WRAP TECHNOLOGIES, INC.
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
QUARTERLY
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 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
October 28, 2020 a total of 37,211,217 shares of the
Registrant’s common stock, par value $0.0001,
(“
Common
Stock
”) were issued and outstanding.
WR
A
P TECHNOLOGIES, INC.
INDEX
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1
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2
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3
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5
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6
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17
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25
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25
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26
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27
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27
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27
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27
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27
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27
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28
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|
-i-
|
PART I. FINAN
C
IAL
INFORMATION
|
|
|
|
|
|
Item 1. Financial Statements
|
|
|
|
|
Wrap Technologies, Inc.
Condensed Balance Sheets
|
|
September 30,
|
|
|
|
2020
|
December 31,
|
|
|
(unaudited)
|
2019
|
|
ASSETS
|
|
|
|
Current assets:
|
|
|
|
Cash
and cash equivalents
|
$
20,118,192
|
$
16,983,864
|
|
Short-term
investments
|
24,986,117
|
-
|
|
Accounts
receivable, net
|
1,170,122
|
195,347
|
|
Inventories,
net
|
1,950,994
|
2,244,541
|
|
Prepaid
expenses and other current assets
|
300,811
|
250,947
|
|
Total current assets
|
48,526,236
|
19,674,699
|
|
Property and equipment, net
|
363,020
|
242,876
|
|
Operating lease right-of-use asset, net
|
170,397
|
260,931
|
|
Intangible assets, net
|
322,952
|
230,283
|
|
Other assets, net
|
12,681
|
12,681
|
|
Total assets
|
$
49,395,286
|
$
20,421,470
|
|
|
|
|
|
LIABILITIES AND STOCKHOLDERS' EQUITY
|
|
|
|
Current liabilities:
|
|
|
|
Accounts
payable
|
$
761,785
|
$
406,967
|
|
Accrued
liabilities
|
466,523
|
194,294
|
|
Customer
deposits
|
128,143
|
343,724
|
|
Deferred
revenue
|
2,484
|
2,684
|
|
Operating
lease liability - short term
|
104,071
|
128,131
|
|
Note
payable to bank - short term
|
230,239
|
-
|
|
Total current liabilities
|
1,693,245
|
1,075,800
|
|
|
|
|
|
Long-term liabilities:
|
|
|
|
Operating
Lease Liability - long term
|
79,116
|
150,018
|
|
Note
payable to bank - long term
|
185,849
|
-
|
|
Total long-term liabilities
|
264,965
|
150,018
|
|
Total liabilities
|
1,958,210
|
1,225,818
|
|
|
|
|
|
Commitments and contingencies (Note 12)
|
|
|
|
|
|
|
|
Stockholders' equity:
|
|
|
|
Preferred
stock - 5,000,000 authorized; par value $0.0001 per share; none
issued and outstanding
|
-
|
-
|
|
Common
stock - 150,000,000 authorized; par value $0.0001 per share;
37,109,317 and 29,829,916 shares issued and outstanding each
period, respectively
|
3,711
|
2,983
|
|
Additional
paid-in capital
|
69,180,916
|
31,922,493
|
|
Accumulated
deficit
|
(21,754,157
)
|
(12,729,824
)
|
|
Accumulated
other comprehensive gain
|
6,606
|
-
|
|
Total stockholders' equity
|
47,437,076
|
19,195,652
|
|
Total liabilities and stockholders' equity
|
$
49,395,286
|
$
20,421,470
|
See
accompanying notes to condensed interim financial
statements.
-1-
Wrap Technol
o
gies, Inc.
Condensed Statements of Operations and Comprehensive Loss
(unaudited)
|
|
Three Months
|
Nine Months
|
||
|
|
Ended September 30,
|
Ended September 30,
|
||
|
|
2020
|
2019
|
2020
|
2019
|
|
Revenues:
|
|
|
|
|
|
Product
sales
|
$
988,089
|
$
255,973
|
$
2,485,866
|
$
418,874
|
|
Other
revenue
|
18,675
|
12,790
|
42,927
|
27,144
|
|
Total
revenues
|
1,006,764
|
268,763
|
2,528,793
|
446,018
|
|
Cost
of revenues
|
687,991
|
157,786
|
1,658,773
|
254,701
|
|
Gross profit
|
318,773
|
110,977
|
870,020
|
191,317
|
|
|
|
|
|
|
|
Operating expenses:
|
|
|
|
|
|
Selling,
general and administrative
|
3,255,464
|
1,878,152
|
7,933,261
|
4,547,215
|
|
Research
and development
|
926,677
|
729,788
|
2,037,633
|
1,620,820
|
|
Total
operating expenses
|
4,182,141
|
2,607,940
|
9,970,894
|
6,168,035
|
|
Loss
from operations
|
(3,863,368
)
|
(2,496,963
)
|
(9,100,874
)
|
(5,976,718
)
|
|
|
|
|
|
|
|
Other income (expense):
|
|
|
|
|
|
Interest
income
|
5,494
|
108,922
|
80,590
|
196,109
|
|
Other
|
(3,981
)
|
837
|
(4,049
)
|
(1,450
)
|
|
|
1,513
|
109,759
|
76,541
|
194,659
|
|
Net loss
|
$
(3,861,855
)
|
$
(2,387,204
)
|
$
(9,024,333
)
|
$
(5,782,059
)
|
|
|
|
|
|
|
|
Net
loss per basic common share
|
$
(0.11
)
|
$
(0.08
)
|
$
(0.28
)
|
$
(0.20
)
|
|
Weighted
average common shares used to compute net loss per basic common
share
|
36,419,771
|
29,662,403
|
32,653,408
|
28,301,725
|
|
|
|
|
|
|
|
Comprehensive loss:
|
|
|
|
|
|
Net
loss
|
$
(3,861,855
)
|
$
(2,387,204
)
|
$
(9,024,333
)
|
$
(5,782,059
)
|
|
Net
unrealized gain on short-term investments
|
6,606
|
-
|
6,606
|
-
|
|
Comprehensive
loss
|
$
(3,855,249
)
|
$
(2,387,204
)
|
$
(9,017,727
)
|
$
(5,782,059
)
|
See
accompanying notes to condensed interim financial
statements.
-2-
Wrap Technologi
e
s, Inc.
Statements of Stockholders' Equity
(unaudited)
|
|
Three Months Ended September 30, 2020
|
|||||
|
|
|
|
|
|
Accumulated
|
|
|
|
|
|
Additional
|
|
Other
|
Total
|
|
|
Common Stock
|
Paid-In
|
Accumulated
|
Comprehensive
|
Stockholders'
|
|
|
|
Shares
|
Amount
|
Capital
|
Deficit
|
Gain
|
Equity
|
|
Balance at June 30, 2020
|
34,361,591
|
$
3,436
|
$
54,972,797
|
$
(17,892,302
)
|
$
-
|
$
37,083,931
|
|
Common
shares issued upon exercise of warrants at $3.00 per share, net of
issuance costs
|
102,621
|
10
|
295,029
|
-
|
-
|
295,039
|
|
Common
shares issued upon exercise of warrants at $5.00 per share, net of
issuance costs
|
1,742,870
|
174
|
8,365,542
|
-
|
-
|
8,365,716
|
|
Common
shares issued upon exercise of warrants at $6.00 per share, net of
issuance costs
|
675,000
|
68
|
3,847,432
|
-
|
-
|
3,847,500
|
|
Common
shares issued upon exercise of warrants at $6.50 per
share
|
177,986
|
18
|
1,102,295
|
-
|
-
|
1,102,313
|
|
Common
shares issued upon exercise of stock options
|
34,250
|
3
|
51,372
|
-
|
-
|
51,375
|
|
Common
shares issued upon vesting of restricted stock units
|
14,999
|
2
|
(2
)
|
-
|
-
|
-
|
|
Stock-based
compensation expense
|
-
|
-
|
546,451
|
-
|
-
|
546,451
|
|
Net
unrealized gain on short-term investments
|
-
|
-
|
-
|
-
|
6,606
|
6,606
|
|
Net
loss for the period
|
-
|
-
|
-
|
(3,861,855
)
|
-
|
(3,861,855
)
|
|
Balance at September 30, 2020
|
37,109,317
|
$
3,711
|
$
69,180,916
|
$
(21,754,157
)
|
$
6,606
|
$
47,437,076
|
|
|
Nine Months Ended September 30, 2020
|
|||||
|
|
|
|
|
|
Accumulated
|
|
|
|
|
|
Additional
|
|
Other
|
Total
|
|
|
Common Stock
|
Paid-In
|
Accumulated
|
Comprehensive
|
Stockholders'
|
|
|
|
Shares
|
Amount
|
Capital
|
Deficit
|
Gain
|
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
|
253,125
|
25
|
735,002
|
-
|
-
|
735,027
|
|
Common
shares issued upon exercise of warrants at $5.00 per share, net of
issuance costs
|
3,593,873
|
359
|
17,233,805
|
-
|
-
|
17,234,164
|
|
Common
shares issued upon exercise of warrants at $6.00 per share, net of
issuance costs
|
675,000
|
68
|
3,847,432
|
-
|
-
|
3,847,500
|
|
Common
shares issued upon exercise of warrants at $6.50 per
share
|
261,679
|
26
|
1,646,292
|
-
|
-
|
1,646,318
|
|
Common
shares issued upon exercise of stock options
|
327,500
|
33
|
566,217
|
-
|
-
|
566,250
|
|
Common
shares issued upon vesting of restricted stock units
|
101,557
|
10
|
(10
)
|
-
|
-
|
-
|
|
Share-based
compensation expense
|
-
|
-
|
1,562,686
|
-
|
-
|
1,562,686
|
|
Net
unrealized gain on short-term investments
|
-
|
-
|
-
|
-
|
6,606
|
6,606
|
|
Net
loss for the period
|
-
|
-
|
-
|
(9,024,333
)
|
-
|
(9,024,333
)
|
|
Balance at September 30, 2020
|
37,109,317
|
$
3,711
|
$
69,180,916
|
$
(21,754,157
)
|
$
6,606
|
$
47,437,076
|
-3-
|
|
Three Months Ended September 30, 2019
|
|||||
|
|
|
|
|
|
Accumulated
|
|
|
|
|
|
Additional
|
|
Other
|
Total
|
|
|
Common Stock
|
Paid-In
|
Accumulated
|
Comprehensive
|
Stockholders'
|
|
|
|
Shares
|
Amount
|
Capital
|
Deficit
|
Gain
|
Equity
|
|
Balance at June 30, 2019
|
29,640,250
|
$
2,964
|
$
30,324,798
|
$
(7,799,191
)
|
$
-
|
$
22,528,571
|
|
Common
shares issued upon exercise of warrants at $3.00 per
share
|
25,000
|
2
|
74,998
|
-
|
-
|
75,000
|
|
Common
shares issued upon exercise of stock options
|
3,750
|
1
|
5,624
|
-
|
-
|
5,625
|
|
Share-based compensation expense
|
473,657
|
|
|
473,657
|
||
|
Net
loss for the period
|
-
|
-
|
-
|
(2,387,204
)
|
-
|
(2,387,204
)
|
|
Balance at September 30, 2019
|
29,669,000
|
$
2,967
|
$
30,879,077
|
$
(10,186,395
)
|
$
-
|
$
20,695,649
|
|
|
Nine Months Ended September 30, 2019
|
|||||
|
|
|
|
|
|
Accumulated
|
|
|
|
|
|
Additional
|
|
Other
|
Total
|
|
|
Common Stock
|
Paid-In
|
Accumulated
|
Comprehensive
|
Stockholders'
|
|
|
|
Shares
|
Amount
|
Capital
|
Deficit
|
Gain
|
Equity
|
|
Balance at December 31, 2018
|
27,364,607
|
$
2,736
|
$
16,791,254
|
$
(4,404,336
)
|
$
-
|
$
12,389,654
|
|
Sale
of Common Stock and warrants at $6.50 per share and placement agent
warrants in public offering, net of issuance costs
|
1,923,076
|
192
|
11,351,022
|
-
|
-
|
11,351,214
|
|
Common
shares issued upon exercise of warrants at $3.00 per
share
|
87,150
|
9
|
261,441
|
-
|
-
|
261,450
|
|
Common
shares issued upon exercise of warrants at $5.00 per
share
|
274,167
|
28
|
1,370,807
|
-
|
-
|
1,370,835
|
|
Common
shares issued upon exercise of stock options
|
20,000
|
2
|
29,998
|
-
|
-
|
30,000
|
|
Share-based compensation expense
|
1,074,555
|
-
|
-
|
1,074,555
|
||
|
Net
loss for the period
|
-
|
-
|
-
|
(5,782,059
)
|
-
|
(5,782,059
)
|
|
Balance at September 30, 2019
|
29,669,000
|
$
2,967
|
$
30,879,077
|
$
(10,186,395
)
|
$
-
|
$
20,695,649
|
See
accompanying notes to condensed interim financial
statements.
-4-
Wrap Technologies, In
c
.
Statements of Cash Flows
(unaudited)
|
|
For the Nine Months
|
|
|
|
Ended September 30,
|
|
|
|
2020
|
2019
|
|
Cash Flows From Operating Activities:
|
|
|
|
Net
loss
|
$
(9,024,333
)
|
$
(5,782,059
)
|
|
Adjustments to reconcile net loss to net cash
|
|
|
|
used
in operating activities:
|
|
|
|
Depreciation
and amortization
|
90,885
|
20,949
|
|
Warranty
provision
|
17,013
|
10,776
|
|
Inventory
obsolescence
|
-
|
(130,591
)
|
|
Non-cash
lease expense
|
90,534
|
50,957
|
|
Share-based
compensation
|
1,562,686
|
1,074,555
|
|
Provision
for doubtful accounts
|
10,140
|
-
|
|
Changes
in assets and liabilities:
|
|
|
|
Accounts
receivable
|
(984,915
)
|
(91,109
)
|
|
Inventories
|
293,547
|
(1,685,059
)
|
|
Prepaid
expenses and other current assets
|
(49,864
)
|
29,705
|
|
Accounts
payable
|
354,818
|
508,457
|
|
Operating
lease liability
|
(94,962
)
|
(34,035
)
|
|
Customer
deposits
|
(215,581
)
|
238,510
|
|
Accrued
liabilities and other
|
254,544
|
76,669
|
|
Deferred
compensation
|
-
|
(96,000
)
|
|
Warranty
settlement
|
2,398
|
-
|
|
Deferred
revenue
|
(200
)
|
2,288
|
|
Net
cash used in operating activities
|
(7,693,290
)
|
(5,805,987
)
|
|
|
|
|
|
Cash Flows From Investing Activities:
|
|
|
|
Purchase
of short-term investments
|
(24,979,511
)
|
-
|
|
Capital
expenditures for property and equipment
|
(202,432
)
|
(197,873
)
|
|
Investment
in patents and trademarks
|
(101,266
)
|
(95,536
)
|
|
Long-term
deposits
|
-
|
(11,169
)
|
|
Net
cash used in investing activities
|
(25,283,209
)
|
(304,578
)
|
|
|
|
|
|
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
|
24,479,654
|
1,632,285
|
|
Offering
costs paid on exercise of warrants
|
(1,016,645
)
|
-
|
|
Proceeds
from exercise of stock options
|
566,250
|
30,000
|
|
Proceeds
from bank note
|
414,362
|
-
|
|
Net
cash provided by financing activities
|
36,110,827
|
13,013,499
|
|
|
|
|
|
Net increase in cash and cash equivalents
|
3,134,328
|
6,902,934
|
|
Cash and cash equivalents, beginning of period
|
16,983,864
|
12,358,896
|
|
Cash and cash equivalents, end of period
|
$
20,118,192
|
$
19,261,830
|
|
|
|
|
|
Supplemental Disclosure of Non-Cash Investing
|
|
|
|
and Financing Activities:
|
|
|
|
Change
in unrealized gain on short-term investments
|
$
6,606
|
$
-
|
|
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-
Wrap
Technologies, Inc.
Notes to Unaudited Condensed Interim Financial
Statements
|
1.
|
ORG
A
N
IZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING
POLICIES
|
Organization and Business Description
Wrap
Technologies, Inc., a Delaware corporation (the “
Company
”, “
we
”, “
us
”, and “
our
”), is a publicly traded
company with our Common Stock, par value $0.0001 per share
(“
Common
Stock
”) listed on the Nasdaq Capital Market
(“
Nasdaq
”)
under the trading symbol “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 US GAAP 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 US GAAP
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,
U.S. treasury bills and accounts receivable from customers. The
Company maintains its cash and cash equivalent deposits at two
domestic financial institutions. The Company is exposed to credit
risk in the event of default by a financial institution to the
extent that cash and cash equivalents are in excess of the amount
insured by the Federal Deposit Insurance Corporation. The Company
places its cash and cash equivalents with high-credit quality
financial institutions. 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.
-6-
Wrap
Technologies, Inc.
Notes to Unaudited Condensed Interim Financial
Statements
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.
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.
Cash and Cash Equivalents
The
Company considers all highly liquid investments purchased with
original maturities of three months or less from the purchase date
to be cash equivalents. Cash equivalents consist primarily of
amounts invested in Money Market Funds and United States
(“U.S.”) Treasury bills and are stated at fair
value.
Short-Term Investments
The
Company’s short-term investments consist of U.S. Treasury
bills with original maturities beyond three months at the date of
purchase and one year or less from the balance sheet date. As of
September 30, 2020, all of the Company’s short-term
investments were classified as available-for-sale and are carried
at estimated fair value with any unrealized gains and losses,
unrelated to credit loss factors, included in other comprehensive
(loss) income in our condensed statements of stockholders’
equity.
We
adopted
Accounting Standards
Codification (“
ASC
”)
Topic
326 issued by the
Financial
Accounting Standards Board (“
FASB
”)
effective
January 1, 2020, and applied the credit loss guidance related to
short-term investments prospectively as we had no historical
short-term investments
.
Because we do not have any history of losses for our short-term
investments, o
ur
expected loss allowance methodology is developed using published or
estimated credit default rates for similar investments and current
and future economic and market conditions.
Any unrealized losses related to
credit loss factors are now recorded through an allowance for
credit losses in other (expense) income, in our condensed
consolidated statements of operations, rather than as a reduction
to the amortized cost basis in other comprehensive (loss) income,
when a decline in fair value has resulted from a credit loss. We
determine realized gains or losses on the sale of investments on a
specific identification method, and record such gains or losses as
other (expense) income, in our condensed statements of
operations.
We
did not record a credit loss reserve for short-term investments
during the quarter ended September 30, 2020.
Stock-Based Compensation
The
Company follows the fair value recognition provisions issued by
FASB in 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 nine months
ended September 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.
-7-
Wrap
Technologies, Inc.
Notes to Unaudited Condensed Interim Financial
Statements
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 expected loss allowance methodology for accounts
receivable is developed using historical collection experience,
when available any published or estimated credit default rates for
entities that represent our customer base, current and future
economic and market conditions and a review of the current status
of customers' trade accounts receivables. Additionally, specific
allowance amounts are established to record the appropriate
provision for customers that have a higher probability of default.
Our monitoring activities include account reconciliation, dispute
resolution, payment confirmation, consideration of customers'
financial condition and macroeconomic conditions. Balances are
written off when determined to be uncollectible.
There
was no allowance for doubtful accounts recorded at December 31,
2019. At September 30, 2020 the Company had an allowance of $10,140
resulting in part from global uncertainty resulting from the
COVID-19 virus. If a major customer’s creditworthiness
deteriorates, or actual defaults exceed our historical experience,
such allowance 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.
Loss per Share
Basic
loss per common share is computed by dividing net loss for the
period by the weighted-average number of shares of common stock
outstanding during the period. Diluted net loss per common share
reflects the potential dilution of securities that could share in
the earnings of an entity. The Company’s losses for the
periods presented cause the inclusion of potential common stock
instruments outstanding to be antidilutive. Stock options,
restricted stock units and warrants exercisable or issuable for a
total of 7,615,959 shares of Common Stock were outstanding at
September 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 September 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.
-8-
Wrap
Technologies, Inc.
Notes to Unaudited Condensed Interim Financial
Statements
Recent Issued Accounting Guidance
Adopted 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.
In June 2016, the FASB issued ASU No.
2016-13, Financial Instruments - Credit Losses
(Topic
326):
Measurement of Credit
Losses on Financial Instruments which was further updated and
clarified by the FASB through issuance of additional related
ASUs
.
Under ASU 2016-13, existing guidance on reporting
credit losses for trade and other receivables and available for
sale debt securities have been replaced with a new forward-looking
“expected loss” model that has resulted in the earlier
recognition of allowances for losses. The adoption of these
standards in the first quarter ended March 31, 2020 had no impact
on the Company’s financial statements or disclosures. As part
of our assessment of the adequacy of our allowances for credit
losses, we consider a number of factors including, but not limited
to, customer credit ratings, bankruptcy filings, published or
estimated credit default rates, age of receivables, expected loss
rates and collateral exposures.
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.
|
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 the SSP based on the price at which the performance
obligation is sold separately. If the SSP 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.
-9-
Wrap
Technologies, Inc.
Notes to Unaudited Condensed Interim Financial
Statements
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 September 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
September 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.
|
FINANCIAL INSTRUMENTS
|
Assets
and liabilities recorded at fair value on a recurring basis in the
Balance Sheets and assets and liabilities measured at fair value on
a non-recurring basis or disclosed at fair value, are categorized
based upon the level of judgment associated with inputs used to
measure their fair values. The accounting guidance for fair value
provides a framework for measuring fair value and requires certain
disclosures about how fair value is determined. Fair value is
defined as the price that would be received upon the sale of an
asset or paid to transfer a liability (an exit price) in an orderly
transaction between market participants at the measurement date.
The accounting guidance also establishes a three-level valuation
hierarchy that prioritizes the inputs to valuation techniques used
to measure fair value based upon whether such inputs are observable
or unobservable. Observable inputs reflect market data obtained
from independent sources, while unobservable inputs reflect market
assumptions made by the reporting entity. The three-level hierarchy
for the inputs to valuation techniques is briefly summarized as
follows:
Level 1
—Inputs are unadjusted,
quoted prices in active markets for identical assets or liabilities
at the measurement date;
Level 2—
Inputs are observable,
unadjusted quoted prices in active markets for similar assets or
liabilities, unadjusted quoted prices for identical or similar
assets or liabilities in markets that are not active, or other
inputs that are observable or can be corroborated by observable
market data for substantially the full term of the related assets
or liabilities; and
Level 3—
Unobservable inputs that
are significant to the measurement of the fair value of the assets
or liabilities that are supported by little or no market
data.
The
Company’s cash equivalent Money Market Funds and short-term
investments consisting of U.S. Treasury bill securities are
classified as Level 1 because they are valued using quoted
market prices.
-10-
Wrap
Technologies, Inc.
Notes to Unaudited Condensed Interim Financial
Statements
The
following tables show the Company’s cash and cash
equivalents, Money Market Funds and short-term investments by
significant investment category as of September 30, 2020. The
Company only had cash and cash equivalents, including Money Market
Funds of $16,618,498 at December 31, 2019 all which were considered
Level 1.
|
|
As of September 30, 2020
|
|||
|
|
Adjusted
|
Unrealized
|
Unrealized
|
Market
|
|
|
Cost
|
Gains
|
Losses
|
Value
|
|
Level
1:
|
|
|
|
|
|
Money
Market Funds
|
$
6,534,798
|
$
-
|
$
-
|
$
6,534,798
|
|
U.S.
Treasury securities considered cash equivalents
|
9,999,125
|
-
|
-
|
9,999,125
|
|
U.S.
Treasury securities in short-term investments
|
24,979,511
|
6,606
|
|
24,986,117
|
|
Total
Financial Assets
|
$
41,513,434
|
$
6,606
|
$
-
|
$
41,520,040
|
The
Company did not recognize any credit losses related to
available-for-sale investments for the first nine months of 2020
and 2019. All of the Company’s U.S. Treasury debt securities
classified as available for sale as of September 30, 2020, have
maturities within one year.
The
Company may sell certain of its short-term investments prior to
their stated maturities for reasons including, but not limited to,
managing liquidity, credit risk, duration and asset
allocation.
There
were no liabilities measured at fair value on a recurring basis as
of September 30, 2020 and December 31, 2019. There have been
no transfers between fair value measurement levels during the nine
months ended September 30, 2020 and 2019. In addition, there
were no assets or liabilities measured at fair value on a
non-recurring basis as of September 30, 2020 and December 31,
2019.
|
4.
|
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:
|
|
September 30,
|
December 31,
|
|
|
2020
|
2019
|
|
Finished
goods
|
$
847,101
|
$
653,323
|
|
Work
in process
|
20,331
|
413
|
|
Raw
materials
|
1,083,562
|
1,590,805
|
|
Inventories
- net
|
$
1,950,994
|
$
2,244,541
|
|
5.
|
PROPERTY AND EQUIPMENT, NET
|
Property and
equipment consisted of the following:
|
|
September 30,
|
December 31,
|
|
|
2020
|
2019
|
|
Laboratory
equipment
|
$
142,123
|
$
44,454
|
|
Tooling
|
80,936
|
59,004
|
|
Computer
equipment
|
132,245
|
83,368
|
|
Furniture,
fixtures and improvements
|
162,736
|
128,782
|
|
|
518,040
|
315,608
|
|
Accumulated
depreciation
|
(155,020
)
|
(72,732
)
|
|
|
$
363,020
|
$
242,876
|
Depreciation
expense was
$34,998 and $82,288
for the three and nine months ended September 30, 2020 and was
$8,175 and $20,361
for the
three and nine months ended September 30, 2019,
respectively.
-11-
Wrap
Technologies, Inc.
Notes to Unaudited Condensed Interim Financial
Statements
|
6.
|
INTANGIBLE ASSETS, NET
|
Intangible assets
consisted of the following:
|
|
September 30,
|
December 31,
|
|
|
2020
|
2019
|
|
|
|
|
|
Patents
|
$
260,694
|
$
176,425
|
|
Trademarks
|
74,916
|
57,919
|
|
|
335,610
|
234,344
|
|
Accumulated
amortization
|
(12,658
)
|
(4,061
)
|
|
|
$
322,952
|
$
230,283
|
Amortization
expense was
$3,301 and $8,597
for the three and nine months ended September 30, 2020 and was
$201 and $588
for the three and
nine months ended September 30, 2019, respectively.
|
7.
|
ACCOUNTS PAYABLE AND ACCRUED LIABILITIES
|
Accounts payable
includes $36,973 and $18,809 due to related party Syzygy Licensing,
LLC (“
Syzygy
”)
as of September 30, 2020 and December 31, 2019, respectively.
Accounts payable at September 30, 2020 also included $10,000 due to
related party V3 Capital Partners, LLC. See Notes 12 and 13 for
additional related party information.
Accrued
liabilities consist of the following:
|
|
September 30,
|
December 31,
|
|
|
2020
|
2019
|
|
Patent
and legal costs
|
$
15,550
|
$
9,851
|
|
Accrued
compensation
|
401,770
|
144,193
|
|
Warranty
costs
|
33,334
|
13,923
|
|
Consulting
costs
|
-
|
7,500
|
|
Taxes
and other
|
15,869
|
18,827
|
|
|
$
466,523
|
$
194,294
|
|
8.
|
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
Right of Use operating lease assets was
$30,734 and $90,534
for the three and nine
months ended September 30, 2020 and was
$28,746 and $50,957
for the three and nine
months ended September 30, 2019, respectively.
Operating lease
expense for capitalized operating leases included in operating
activities was
$34,322 and
$102,965
for the three and nine months ended September 30,
2020 and was
$34,682 and
$60,278
for the three and nine months ended September 30,
2019, respectively. Operating lease obligations recorded on the
balance sheet at September 30, 2020 are:
|
Operating
lease liability- short term
|
$
104,071
|
|
Operating
lease liability - long term
|
79,116
|
|
Total
Operating Lease Liability
|
$
183,187
|
Future
lease payments included in the measurement of lease liabilities on
the balance sheet at September 30, 2020 for future periods are as
follows:
|
Remainder
of 2020 (three months)
|
$
36,181
|
|
2021
|
101,406
|
|
2022
|
57,328
|
|
Total
future minimum lease payments
|
194,915
|
|
Less
imputed interest
|
(11,728
)
|
|
Total
|
$
183,187
|
The
weighted average remaining lease term is 1.69 years and the
weighted average discount rate is 7.0%.
The
Company does not have any finance leases.
-12-
Wrap
Technologies, Inc.
Notes to Unaudited Condensed Interim Financial
Statements
|
9.
|
NOTE PAYABLE TO BANK
|
On May 1, 2020, the Company received loan proceeds
of $414,362 from Bank of America, N.A. (the
“
Lender
”), as a potentially forgivable loan (the
“
PPP
Loan
”) from the U.S.
Small Business Administration pursuant to the Paycheck Protection
Program (the “
PPP
”) enacted by Congress under Division A,
Title 1 of the Coronavirus Aid, Relief, and Economic Security Act
(15 U.S.C. 636(a)(36)) (the “
CARES Act
”), which was enacted March 27,
2020.
The PPP Loan, which was in the form of a
Promissory Note dated May 1, 2020 by the Company in favor of Lender
(the “
PPP Note
”), 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 of the
PPP Loan. 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 $1,726 at September 30, 2020. The PPP Loan may be
repaid at any time prior to maturity with no prepayment penalties.
The PPP 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 during specified periods, 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 covered eight
or 24-week period. The Company believes it used the PPP Loan
proceeds for purposes consistent with the PPP and filed an
application for forgiveness in October 2020. The Company
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.
|
10.
|
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 (the “
Unit
Offering
”) whereby the
Company offered and sold certain securities consisting of one share
of Common Stock and one detachable two-year warrant to purchase one
share of Common Stock at an exercise price of $6.00 per share (a
“
Unit
”) at the public offering price of $6.00 per
Unit. Pursuant to the Unit Offering, the Company sold 2,066,667
Units, resulting in the Company’s receipt of gross cash
proceeds of $12.4 million and net cash proceeds of $11.67 million
after deduction of commissions and offering
costs.
Summary of Stock Purchase Warrants
The
following table summarizes warrant activity during the nine months
ended September 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
|
(4,783,677
)
|
$
5.12
|
|
Shares
purchasable under outstanding warrants at September 30,
2020
|
3,903,610
|
$
6.08
|
During
the nine months ended September 30, 2020 the Company received gross
proceeds of $24,479,654 from the exercise of warrants and paid
$1,016,645 as an agent fee to facilitate exercise of certain
warrants resulting in net proceeds of $23,463,009.
-13-
Wrap
Technologies, Inc.
Notes to Unaudited Condensed Interim Financial
Statements
The
Company has outstanding Common Stock purchase warrants as of
September 30, 2020 as follows:
|
|
Number of
|
Exercise Price
|
|
Description
|
Common Shares
|
Per Share
|
|
Purchase
Warrants
|
621,367
|
$
5.00
|
|
Agent
Warrants
|
75,333
|
$
3.00
|
|
Purchase
Warrants
|
1,661,397
|
$
6.50
|
|
Agent
Warrants
|
153,846
|
$
8.125
|
|
Purchase
Warrants
|
1,391,667
|
$
6.00
|
|
|
3,903,610
|
|
Subsequent to
September 30, 2020 a total of 101,900 warrants were exercised for
gross proceeds of $358,834.
|
11.
|
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 nine
months ended September 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
|
731,336
|
$
7.65
|
-
|
|
|
Exercised
|
(327,500
)
|
$
1.73
|
-
|
|
|
Forfeited,
cancelled, expired
|
(50,000
)
|
$
3.00
|
-
|
|
|
Outstanding
September 30, 2020
|
3,282,586
|
$
4.13
|
4.48
|
$
10,221,541
|
|
Vested
and exercisable at September 30, 2020
|
2,042,500
|
$
2.56
|
2.87
|
$
8,597,238
|
-14-
Wrap
Technologies, Inc.
Notes to Unaudited Condensed Interim Financial
Statements
The
Company uses the Black-Scholes option pricing model to determine
the fair value of the options granted.
|
|
For the Nine Months
|
|
|
|
Ended September 30,
|
|
|
|
2020
|
2019
|
|
Expected
stock price volatility
|
46
%
|
49
%
|
|
Risk-free
interest rate
|
0.38
%
|
2.41
%
|
|
Forfeiture
rate
|
0
%
|
0
%
|
|
Expected
dividend yield
|
0
%
|
0
%
|
|
Expected
life of options - years
|
6.15
|
3.50
|
|
Weighted-average
fair value of options granted
|
$
3.43
|
$
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 service-based RSUs to
officers and directors vesting over a period of three years that
are settled in shares of the Company’s Common Stock as the
RSUs become vested. On April 1, 2020 the Company granted 122,222
service-based RSUs to employees vesting over a period of three
years that are settled in shares of the Company’s Common
Stock as the RSUs become vested. Also, on April 1, 2020 the Company
granted an officer 35,211 performance-based RSUs. In July and
September 2020, the Company granted 52,160 service-based
RSU’s to employees vesting over three and four year periods
that are settled in shares of the Company’s Common Stock as
the RSUs become vested.
The
following table summarizes RSU activity under the Plan for the nine
months ended September 30, 2020:
|
|
|
Weighted Average
|
Weighted Average
|
|
|
Service-Based
|
Grant Date
|
Vesting
|
|
|
RSU's
|
Fair Value
|
Period
|
|
Unvested
at January 1, 2020
|
308,087
|
$
6.77
|
|
|
Granted
- service based
|
248,374
|
$
6.03
|
3.02
Years
|
|
Granted
- performance based
|
35,211
|
$
4.26
|
|
|
Vested
|
(101,557
)
|
$
6.77
|
|
|
Forfeited
and cancelled
|
(60,352
)
|
$
7.24
|
|
|
Unvested
at September 30, 2020
|
429,763
|
$
6.08
|
|
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 Nine Months
|
||
|
|
Ended September 30,
|
Ended September 30,
|
||
|
|
2020
|
2019
|
2020
|
2019
|
|
Selling,
general and administrative
|
$
468,241
|
$
438,834
|
$
1,393,375
|
$
987,251
|
|
Research
and development
|
78,210
|
34,823
|
169,311
|
87,304
|
|
Total
stock-based expense
|
$
546,451
|
$
473,657
|
$
1,562,686
|
$
1,074,555
|
As of
September 30, 2020, total estimated compensation cost of stock
options and RSUs granted but not yet vested was $5.4 million which
is expected to be recognized over the weighted average period of
2.6 years.
-15-
Wrap
Technologies, Inc.
Notes to Unaudited Condensed Interim Financial
Statements
|
12.
|
COMMITMENTS AND CONTINGENCIES
|
Facility Leases
See
Note 8.
Related Party Technology License Agreement
The
Company is obligated to pay royalties and pay development and
patent costs pursuant to that certain exclusive Amended and
Restated Intellectual Property License Agreement dated as of
September 30, 2016, by and between the Company and Syzygy (the
“
Syzygy
Agreement
”), a company owned and controlled by Mr.
Elwood Norris and Mr. James Barnes, both of whom are stockholders
and officers of the Company. The Syzygy 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 payments under the Syzygy
Agreement of
$36,973 and
$90,440
for royalties incurred during the three and nine
months ended September 30, 2020 and
$9,915 and $16,634 incurred
for the three
and nine months ended September 30, 2019,
respectively.
Purchase Commitments
At
September 30, 2020 the Company was committed for approximately $0.5
million for future component deliveries and contract services that
are generally subject to modification or rescheduling in the normal
course of business.
Shareholder Litigation
On September 23, 2020, Carone Cobden filed a
putative class action complaint against the Company, former Chief
Executive Officer David Norris (“
Norris
”), Chief Financial Officer James A. Barnes
(“
Barnes
”) and President Thomas Smith
(“
Smith
”) in the United States District Court for
the Central District of California, docketed as Case No.
2-20-cv-08760-DMG-PVCx (the “
Complaint
”). The class period in the Complaint is
defined as July 31, 2020 through September 23, 2020. The
Complaint alleges that the named defendants, in their capacities as
officers of the Company, knowingly made false or misleading
statements or omissions regarding trials of the Company’s
BolaWrap product conducted by the Los Angeles Police Department
(the “
BolaWrap Pilot
Program
”). The
Complaint further alleges that the conduct of the named defendants
artificially inflated the price of the Company’s traded
securities, and that the disclosure of certain adverse information
to the public led to a decline in the market value of the
Company’s securities. The Complaint alleges
violations of Sections 10(b) and 20(a) of the Securities Exchange
Act of 1934, as amended (the “
Exchange
Act
”), and Rule 10b-5
promulgated thereunder.
On
October 1, 2020, Joseph Mercurio filed a second putative class
action complaint against the Company, Norris, Smith, and Barnes in
the United States District Court for the Central District of
California, which contains substantially the same factual
allegations and legal claims as set forth in the Complaint, and is
docketed as Case No.
2-20-cv-09030-DMG-PVCx.
On
October 15, 2020, Paula Earley filed a third putative class action
complaint against the Company, Smith, Norris, Barnes, Chief
Strategy Officer Mike Rothans, and Chief Executive Officer Marc
Thomas in the United States District Court for the Central District
of California, which contains substantially the same factual
allegations and legal claims as set forth in the Complaint, but
defines the class period as April 29, 2020 through September 23,
2020, and alleges that the named defendants made additional false
or misleading statements in connection with BolaWrap and the
BolaWrap Pilot Program. The complaint is docketed as Case No.
2-20-cv-09444-DMG-PVCx.
On October 20, 2020, the Hon. Dolly M. Gee issued
an order to show cause why the above-described cases should not be
consolidated under the caption
In re Wrap Technologies, Inc.
Securities Exchange Act Litigation
, Case No. 20-8760-DMG (PVCx), with a single
consolidated class action complaint or designated operative
complaint. As such, the Company expects that these cases will
be consolidated, and that plaintiffs in these cases will file a
consolidated amended complaint following the selection of a lead
plaintiff pursuant to 15 U.S.C. § 78u-4(a)(3)(B). The Company
believes that these cases are without merit and intends to
vigorously defend against the claims raised
therein.
|
13.
|
RELATED PARTY TRANSACTIONS
|
Commencing in
October 2017 the Company began reimbursing Mr. Elwood Norris, an
officer and stockholder of the Company, $1,500 per month on a month
to month basis for laboratory facility costs, for an aggregate of
$13,500 during the nine months ended September 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 for an aggregate of
$60,000 during the nine months ended September 30, 2020. In
addition, the Company paid V3 a bonus of $175,000 for assistance in
a qualified financing that was consummated in July
2020.
See
Notes 7 and 12 for additional information on related party
transactions and obligations.
|
14.
|
SUBSEQUENT EVENTS
|
See
Notes 10 and 12. The Company evaluated other 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.
-16-
Item 2. Man
a
gement's Discussion and
Analysis of Financial Condition and Results of
Operations
You should read the following discussion in conjunction with the
financial statements and other financial information included
elsewhere in this Quarterly Report on Form 10-Q (this
“Report”) 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 Report 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 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, a market research consulting
firm, we participate in a segment of the non-lethal products global
market expected to grow to $11.85 billion by 2023.
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 aggressive 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 13 domestic distributors representing
49 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 29 international
distributors representing 36 countries and have delivered BolaWrap
products to 35 countries to date. These international 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
September 30, 2020, in addition to our internal training
executives, we have trained 50 contract regional Master
Instructors. As of September 30, 2020, over 300 agencies had
received BolaWrap 100 training with over 1,100 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.
-17-
At
September
30, 2020, we had
$128,143 of customer deposits on orders and had backlog of
approximately $1.1 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.
Starting 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. In the third quarter we continued
to face some domestic and substantial international restrictions
that affected our ability to travel and train customers. We believe
this had an adverse effect on our sales in the third quarter and
while it appears some severe international restrictions may ease it
is uncertain as to timing and the effect on future international
orders.
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.
-18-
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. Our expected loss allowance
methodology for accounts receivable is developed using historical
collection experience, when available any published or estimated
credit default rates for entities that represent our customer base,
current and future economic and market conditions and a review of
the current status of customers' trade accounts receivables. 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 nine months
ended September 30, 2020.
-19-
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 September 30, 2020 Compared to Three Months
Ended September 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
.
|
|
Three Months
|
|
|
|
|
|
Ended September 30,
|
Change
|
||
|
|
2020
|
2019
|
$
|
%
|
|
Revenues:
|
|
|
|
|
|
Product
sales
|
$
988,089
|
$
255,973
|
$
732,116
|
286
%
|
|
Other
revenue
|
18,675
|
12,790
|
5,885
|
46
%
|
|
Total
revenues
|
1,006,764
|
268,763
|
738,001
|
275
%
|
|
Cost
of revenues
|
687,991
|
157,786
|
530,205
|
336
%
|
|
Gross profit
|
318,773
|
110,977
|
207,796
|
187
%
|
|
|
|
|
|
|
|
Operating expenses:
|
|
|
|
|
|
Selling,
general and administrative
|
3,255,464
|
1,878,152
|
1,377,312
|
73
%
|
|
Research
and development
|
926,677
|
729,788
|
196,889
|
27
%
|
|
Total
operating expenses
|
4,182,141
|
2,607,940
|
1,574,201
|
60
%
|
|
Loss
from operations
|
$
(3,863,368
)
|
$
(2,496,963
)
|
$
(1,366,405
)
|
55
%
|
Revenue
We
reported revenue of $1,006,764 for the three months ended September
30, 2020 from the sale of BolaWrap products and accessories. This
was a significant increase from the third quarter of the prior year
when we had only recently commenced product sales and reported
sales of $268,763. It is also a 21% increase over the immediately
preceding quarter ended June 30, 2020 of $832,592. We believe our
sales during the third quarter were negatively impacted by the
COVID-19 pandemic as we were limited in our ability to make product
demonstrations and conduct training primarily internationally. As
some areas of the United States 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 $261,102 during the three
months ended September 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 $153,539
of such product marketing costs were incurred during the three
months ended September 30, 2019.
-20-
We had
$594 of deferred revenue at September 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 and third quarters. 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
September 30, 2020, we had $128,143 of customer deposits on orders
and had backlog of approximately $1.1 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 September 30, 2020 was
$687,991 resulting in a gross margin of 32%. The gross margin for
the three months ended September 30, 2019 was 41% on a small
revenue base.
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. Our sales mix of
cartridges was higher in the third quarter than the prior year
comparable quarter and as compared to recent quarters. Currently,
our cartridges have lower margins than BolaWrap devices, but late
in the third quarter we implemented 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 continue to implement
production and process changes targeted to improve
efficiency.
Selling, General and Administrative Expense
Selling,
general and administrative expense for the three months ended
September 30, 2020 increased by $1,377,312 when compared to the
three months ended September 30, 2019. We increased our staffing
and promotion activities in 2020 to address growing market
opportunities. We incurred a $29,407 increase in non-cash
stock-based compensation expense allocated to selling, general and
administrative expense that totaled $468,241 in the three months
ended September 30, 2020 compared to $438,834 in the three months
ended September 30, 2019. Other increases included a $605,322
increase in cash compensation and recruiting costs from an increase
in headcount since the prior year and a $116,080 increase in public
company related costs. Marketing and promotion costs increased
$381,260 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 $28,086 primarily due to
COVID-19 restrictions even though the number of sales and training
personnel increased from the prior year.
Due in
part to our receipt of $414,362 in loan proceeds from Bank of
America, N.A. (the “
Lender
”), in the form of a
potentially forgivable loan (the “
PPP Loan
”) through the U.S. Small
Business Administration pursuant to the Paycheck Protection Program
(the “
PPP
”)
enacted by Congress under the Coronavirus Aid, Relief, and Economic
Security Act (15 U.S.C. 636(a)(36)) (the “
CARES Act
”), we maintained
staffing in April, we were able to respond to limited re-openings
commencing 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.
-21-
Research and Development Expense
Research
and development expense increased $196,889 during the three months
ended September 30, 2020, when compared to the comparable period in
2019. We incurred a $43,387 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 $113,147 increase in
cash compensation costs resulting from an increase in headcount
primarily associated with product development. Prototype related
costs increased $129,366 in the 2020 period,
primarily related to development efforts to
improve our BolaWrap 100 product and develop new products.
Outside consulting costs decreased $51,486 from the comparable
period in 2019 primarily due to the addition of permanent staff.
Travel costs related to research and development decreased $34,618
during the three months ended September 30, 2020 when compared to
the same period in 2019 primarily due to COVID-19 restrictions and
completion of the Arizona facility setup. We expect our research
and development costs to increase during the balance of 2020 as we
are adding staff and expanding our research initiatives in response
to market opportunities.
Net Loss
Loss
from operations during the three months ended September 30, 2020
increased by $1,366,405 when compared to the three months ended
September 30, 2019, resulting, primarily, from increased operating
costs due to increased personnel, marketing and selling and
supporting activities.
Nine Months Ended September 30, 2020 Compared to Nine Months Ended
September 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.
|
|
Nine Months
|
|
|
|
|
|
Ended September 30,
|
Change
|
||
|
|
2020
|
2019
|
$
|
%
|
|
Revenues:
|
|
|
|
|
|
Product
sales
|
$
2,485,866
|
$
418,874
|
$
2,066,992
|
493
%
|
|
Other
revenue
|
42,927
|
27,144
|
15,783
|
58
%
|
|
Total
revenues
|
2,528,793
|
446,018
|
2,082,775
|
467
%
|
|
Cost
of revenues
|
1,658,773
|
254,701
|
1,404,072
|
551
%
|
|
Gross profit
|
870,020
|
191,317
|
678,703
|
355
%
|
|
|
|
|
|
|
|
Operating expenses:
|
|
|
|
|
|
Selling,
general and administrative
|
7,933,261
|
4,547,215
|
3,386,046
|
74
%
|
|
Research
and development
|
2,037,633
|
1,620,820
|
416,813
|
26
%
|
|
Total
operating expenses
|
9,970,894
|
6,168,035
|
3,802,859
|
62
%
|
|
Loss
from operations
|
$
(9,100,874
)
|
$
(5,976,718
)
|
$
(3,124,156
)
|
52
%
|
Revenue
We
reported revenue of $2,528,793 for the nine months ended September
30, 2020 from the sale of BolaWrap products and accessories and
Wrap Armor tactical shields. This was a significant increase from
the first nine months of the prior year when we had only recently
commenced product sales and reported sales of $446,018. As
disclosed above we believe our sales during the third 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 United States eased restrictions early in the third quarter we
were able to commence limited in-person demonstrations and training
to supplement our webinar capabilities. We incurred product
promotional costs of $572,075 during the nine months ended
September 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 $288,599 of such product
marketing costs were incurred during the nine months ended
September 30, 2019.
We had
$594 of deferred revenue at September 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
September 30, 2020, we had $128,143 of customer deposits on orders
and had backlog of approximately $1.1 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.
-22-
Gross Profit
Our
cost of revenue for the nine months ended September 30, 2020 was
$1,658,773 resulting in a gross margin of 34%. The gross margin for
the nine months ended September 30, 2019 was 43% 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
nine months of 2020 than 2019. Currently, our cartridges have lower
margins than BolaWrap devices, but late in the third quarter we
implemented 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 nine months ended
September 30, 2020 increased by $3,386,046 when compared to the
nine months ended September 30, 2019. We increased our staffing and
promotion activities in 2020 to address growing market
opportunities. We incurred a $406,124 increase in non-cash
stock-based compensation expense allocated to selling, general and
administrative expense that totaled $1,393,375 in the nine months
ended September 30, 2020 compared to $987,251 in the nine months
ended September 30, 2019. Other increases included a $1,433,545
increase in cash compensation and recruiting costs from an increase
in headcount since the prior year and a $240,380 increase in public
company related costs. Marketing and promotion costs increased
$761,791 due primarily to promotional products and online
advertising. Travel efforts resumed during the third quarter,
however, due to the COVID-19 pandemic, travel was still limited.
Our travel costs related to sales, demonstrations and training
increased by $7,469 from the prior year resulting from an increase
in the number of sales and training personnel offset in part by
travel restrictions.
Due in
part to our receipt of $414,362 in loan proceeds by way of the PPP
Loan, we maintained staffing in April, we were able to respond to
agency re-openings during the third quarter 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 $416,813 during the nine months
ended September 30, 2020, when compared to the comparable period in
2019. We incurred a $82,007 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 $328,124 increase in
cash compensation costs resulting from an increase in headcount
primarily associated with product development. Prototype related
costs increased $164,482 in the 2020 period,
primarily related to development efforts to
improve our BolaWrap 100 product and develop new products
.
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 nine months ended September 30, 2020
increased by $3,124,156 when compared to the nine months ended
September 30, 2019, resulting, primarily, from increased operating
costs due to increased personnel, marketing and selling and
supporting activities.
-23-
Liquidity and Capital Resources
Overview
We have experienced net losses and negative cash flows from
operations since our inception. As of September 30, 2020, we had
cash and cash equivalents of $20,118,192, short-term investments of
$24,986,117 and positive working capital of $46,832,991 and had
sustained cumulative losses attributable to stockholders of
$21,747,551. We believe that our cash on hand and short-term
investments will sustain our operations for at least the next
twelve months from the date of this Report.
During the nine months ended September 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
$24,029,259 of net proceeds from the exercise of previously issued
warrants and stock options. We also obtained $414,362 in proceeds
from the PPP Loan during the nine months ended September 30,
2020.
In October 2020 through the date of this Report we obtained
$358,834
of gross 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 nine months ended September 30, 2020, net cash used in
operating activities was $7,693,290.
The net loss of $9,024,333 was
decreased by
non-cash expense of $1,771,258 consisting primarily of stock-based
compensation expense of $1,562,686. Other major component changes
using operating cash included an increase of $984,915 in accounts
receivable, a $215,581 decrease in customer deposits and a $49,864
increase in prepaid expenses and other current assets. A decrease
of $293,547 in inventories and an increase of $609,362 in accounts
payable and accrued liabilities reduced the cash used in operating
activities.
-24-
During the nine months ended September 30, 2019, net cash used in
operating activities was $5,805,987 consisting primarily of the net
loss of $5,782,059 reduced by non-cash stock-based compensation of
$1,074,555. Major component changes using operating cash included a
$1,685,059 increase in inventories, an increase of $91,109 in
accounts receivable and a $96,000 reduction in deferred
compensation. An increase of $585,126 in accounts payable and
accrued liabilities and new customer deposits of $238,510 reduced
the cash used in operating activities.
Investing Activities.
We used $202,432 and $197,873 of cash for the purchase of property
and equipment during the nine months ended September 30, 2020 and
2019, respectively. We invested $101,266 and $95,536 in patents
during the nine months ended September 30, 2020 and 2019,
respectively. We purchased $24,979,511 of short-term investments in
August 2020.
Financing Activities.
During the nine months ended September 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
$24,029,259 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 nine months ended September 30,
2020.
During the nine months ended September 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
$1,662,285 from the exercise of previously issued warrants and
stock options.
In
October 2020 through the date of this Report our financing
activities included
$
358,834
of gross cash proceeds from the
exercise of outstanding warrants and stock
options.
Contractual Obligations and Commitments
Pursuant to that certain exclusive Amended and Restated
Intellectual Property License Agreement dated September 30, 2016,
by and between the Company and Syzygy Licensing, LLC
(“
Syzygy
”), we are obligated to pay to Syzygy a 4%
royalty fee on future product sales up to an aggregate amount of
$1.0 million in royalty payments
or until September 30,
2026, whichever occurs earlier
.
We are committed to aggregate lease payments on facility leases of
$36,181 for the balance of 2020, $101,406 in 2021 and $57,328 in
2022.
At
September 30, 2020 the Company was committed for approximately $0.5
million for future component deliveries and contract services that
are generally subject to modification or rescheduling in the normal
course of business.
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 September 30,
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. Controls and Procedures.
We are
required to maintain disclosure controls and procedures designed to
ensure that material information related to us, including our
consolidated subsidiaries, is recorded, processed, summarized and
reported within the time periods specified in the SEC rules and
forms.
Conclusion Regarding the Effectiveness of Disclosure Controls and
Procedures
Under
the supervision and with the participation of our management,
including our principal executive officer and our principal
financial officer, as of September 30, 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 (the
“
Exchange
Act
”). Based on this evaluation, our principal
executive officer and our principal financial officer concluded
that our disclosure controls and procedures
were effective at the reasonable assurance
level.
Changes in Internal Control over Financial Reporting
There
have been no changes in our internal control over financial
reporting during our fiscal quarter ended September 30, 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.
-25-
PAR
T
II. OTHER
INFORMATION
Item 1. Legal Proceedings
On
September 23, 2020, Carone Cobden filed a putative class action
complaint against the Company, former Chief Executive Officer David
Norris (“
Norris
”), Chief Financial Officer
James A. Barnes (“Barnes”) and President Thomas Smith
(“
Smith
”) in
the United States District Court for the Central District of
California, docketed as Case No. 2-20-cv-08760-DMG-PVCx (the
“
Complaint
”).
The class period in the Complaint is defined as July 31, 2020
through September 23, 2020. The Complaint alleges that the
named defendants, in their capacities as officers of the Company,
knowingly made false or misleading statements or omissions
regarding trials of the Company’s BolaWrap product conducted
by the Los Angeles Police Department (the “
BolaWrap Pilot
Program
”). The Complaint further alleges that the
conduct of the named defendants artificially inflated the price of
the Company’s traded securities, and that the disclosure of
certain adverse information to the public led to a decline in the
market value of the Company’s securities. The
Complaint alleges violations of Sections 10(b) and 20(a) of the
Exchange Act, and Rule 10b-5 promulgated
thereunder.
On
October 1, 2020, Joseph Mercurio filed a second putative class
action complaint against the Company, Norris, Smith, and Barnes in
the United States District Court for the Central District of
California, which contains substantially the same factual
allegations and legal claims as set forth in the Complaint, and is
docketed as Case No.
2-20-cv-09030-DMG-PVCx.
On
October 15, 2020, Paula Earley filed a third putative class action
complaint against the Company, Smith, Norris, Barnes, Chief
Strategy Officer Mike Rothans, and Chief Executive Officer Marc
Thomas in the United States District Court for the Central District
of California, which contains substantially the same factual
allegations and legal claims as set forth in the Complaint, but
defines the class period as April 29, 2020 through September 23,
2020, and alleges that the named defendants made additional false
or misleading statements in connection with BolaWrap and the
BolaWrap Pilot Program. The complaint is docketed as Case No.
2-20-cv-09444-DMG-PVCx.
On
October 20, 2020, the Hon. Dolly M. Gee issued an order to show
cause why the above-described cases should not be consolidated
under the caption In re Wrap Technologies, Inc. Securities
Exchange Act Litigation, Case No. 20-8760-DMG (PVCx), with a single
consolidated class action complaint or designated operative
complaint. As such, the Company expects that these cases will
be consolidated, and that plaintiffs in these cases will file a
consolidated amended complaint following the selection of a lead
plaintiff pursuant to 15 U.S.C. § 78u-4(a)(3)(B). The Company
believes that these cases are without merit and intends to
vigorously defend against the claims raised therein.
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.
-26-
Item 1A. R
i
sk
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 pandemic. The extent to which the COVID-19 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 COVID-19
and the actions to contain COVID-19 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. Unregistered Sales of Equity Securities and Use of
Proceeds
No
unregistered securities were issued during the three months ended
September 30, 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 Thomas P. Smith, 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
Thomas
P. Smith
, 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
-27-
SIG
N
ATURES
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.
|
October
29, 2020
|
WRAP
TECHNOLOGIES, INC.
By:
/s/ JAMES A.
BARNES
James
A. Barnes
Chief
Financial Officer, Secretary and Treasurer
(Principal
Accounting Officer)
|
-28-
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