of
$48,000 related to parts expected to be displaced by product
improvement initiatives.
7
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 10,018,461 shares of Common Stock were outstanding at June
30, 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.
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 June 30, 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.
8
|
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.
Periodically, certain customers request bill and
hold transactions for future delivery as scheduled and designated
by them. In such cases, revenue is not recognized until after
control, title and risk of ownership has transferred which is
generally when the customer has requested such transaction under
normal billing and payment terms and has been notified that the
product (i) has been completed according to customer
specifications, (ii) has passed our quality control inspections,
and (iii) has been tagged and packed for shipment, separated from
our inventory and ready for physical transfer to the
customer. The value associated with custodial storage services
is deemed immaterial in the context of such contracts and in total,
and accordingly, none of the transaction price is allocated to such
service.
The
Company has elected to recognize shipping costs as an expense in
cost of revenue when control has transferred to the customer. 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 June 30, 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 June 30,
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:
9
|
|
June
30,
|
December
31,
|
|
|
2020
|
2019
|
|
Finished
goods
|
$
719,104
|
$
653,323
|
|
Work in
process
|
22,149
|
413
|
|
Raw
materials
|
1,393,252
|
1,590,805
|
|
|
2,134,505
|
2,244,541
|
|
Less allowance for
obsolescence
|
(48,000
)
|
-
|
|
Inventories -
net
|
$
2,086,505
|
$
2,244,541
|
At
June 30, 2020 the Company established a reserve for obsolescence of
$48,000 related to parts expected to be displaced by product
improvement initiatives.
|
4.
|
PROPERTY AND EQUIPMENT, NET
|
Property and
equipment consisted of the following:
|
|
June
30,
|
December
31,
|
|
|
2020
|
2019
|
|
Laboratory
equipment
|
$
55,645
|
$
44,454
|
|
Tooling
|
77,459
|
59,004
|
|
Computer
equipment
|
106,765
|
83,368
|
|
Furniture, fixtures
and improvements
|
144,323
|
128,782
|
|
|
384,192
|
315,608
|
|
Accumulated
depreciation
|
(120,022
)
|
(72,732
)
|
|
|
$
264,170
|
$
242,876
|
Depreciation
expense was
$24,793 and $47,290
for the three and six months ended June 30, 2020 and was
$7,621 and $12,186
for the
three and six months ended June 30, 2019,
respectively.
|
5.
|
INTANGIBLE ASSETS, NET
|
Intangible assets
consisted of the following:
|
|
June
30,
|
December
31,
|
|
|
2020
|
2019
|
|
|
|
|
|
Patents
|
$
242,202
|
$
176,425
|
|
Trademarks
|
74,145
|
57,919
|
|
|
316,347
|
234,344
|
|
Accumulated
amortization
|
(9,357
)
|
(4,061
)
|
|
|
$
306,990
|
$
230,283
|
Amortization
expense was
$2,695 and $5,296
for the three and six months ended June 30, 2020 and was
$203 and $387
for the three and
six months ended June 30, 2019, respectively.
|
6.
|
ACCOUNTS PAYABLE AND ACCRUED LIABILITIES
|
Accounts payable
includes $28,481 and $18,809 due to related party Syzygy Licensing,
LLC (“
Syzygy
”)
as of June 30, 2020 and December 31, 2019, respectively. Accounts
payable at June 30, 2020 also included $185,000 due to related
party V3 Capital Partners, LLC. See Notes 11 and 12 for additional
related party information.
10
Accrued
liabilities consist of the following:
|
|
June
30,
|
December
31,
|
|
|
2020
|
2019
|
|
Patent and legal
costs
|
$
25,000
|
$
9,851
|
|
Accrued
compensation
|
264,311
|
144,193
|
|
Warranty
costs
|
32,832
|
13,923
|
|
Consulting
costs
|
5,000
|
7,500
|
|
Taxes and
other
|
17,972
|
18,827
|
|
|
$
345,115
|
$
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
$30,172 and
$59,800
for the three and six months ended June 30, 2020 and
was
$16,432 and $22,211
for the
three and six months ended June 30, 2019,
respectively.
Operating lease
expense for capitalized operating leases included in operating
activities was
$34,322 and
$68,644
for the three and six months ended June 30, 2020 and
was
$19,305 and $25,956
for the
three and six months ended June 30, 2019, respectively. Operating
lease obligations recorded on the balance sheet at June 30, 2020
are:
|
Operating lease
liability- short term
|
$
113,954
|
|
Operating lease
liability - long term
|
101,826
|
|
Total Operating
Lease Liability
|
$
215,780
|
Future
lease payments included in the measurement of lease liabilities on
the balance sheet at June 30, 2020 for future periods are as
follows:
|
Remainder of 2020
(six months)
|
$
72,362
|
|
2021
|
101,406
|
|
2022
|
57,328
|
|
Total future
minimum lease payments
|
231,096
|
|
Less imputed
interest
|
(15,316
)
|
|
Total
|
$
215,780
|
The
weighted average remaining lease term is 1.9 years and the weighted
average discount rate is 7.0%.
The
Company does not have any finance leases.
|
8.
|
NOTE PAYABLE TO BANK
|
On May 1, 2020, the Company received loan proceeds
of $414,362 from Bank of America, N.A., pursuant to the Paycheck
Protection Program (the “
PPP Loan
”) under Division A, Title 1 of the CARES
Act, which was enacted March 27, 2020.
The
PPP Loan, which was in the form of a Promissory Note dated May 1,
2020 has a two-year term and bears interest at a rate of 1% per
annum. Monthly principal and interest payments are deferred for six
months after the date of disbursement. Beginning seven months from
the date of the PPP Note, the Company is required to make monthly
payments of principal and interest of approximately $23,320. The
Company recorded accrued interest of $681 at June 30, 2020. The PPP
Loan may be prepaid at any time prior to maturity with no
prepayment penalties. The Promissory Note contains events of
default and other provisions customary for a loan of this
type.
Under
the terms of the CARES Act, PPP Loan participants can apply for and
be granted forgiveness for all or a portion of loans granted under
the PPP. Under the terms of the PPP, PPP loans and accrued interest
are forgivable between eight weeks and twenty-four weeks, as long
as the borrower uses the loan proceeds for eligible purposes,
including payroll, benefits, rent and utilities, and maintains its
payroll levels. The amount of loan forgiveness will be reduced if
the borrower terminates employees or reduces salaries during the
eight-week period. The Company intends to use the loan proceeds for
purposes consistent with the PPP, and anticipates that all or a
majority of the loan amount may be forgiven, but there is no
assurance provided that the Company will obtain forgiveness of the
PPP Loan in whole or part.
11
|
9.
|
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
”).
2020 Follow-On Public Offering
On
June 2, 2020, the Company consummated a follow-on public offering,
pursuant to which a total of 2,066,667 Units were offered and sold
at the public offering price of $6.00 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 $6.00 per share. The offering resulted in the Company’s
receipt of gross cash proceeds of $12.4 million and net cash
proceeds of $11.67 million after deduction of commissions and
offering costs.
Summary of Stock Purchase Warrants
The
following table summarizes warrant activity during the six months
ended June 30, 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
|
2,066,667
|
$
6.00
|
|
Stock purchase
warrants exercised
|
(2,085,200
)
|
$
4.92
|
|
Shares purchasable
under outstanding warrants at June 30, 2020
|
6,602,087
|
$
5.75
|
During
the six months ended June 30, 2020 the Company received gross
proceeds of $10,250,532 from the exercise of warrants and paid
$398,091 as an agent fee to facilitate exercise of certain warrants
resulting in net proceeds of $9,852,441. The Company is obligated
to pay an agent fee of 5% on certain warrant exercises facilitated
by the agent through September 15, 2020.
The
Company has outstanding Common Stock purchase warrants as of June
30, 2020 as follows:
|
|
Number
of
|
Exercise
Price
|
|
Description
|
Common
Shares
|
Per
Share
|
|
Purchase Warrants
(1)
|
2,364,237
|
$
5.00
|
|
Agent
Warrants
|
177,954
|
$
3.00
|
|
Purchase
Warrants
|
1,839,383
|
$
6.50
|
|
Agent
Warrants
|
153,846
|
$
8.125
|
|
Purchase
Warrants
|
2,066,667
|
$
6.00
|
|
|
6,602,087
|
|
(1) Warrants
to purchase 233,334 shares of common stock are held by a family
trust of Elwood G. Norris, the Company’s Chief Technology
Officer. Mr. Norris exercised the 233,334 warrants in July 2020 for
cash of $1,166,670.
Subsequent to June
30, 2020 a total of 2,170,709 warrants, including those of Mr.
Norris, were exercised for gross proceeds of
$11,486,070.
12
|
10.
|
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
May 2019, the stockholders ratified an increase in the Plan
authorizing an additional 2,100,000 shares of Common Stock and in
June 2020 ratified a further authorization of 1,900,000 shares of
Common Stock for a total of 6,000,000 shares subject to the
Plan.
The
Company generally recognizes stock-based compensation expense on
the grant date and over the period of vesting or period that
services will be provided.
Stock Options
The
following table summarizes stock option activity for the six months
ended June 30, 2020:
|
|
|
Weighted
Average
|
|
|
|
|
Options
on
|
|
Remaining
|
Aggregate
|
|
|
Common
|
Exercise
|
Contractual
|
Intrinsic
|
|
|
Shares
|
Price
|
Term
|
Value
|
|
Outstanding
December 31, 2019
|
2,928,750
|
$
2.96
|
3.71
|
|
|
Granted
|
381,336
|
$
4.37
|
-
|
|
|
Exercised
|
(293,250
)
|
$
1.76
|
-
|
|
|
Forfeited,
cancelled, expired
|
(50,000
)
|
$
3.00
|
-
|
|
|
Outstanding June
30, 2020
|
2,966,836
|
$
3.26
|
4.08
|
$
21,409,000
|
|
Vested and
exercisable at June 30, 2020
|
1,984,667
|
$
2.42
|
3.09
|
$
15,999,867
|
The
Company uses the Black-Scholes option pricing model to determine
the fair value of the options granted.
|
|
|
|
|
For the Six Months
|
||
|
|
|
|
|
Ended June 30,
|
||
|
|
|
|
|
2020
|
|
2019
|
|
|
Expected
stock price volatility
|
|
|
45%
|
|
49%
|
|
|
Risk-free
interest rate
|
|
|
0.42%
|
|
2.41%
|
|
|
Forfeiture
rate
|
|
|
0%
|
|
0%
|
|
|
Expected
dividend yield
|
|
|
0%
|
|
0%
|
|
|
Expected
life of options - years
|
|
|
6.03
|
|
3.50
|
|
|
Weighted-average fair value of options granted
|
|
|
$1.86
|
|
$2.06
|
Estimated
volatility is a measure of the amount by which the Company’s
stock price is expected to fluctuate each year during the expected
life of awards. The Company’s estimated volatility was based
on an average of the historical volatility of peer entities whose
stock prices were publicly available. The Company’s
calculation of estimated volatility is based on historical stock
prices of these peer entities over a period equal to the expected
life of the awards. The Company uses the historical volatility of
peer entities due to the lack of sufficient historical data of its
stock price.
The
risk-free interest rate assumption is based upon observed interest
rates on zero coupon U.S. Treasury bonds whose maturity period is
appropriate for the term of the options. The dividend yield of zero
is based on the fact that the Company has never paid cash dividends
and has no present intention to pay cash dividends. The Company
calculates the expected life of the options using the Simplified
Method for the employee stock options as the Company does not have
sufficient historical data.
Restricted Stock Units
The
Plan provides for the grant of restricted stock units (
RSUs
). On January 16, 2020 the Company
granted 73,392 of service based RSUs to officers and directors
vesting over three years that convert to Common Stock as vesting
occurs. On April 1, 2020 the Company granted 122,222 of service
based RSUs to employees vesting over three years that convert to
Common Stock as vesting occurs. Also, on April 1, 2020 the Company
granted an officer 35,211 of performance based RSUs.
13
The
following table summarizes RSU activity under the Plan for the six
months ended June 30, 2020:
|
|
|
Weighted
Average
|
|
|
|
Service-Based
|
Grant
Date
|
Vesting
|
|
|
RSU's
|
Fair
Value
|
Period
|
|
Unvested at January
1, 2020
|
308,087
|
$
6.77
|
|
|
Granted
- service based
|
196,214
|
$
4.72
|
3
Years
|
|
Granted
- performance based
|
35,211
|
$
4.72
|
|
|
Vested
|
(86,558
)
|
$
7.24
|
|
|
Forfeited
and cancelled
|
(3,416
)
|
$
7.24
|
|
|
Unvested at June
30, 2020
|
449,538
|
$
5.62
|
|
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
|
For
the Six Months
|
||
|
|
Ended
June 30,
|
Ended
June 30,
|
||
|
|
2020
|
2019
|
2020
|
2019
|
|
Selling, general
and administrative
|
$
496,036
|
$
345,217
|
$
925,134
|
$
548,417
|
|
Research and
development
|
52,953
|
28,634
|
91,101
|
52,481
|
|
Total stock-based
expense
|
$
548,989
|
$
373,851
|
$
1,016,235
|
$
600,898
|
As of
June 30, 2020, total estimated compensation cost of stock options
and RSUs granted but not yet vested was $4.0 million which is
expected to be recognized over the weighted average period of 2.1
years.
|
11.
|
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
$28,481 and $53,467
for royalties incurred
during the three and six months ended June 30, 2020 and
$2,231 and $6,719 incurred
for
the three and six months ended June 30, 2019,
respectively
Purchase Commitments
At June
30, 2020 the Company was committed for approximately $1.7 million
for future component deliveries and contract services that are
generally subject to modification or rescheduling in the normal
course of business.
|
12.
|
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
$9,000 during the six months ended June 30, 2020 and 2019,
respectively.
Commencing in April
2020 the Company engaged V3 Capital Partners, LLC
(“
V3
”), a
company owned and controlled by Scot Cohen, the Company’s
Executive Chairman, to provide certain investor, shareholder and
marketing services, in consideration for the payment to V3 of
$10,000 per month on a month to month basis. In addition, the
Company agreed to pay V3 a bonus of $175,000 for assistance in a
qualified financing that was consummated in June 2020. This bonus
was paid in July 2020.
See
Notes 6, 9 and 11 for additional information on related party
transactions and obligations.
|
13.
|
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.
M
anagement'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
the BolaWrap 100 is gaining traction as a recognized global brand,
with innovative technology and an initial product foundation
achieved through extensive marketing and public
relations.
We are expanding our business in 2020 domestically and
internationally through both direct and distributor sales. We have
distribution agreements with 11 domestic distributors representing
46 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 19 international
distributors representing 29 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 June
30, 2020, in addition to our internal training executives, we have
trained 50 contract regional Master Instructors. As of June 30,
2020, 206 agencies had received BolaWrap 100 training with over 750
training officers at those agencies certified as BolaWrap 100
instructors qualified to train the rest of their
departments.
As we announced earlier this year, we have designed, tested and
obtained independent certification for our Wrap Armor labeled
20” x 30” rifle rated police shield. Early in the
second quarter we delivered our first order of Wrap Armor shields.
We believe our strong and light National Institute of Justice
0108.01 Type III (High Powered Rifle) compliant tactical shields
offer police agencies an affordable defense against increasingly
sophisticated threats. We are currently evaluating and testing
additional models and sizes, securing sources of supply and
determining the sales and marketing resources required to grow this
product line.
At June
30, 2020, we had $183,537 of customer deposits on orders and had
backlog of approximately $1.5 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.
We believe that we have adequate financial resources
to sustain our operations for the next year
.
We expect that we will need to continue to innovate new
applications for our security technology, develop new products and
technologies to meet diverse customer requirements and identify and
develop new markets for our products.
COVID-19 Impact
We face significant challenges in operating and growing our
business related to the outbreak of the novel coronavirus
(“
COVID-19
”) which continues to spread throughout the
United States and the World. The outbreak of COVID-19 has resulted
in travel restrictions, quarantines,
“stay-at-home” and
“shelter-in-place” orders and extended shutdown of
certain businesses around the world. We are monitoring the outbreak
of COVID-19 and the related business and travel restrictions and
changes to behavior intended to reduce its spread, in addition to
the impact on our employees. We continued to operate with some
modifications, and we took actions intended to protect our
employees and our customers that adversely affected our results by
increasing costs during a period of stalled sales and production
activity.
During the second quarter our customers experienced staffing issues
limiting our ability to demonstrate and train. We believe we made
an important transition during the second quarter including remote
sales and training through webinars and expect this to be a
continuing aspect of our business. We curtailed most sales and
training travel and reduced our production personnel until late in
the second quarter when some customer locations domestically and
internationally eased restrictions and we began to again close
business prospects.
The magnitude and the duration of the pandemic and the extent and
duration of the pandemic’s adverse effect on economic and
social activity, consumer confidence, customer spending and
preferences, labor and healthcare costs, and unemployment rates is
uncertain as of the date of this report. Our ability to sell, train
and service our products and conduct our business may be adversely
impacted as a result of continuing or future pandemic related
travel restrictions, mandatory business closures, and stay-at home
or similar orders; temporary reductions in our workforce, closures
of our offices and facilities and the ability of our customers and
suppliers to continue their operations as a result of the pandemic.
While there could ultimately be a material impact on operations and
liquidity of the Company, at the time of issuance of this report,
the impact cannot be determined.
Critical Accounting Policies and Estimates
The
preparation of financial statements in accordance with accounting
principles generally accepted in the United States
(“
U.S. GAAP
”)
requires us to make estimates and judgments that affect the
reported amounts of assets, liabilities, revenue and expense, and
related disclosure of contingent assets and liabilities. We
evaluate our estimates, on an on-going basis, including those
estimates related to recognition and measurement of contingencies
and accrued costs. We base our estimates on historical experience
and on various other assumptions we believe to be reasonable under
the circumstances. Actual results may differ from these estimates
under different assumptions or conditions.
As part
of the process of preparing our financial statements, we are
required to estimate our provision for income taxes. Significant
management judgment is required in determining our provision for
income taxes, deferred tax assets and liabilities, tax
contingencies, unrecognized tax benefits, and any required
valuation allowance, including taking into consideration the
probability of the tax contingencies being incurred. Management
assesses this probability based upon information provided by its
tax advisers, its legal advisers and similar tax cases. If at a
later time our assessment of the probability of these tax
contingencies changes, our accrual for such tax uncertainties may
increase or decrease. Our effective tax rate for annual and interim
reporting periods could be impacted if uncertain tax positions that
are not recognized are settled at an amount which differs from our
estimates.
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 sometimes
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 six months
ended June 30, 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 June 30, 2020 Compared to Three Months Ended
June 30, 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
”)
.
|
|
Three
Months
|
|
|
|
|
|
Ended
June 30,
|
Change
|
||
|
|
2020
|
2019
|
$
|
%
|
|
Revenues:
|
|
|
|
|
|
Product
sales
|
$
823,164
|
$
48,948
|
$
774,216
|
1582
%
|
|
Other
revenue
|
9,428
|
10,496
|
(1,068
)
|
-10
%
|
|
Total
revenues
|
832,592
|
59,444
|
773,148
|
1301
%
|
|
Cost of
revenues
|
564,970
|
35,695
|
529,275
|
1483
%
|
|
Gross
profit
|
267,622
|
23,749
|
243,873
|
1027
%
|
|
|
|
|
|
|
|
Operating
expenses:
|
|
|
|
|
|
Selling,
general and administrative
|
2,537,547
|
1,481,187
|
1,056,360
|
71
%
|
|
Research
and development
|
577,478
|
516,213
|
61,265
|
12
%
|
|
Total operating
expenses
|
3,115,025
|
1,997,400
|
1,117,625
|
56
%
|
|
Loss from
operations
|
$
(2,847,403
)
|
$
(1,973,651
)
|
$
(873,752
)
|
44
%
|
Revenue
We
reported revenue of $832,592 for the three months ended June 30,
2020 from the sale of BolaWrap products and accessories and Wrap
Armor tactical shields. This was a significant increase from the
second quarter of the prior year when we had only recently
commenced product sales and reported sales of $59,444. It is also a
21% increase over the immediately preceding quarter ended March 31,
2020 of $689,437. We believe our sales during the second quarter
were negatively impacted by the COVID-19 pandemic as we were
severely limited in our ability to make product demonstrations and
conduct training both domestically and internationally. As some
areas of the country eased restrictions late in the second quarter
we were able to commence limited in-person demonstrations and
training to supplement our webinar capabilities. We incurred
product promotional costs of $125,278 during the three months ended
June 30, 2020 related to the cost of demonstration products and
accessories delivered to law enforcement agencies that were
expensed as marketing costs. A total of $67,565 of such product
marketing costs were incurred during the three months ended June
30, 2019.
We had
$594 of deferred revenue at June 30, 2020 related to products sold
for which the related 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 believe the pandemic had a negative impact on our
sales in the second quarter. We are unable to predict the impact on
demand for our products in future quarters. We expect
sales may be sporadic as we grow both our domestic
and international distributor and customer base and due to COVID-19
restrictions
. There can be no assurance, especially given
the uncertainties of the COVID-19 crisis, that we can increase
quarterly revenues during the balance of 2020.
At June
30, 2020, we had $183,537 of customer deposits on orders and had
backlog of approximately $1.5 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.
Gross Profit
Our
cost of revenue for the three months ended June 30, 2020 was
$564,970 resulting in a gross margin of 32%. The gross margin for
the three months ended June 30, 2019 was 40% on a small revenue
base. We curtailed production for ten weeks during the second
quarter due the Covid-19 restrictions in Arizona and this down time
negatively impacted our gross margin.
Due to
our history of minimal revenue and startup costs incurred to
establish volume manufacturing historical margins may not be
indicative of future margins.
In
addition, our margins vary based on the sales channels through
which our products are sold and product mix. Due to timing of
international orders our mix of cartridges was higher in the second
quarter than the first quarter and as compared to prior comparable
quarters. Currently, our cartridges have lower margins than
BolaWrap devices, but we are pursuing initiatives to improve gross
margins attributable to our cartridges. 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.
In September 2019 we relocated manufacturing operations and
commenced production at 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 until revenues grow.
Selling, General and Administrative Expense
Selling,
general and administrative expense for the three months ended June
30, 2020 increased by $1,056,360 when compared to the three months
ended June 30, 2019. We increased our staffing and promotion
activities in 2020 to address growing market opportunities. We
incurred a $150,819 increase in non-cash stock-based compensation
expense allocated to selling, general and administrative expense
that totaled $496,036 in the three months ended June 30, 2020
compared to $345,217 in the three months ended June 30, 2019. Other
increases included a $569,112 increase in cash compensation and
recruiting costs from an increase in headcount since the prior year
and a $101,447 increase in public company related costs. Marketing
and promotion costs increased $215,423 due primarily to promotional
products and online advertising. Due to the Covid-19 pandemic we
suspended most travel in the second quarter. Our travel costs
related to sales, demonstrations and training decreased by $79,794
due to COVID-19 restrictions.
Due in
part to the receipt of $414,362 in proceeds from the PPP Loan we
maintained staffing in April, May and June positioning us to
respond to limited re-openings late in the second quarter and
develop and employ new tools such as webinars to communicate with
prospective and existing customers. We believe these staffing
decisions positioned us to respond to increased opportunities
resulting from recent highly publicized policing issues and an
increased focus on less lethal engagement.
We
expect to expend increased resources on the marketing and selling
of our products, training distributors and customers and
administratively supporting our operations during the balance of
2020 to respond to increased opportunities but amounts could vary
depending on sales levels, the impact of the COVID-19 pandemic and
other factors outside of our
control.
Research and Development Expense
Research
and development expense increased $61,265 during the three months
ended June 30, 2020, when compared to the comparable period in
2019. We incurred a $24,319 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 $93,487 increase in
cash compensation costs resulting from an increase in headcount
primarily associated with product development. Prototype related
costs decreased $42,614 in the 2020 period, primarily related to
the timing of projects. We expect our research and development
costs to increase during the balance of 2020 was we are adding
staff and expanding our research initiatives in response to market
opportunities.
Net Loss
Loss
from operations during the three months ended June 30, 2020
increased by $873,752 when compared to the three months ended June
30, 2019, resulting, primarily, from increased operating costs due
to increased personnel and marketing and selling and supporting
activities.
Six Months Ended June 30, 2020 Compared to Six Months Ended June
30, 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
Report.
|
|
Six
Months
|
|
|
|
|
|
Ended
June 30,
|
Change
|
||
|
|
2020
|
2019
|
$
|
%
|
|
Revenues:
|
|
|
|
|
|
Product
sales
|
$
1,497,777
|
$
162,901
|
$
1,334,876
|
819
%
|
|
Other
revenue
|
24,252
|
14,354
|
9,898
|
69
%
|
|
Total
revenues
|
1,522,029
|
177,255
|
1,344,774
|
759
%
|
|
Cost of
revenues
|
970,782
|
96,915
|
873,867
|
902
%
|
|
Gross
profit
|
551,247
|
80,340
|
470,907
|
586
%
|
|
|
|
|
|
|
|
Operating
expenses:
|
|
|
|
|
|
Selling,
general and administrative
|
4,677,797
|
2,669,063
|
2,008,734
|
75
%
|
|
Research
and development
|
1,110,956
|
891,032
|
219,924
|
25
%
|
|
Total operating
expenses
|
5,788,753
|
3,560,095
|
2,228,658
|
63
%
|
|
Loss from
operations
|
$
(5,237,506
)
|
$
(3,479,755
)
|
$
(1,757,751
)
|
51
%
|
Revenue
We
reported revenue of $1,497,777 for the six months ended June 30,
2020 from the sale of BolaWrap products and accessories and Wrap
Armor tactical shields. This was a significant increase from the
first six month of the prior year when we had only recently
commenced product sales and reported sales of $162,901. As
disclosed above we believe our sales during the second quarter were
negatively impacted by the COVID-19 pandemic as we were severely
limited in our ability to make product demonstrations and conduct
training both domestically and internationally. As some areas of
the country eased restrictions late in the second quarter we were
able to commence limited in-person demonstrations and training to
supplement our webinar capabilities. We incurred product
promotional costs of $310,973 during the six months ended June 30,
2020 related to the cost of demonstration products and accessories
delivered to law enforcement agencies that were expensed as
marketing costs. A total of $135,060 of such product marketing
costs were incurred during the six months ended June 30,
2019.
We had
$594 of deferred revenue at June 30, 2020 related to products sold
for which the related training revenue component had not been
completed and $1,890 related to extended warranties.
At June
30, 2020, we had $183,537 of customer deposits on orders and had
backlog of approximately $1.5 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.
Gross Profit
Our
cost of revenue for the six months ended June 30, 2020 was $970,782
resulting in a gross margin of 36%. The gross margin for the six
months ended June 30, 2019 was 45% on a small revenue base. We
curtailed production for ten weeks during the second quarter due
the COVID-19 restrictions in Arizona and this down time negatively
impacted our gross margin.
Due to
our history of minimal revenue and startup costs incurred to
establish volume manufacturing historical margins may not be
indicative of future margins.
In
addition, our margins vary based on the sales channels through
which our products are sold and product mix. Due to timing of
international orders our mix of cartridges was higher in the first
six months of 2020 than 2019. Currently, our cartridges have lower
margins than BolaWrap devices, however, we are pursuing initiatives
to improve gross margins attributable to our cartridges. 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.
Selling, General and Administrative Expense
Selling,
general and administrative expense for the six months ended June
30, 2020 increased by $2,008,734 when compared to the six months
ended June 30, 2019. We increased our staffing and promotion
activities in 2020 to address growing market opportunities. We
incurred a $376,717 increase in non-cash stock-based compensation
expense allocated to selling, general and administrative expense
that totaled $925,134 in the six months ended June 30, 2020
compared to $548,417 in the six months ended June 30, 2019. Other
increases included a $828,223 increase in cash compensation and
recruiting costs from an increase in headcount since the prior year
and a $124,300 increase in public company related costs. Marketing
and promotion costs increased $380,531 due primarily to promotional
products and online advertising. Due to the COVID-19 pandemic we
suspended most travel in the second quarter. Our travel costs
related to sales, demonstrations and training increased by $35,555
from the prior year substantially resulting from increased travel
during the first quarter.
Due in
part to the receipt of $414,362 in proceeds from the PPP Loan, we
maintained staffing in April, May and June positioning us to
respond to limited re-openings late in the second quarter and
develop and employ new tools such as webinars to communicate with
prospective and existing customers. We believe these staffing
decisions positioned us to respond to increased opportunities
resulting from recent highly publicized policing issues and an
increased focus on less lethal engagement.
We
expect to expend increased resources on the marketing and selling
of our products, training distributors and customers and
administratively supporting our operations during the balance of
2020 to respond to increased opportunities 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 $219,924 during the six months
ended June 30, 2020, when compared to the comparable period in
2019. We incurred a $38,620 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 $214,976 increase in
cash compensation costs resulting from an increase in headcount
primarily associated with product development. Prototype related
costs increased $35,116 in the 2020 period, primarily related to
the timing of projects. We expect our research and development
costs to increase during the balance of 2020 was we are adding
staff and expanding our research initiatives in response to market
opportunities.
Net Loss
Loss
from operations during the six months ended June 30, 2020 increased
by $1,757,751 when compared to the six months ended June 30, 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 June 30, 2020, we had cash of
$35,385,246 and positive working capital of $36,656,013 and had
sustained cumulative losses attributable to stockholders of
$17,892,302. We believe that our cash on hand will sustain our
operations for at least the next twelve months from the date of
this Report.
During the six months ended June 30, 2020 we received $11,667,206
of net proceeds resulting from the consummation of a registered
offering of our common stock in June 2020, and obtained $10,367,316
of net proceeds from the exercise of previously issued warrants and
stock options. We also obtained $414,362 in proceeds from a PPP
Loan during the period.
In
July 2020 through the date of this report we obtained
$10,996,975
of net cash proceeds from the exercise
of outstanding warrants and stock options to supplement our
liquidity.
Our primary source of liquidity to date has been funding from our
stockholders from the sale of equity securities and the exercise of
derivative securities, consisting of options and warrants. We
expect our primary source of future liquidity will be from the sale
of products, exercise of stock options and warrants and if required
from future equity or debt financings.
Capital Requirements
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.
Our future capital requirements, cash flows and results of
operations could be affected by, and will depend on, many factors,
some of which are currently unknown to us, including, among other
things:
●
the
impact and effects of the global outbreak of the COVID-19 pandemic,
and other potential pandemics or contagious diseases or fear of
such outbreaks;
●
decisions
regarding staffing, development, production, marketing and other
functions;
●
the timing and
extent of any market acceptance of our products;
●
the costs, timing
and outcome of planned production and required customer and
regulatory compliance of our 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 six months ended June 30, 2020, net cash used in
operating activities was $3,896,915.
The net loss of $5,162,478 was
decreased by
non-cash expense of $1,109,670 consisting primarily of stock-based
compensation expense of $1,016,235. Other major component changes
using operating cash included an increase of $306,979 in accounts
receivable, a $193,019 decrease in customer deposits and a $29,323
increase in prepaid expenses and other current assets. A decrease
of $206,036 in inventories and an increase of $541,747 in accounts
payable and accrued liabilities reduced the cash used in operating
activities.
During the six months ended June 30, 2019, net cash used in
operating activities was $3,725,677 consisting primarily of the net
loss of $3,394,855 reduced by non-cash stock-based compensation of
$600,898. Inventories increased $1,032,308 and prepaid expenses
increased $71,182 both changes using operating cash while a
$242,894 increase in accounts payable and accrued liabilities
reduced cash used in operations.
Investing Activities.
We used $68,584 and $108,616 of cash for the purchase of property
and equipment during the six months ended June 30, 2020 and 2019,
respectively. We invested $82,003 and $68,501 in patents during the
six months ended June 30, 2020 and 2019, respectively.
Financing Activities.
During the six months ended June 30, 2020 we received $11,667,206
of net proceeds resulting from the consummation of a registered
offering of our common stock in June 2020, and obtained $10,367,316
of net proceeds from the exercise of previously issued warrants and
stock options. We also obtained $414,362 in proceeds from a PPP
Loan during the period.
During the six months ended June 30, 2019 we received $11,351,214
of net proceeds resulting from the consummation of a registered
offering of our common stock in June 2019, and obtained $1,581,660
from the exercise of previously issued warrants and stock
options.
In
July 2020 through the date of this report our financing activities
included
$10,996,975
of net cash proceeds from the exercise
of outstanding warrants and stock
options.
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
$72,362 for the balance of 2020, $101,406 in 2021 and $57,328 in
2022.
At June
30, 2020 we were committed to approximately $1.7 million 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 June 30, 2020, or
subsequently thereto, that we believe are of potential significance
to our financial statements.
Item 3.
Q
uantitative and Qualitative
Disclosures about Market Risk.
Not
applicable.
Item 4.
C
ontrols 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 June 30, 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 June 30, 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.
P
ART II. OTHER
INFORMATION
Item 1.
L
egal 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.
R
isk 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 adversely affect our business, financial condition
and results of operations.
Item 2.
U
nregistered Sales of Equity
Securities and Use of Proceeds
No
unregistered securities were issued during the three months ended
June 30, 2020 that were not previously reported.
None.
Item 4.
M
ine Safety
Disclosures
Not
Applicable.
Item 5.
O
ther Information
None.
Item 6.
E
xhibits
|
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
S
IG
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.
|
July
30, 2020
|
WRAP
TECHNOLOGIES, INC.
By:
/s/ JAMES A.
BARNES
James
A. Barnes
Chief
Financial Officer, Secretary and Treasurer
(Principal
Accounting Officer)
|
25
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