WRAP TECHNOLOGIES, INC.
UNITED
STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C.
20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION
13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF
1934
For the quarterly
period ended March 31, 2021
Commission File Number:
000-55838
Wrap
Technologies, Inc.
(Exact name of registrant as
specified in its charter)
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Delaware
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98-0551945
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(State or other jurisdiction
of
incorporation or
organization)
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(I.R.S. Employer
Identification Number)
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1817 W 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:
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Title of each class
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Trading Symbol(s)
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Name of each exchange on which
registered
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Common Stock, par value $0.0001 per
share
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WRAP
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Nasdaq Capital Market
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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
[ ]
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Accelerated
filer
[ ]
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Non-accelerated
filer
[X]
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Smaller reporting company
[X]
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Emerging growth company
[X]
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If an emerging growth company,
indicate by check mark if the registrant has elected not to use the
extended transition period for complying with any new or revised
financial accounting standards provided pursuant to Section 13(a)
of the Exchange Act. [ ]
Indicate by check mark whether the
registrant is a shell company (as defined in Rule 12b-2 of the
Act). Yes [ ] No [ X]
As of April 28, 2021 a total of
37,948,413 shares of the Registrant’s common stock, par value
$0.0001, (“
Common
Stock
”) were issued and
outstanding.
WRAP
TECHNOLOGIES, INC.
INDEX
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PART
I. FINANCIAL INFORMATION
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1
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2
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3
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4
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5
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19
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27
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28
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PART
II. OTHER INFORMATION
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28
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29
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30
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30
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30
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30
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31
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32
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-i-
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PART I. FINAN
C
IAL
INFORMATION
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Item 1. Financial Statements
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W
rap Technologies, Inc.
Condensed Balance Sheets
(in
thousands, except par value and share amounts)
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March
31,
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2021
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December
31,
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(Unaudited)
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2020
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ASSETS
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Current
assets:
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Cash and cash
equivalents
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$
2,000
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$
16,647
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Short-term
investments
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35,000
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24,994
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Accounts receivable,
net
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2,212
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1,871
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Inventories,
net
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3,580
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2,655
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Prepaid expenses and other
current assets
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769
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760
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Total
current assets
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43,561
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46,927
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Property
and equipment, net
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463
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357
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Operating
lease right-of-use asset, net
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114
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139
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Intangible
assets, net
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1,404
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1,397
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Other
assets
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8
|
13
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Total
assets
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$
45,550
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$
48,833
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LIABILITIES
AND STOCKHOLDERS' EQUITY
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Current
liabilities:
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Accounts
payable
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$
2,400
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$
1,232
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Accrued
liabilities
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593
|
721
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Customer
deposits
|
5
|
2
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Deferred
revenue
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172
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16
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Operating lease liability -
short term
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91
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94
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Business acquisition
liability - short term
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175
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275
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Total
current liabilities
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3,436
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2,340
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Long-term
liabilities:
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Operating Lease Liability -
long term
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32
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56
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Business acquisition
liability - long term
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23
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23
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Total
long-term liabilities
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55
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79
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Total
liabilities
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3,491
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2,419
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Commitments
and contingencies (Note 12)
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Stockholders'
equity:
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Preferred stock - 5,000,000
authorized; par value $0.0001 per share; none issued and
outstanding
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-
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-
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Common stock - 150,000,000
authorized; par value $0.0001 per share; 37,711,698 and 37,554,162
shares issued and outstanding each period,
respectively
|
4
|
4
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Additional paid-in
capital
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72,777
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71,705
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Accumulated
deficit
|
(30,739
)
|
(25,310
)
|
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Accumulated other
comprehensive income
|
17
|
15
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Total
stockholders' equity
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42,059
|
46,414
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Total
liabilities and stockholders' equity
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$
45,550
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$
48,833
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See
accompanying notes to condensed interim financial
statements.
-1-
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Condensed Consolidated
Statements of Operations and Comprehensive Loss
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|||||
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(in thousands, except share and per share
amounts)
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(unaudited)
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Three
Months Ended March 31,
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2021
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2020
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Revenues:
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Product
sales
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$
1,427
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$
675
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Other
revenue
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115
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15
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Total
revenues
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1,542
|
690
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Cost of
revenues
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937
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406
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Gross
profit
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605
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284
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Operating
expenses:
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Selling, general and
administrative
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4,978
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2,140
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Research and
development
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1,065
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534
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Total
operating expenses
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6,043
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2,674
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Loss
from operations
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(5,438
)
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(2,390
)
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Other income
(expense):
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Interest
income
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2
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44
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Other
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7
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-
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9
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44
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Net
loss
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$
(5,429
)
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$
(2,346
)
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Net loss
per basic and diluted common share
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$
(0.14
)
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$
(0.08
)
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Weighted
average common shares used to compute net loss per basic and
diluted common share
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37,618,629
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29,976,825
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Comprehensive
loss:
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Net
loss
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$
(5,429
)
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$
(2,346
)
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Net unrealized gain on
short-term investments
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2
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-
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Comprehensive loss
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$
(5,427
)
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$
(2,346
)
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See
accompanying notes to condensed interim financial
statements.
-2-
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Consolidated Statements
of Stockholders' Equity
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|||||||
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(in thousands, except share
amounts)
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(Unaudited)
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Accumulated
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Additional
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Other
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Total
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Common
Stock
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Paid-In
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Accumulated
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Comprehensive
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Stockholders'
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Shares
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Amount
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Capital
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Deficit
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Income
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Equity
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Balance
at December 31, 2020
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37,554,162
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$
4
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$
71,705
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$
(25,310
)
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$
15
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$
46,414
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Common shares issued upon
exercise of stock options
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75,000
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-
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113
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-
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-
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113
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Share-based compensation
expense
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-
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-
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859
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-
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-
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859
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Common shares
issued upon vesting of restricted stock units
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64,660
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-
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-
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-
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-
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-
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Net unrealized gain on
short-term investments
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-
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-
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-
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-
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2
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2
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Common shares issued for
services
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17,876
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-
|
100
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-
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-
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100
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Net loss for the
period
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-
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-
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-
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(5,429
)
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-
|
(5,429
)
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Balance
at March 31, 2021
|
37,711,698
|
$
4
|
$
72,777
|
$
(30,739
)
|
$
17
|
$
42,059
|
|
|
|
|
|
|
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Balance
at December 31, 2019
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29,829,916
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$
3
|
$
31,923
|
$
(12,730
)
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$
-
|
$
19,196
|
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Common shares issued upon
exercise of warrants at $3.00 per share, net of issuance
costs
|
11,783
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-
|
35
|
-
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-
|
35
|
|
Common shares issued upon
exercise of warrants at $5.00 per share, net of issuance
costs
|
119,400
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-
|
597
|
-
|
-
|
597
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Common shares issued upon
exercise of stock options
|
112,625
|
-
|
169
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-
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-
|
169
|
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Share-based compensation
expense
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-
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-
|
467
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-
|
-
|
467
|
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Net loss for the
period
|
-
|
-
|
-
|
(2,346
)
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-
|
(2,346
)
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Balance
at March 31, 2020
|
30,073,724
|
$
3
|
$
33,191
|
$
(15,076
)
|
$
-
|
$
18,118
|
See
accompanying notes to condensed interim financial
statements.
-3-
|
|
Three
Months Ended March 31,
|
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|
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2021
|
2020
|
|
Cash Flows From
Operating Activities:
|
|
|
|
Net
loss
|
$
(5,429
)
|
$
(2,346
)
|
|
Adjustments to reconcile net loss to
net cash
|
|
|
|
used in operating
activities:
|
|
|
|
Depreciation and
amortization
|
104
|
25
|
|
Gain on sale of
assets
|
(1
)
|
-
|
|
Warranty
provision
|
(2
)
|
14
|
|
Non-cash lease
expense
|
25
|
30
|
|
Share-based
compensation
|
859
|
467
|
|
Common shares
issued for services
|
100
|
-
|
|
Provision for
doubtful accounts
|
-
|
10
|
|
Changes in assets
and liabilities:
|
|
|
|
Accounts
receivable
|
(341
)
|
(198
)
|
|
Inventories
|
(924
)
|
(44
)
|
|
Prepaid
expenses and other current assets
|
(9
)
|
(94
)
|
|
Accounts
payable
|
1,168
|
43
|
|
Operating
lease liability
|
(26
)
|
(31
)
|
|
Customer
deposits
|
3
|
(149
)
|
|
Accrued
liabilities and other
|
(136
)
|
35
|
|
Warranty
settlement
|
9
|
-
|
|
Deferred
revenue
|
156
|
-
|
|
Net cash
used in operating activities
|
(4,444
)
|
(2,238
)
|
|
|
|
|
|
Cash Flows From
Investing Activities:
|
|
|
|
Purchase
of short-term investments
|
(25,003
)
|
-
|
|
Proceeds
from maturities of short-term investments
|
15,000
|
-
|
|
Capital
expenditures for property and equipment
|
(160
)
|
(20
)
|
|
Investment in patents and
trademarks
|
(56
)
|
(34
)
|
|
Proceeds
from long-term deposits
|
3
|
-
|
|
Net cash
used in investing activities
|
(10,216
)
|
(54
)
|
|
|
|
|
|
Cash Flows From
Financing Activities:
|
|
|
|
Proceeds
from exercise of warrants
|
-
|
632
|
|
Proceeds
from exercise of stock options
|
113
|
169
|
|
Repayment of debt
|
(100
)
|
-
|
|
Net cash
provided by financing activities
|
13
|
801
|
|
|
|
|
|
Net decrease in
cash and cash equivalents
|
(14,647
)
|
(1,491
)
|
|
Cash and cash
equivalents, beginning of period
|
16,647
|
16,984
|
|
Cash and cash
equivalents, end of period
|
$
2,000
|
$
15,493
|
|
|
|
|
See
accompanying notes to condensed interim financial
statements.
-4-
W
rap
Technologies, Inc.
Notes to
Unaudited Condensed Consolidated Interim Financial
Statements
(in thousands, except per share and
share amounts)
Organization and
Business Description
Wrap Technologies, Inc., a Delaware
corporation
(the
“
Company
”, “
we
”, “
us
”, and “
our
”)
, is a publicly traded company
with our Common Stock, par value
$0.0001 per share (“
Common
Stock
”),
listed on
the Nasdaq Capital Market (“
Nasdaq
”) under the trading symbol
“WRAP”. The Company is a developer and supplier of
public safety products and training services for law enforcement
and security personnel. The Company’s primary product is the
BolaWrap® remote restraint device. The principal markets for
the Company’s proprietary products and services are in North
and South America, Europe, Middle East and Asia.
Basis of
Presentation
The Company’s
unaudited interim condensed consolidated financial statements
included herein have been prepared in accordance with the
instructions to Form 10-Q and Article 8 of Regulation S-X and the
rules and regulations of the Securities and Exchange Commission
(“
SEC
”).
Certain information and footnote disclosures normally included in
financial statements prepared in accordance with U.S. generally
accepted accounting principles have been condensed or omitted
pursuant to such rules and regulations. In management’s
opinion, the accompanying financial statements reflect adjustments
necessary to present fairly the financial position, results of
operations, and cash flows for those 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 condensed
consolidated 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, 2020
included in the Company’s Annual Report on Form 10-K, as
filed with the SEC on March 4, 2021. The accompanying condensed
consolidated balance sheet at December 31, 2020 has been derived
from the audited consolidated balance sheet at December 31, 2020
contained in the above referenced Form 10-K. Results of operations
for interim periods are not necessarily indicative of the results
of operations for a full year.
Where
necessary, the prior year’s information has been reclassified
to conform to the current year presentation.
Principles of
Consolidation
The Company has one wholly-owned
subsidiary, Wrap Reality, Inc., formed in December 2020, and has
commenced selling its virtual reality training system primarily
targeting law enforcement and security agencies. The condensed
consolidated financial statements include the accounts of this
subsidiary after elimination of intercompany transactions and
accounts.
Use of
Estimates
The preparation of financial
statements in conformity with U.S. 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.
-5-
Wrap Technologies, Inc.
Notes to
Unaudited Condensed Consolidated Interim Financial
Statements
(in thousands, except per share and
share amounts)
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 8,031,842
shares of Common Stock were outstanding at March 31, 2021. 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.
Recent
Issued Accounting Guidance
Adopted the
First Quarter of 2021:
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 clarifies and
amends existing guidance to improve consistent application. We
adopted ASU 2019-12 in the first quarter ended March 31,
2021 and it did not have a significant impact on our financial
statements.
Other
Pronouncements:
In August 2020, the FASB issued Accounting
Standards Update (“ASU”)
2020-06,
Debt—Debt with
Conversion and Other Options (“Subtopic 470-20”) and
Derivatives and Hedging—Contracts in Entity’s Own
Equity “(Subtopic 815-40”): Accounting for Convertible
Instruments and Contracts in an Entity’s Own
Equity
, which simplifies
accounting for convertible instruments by removing major separation
models required under current U.S. GAAP. The ASU removes certain
settlement conditions that are required for equity contracts to
qualify for the derivative scope exception, and it also simplifies
the diluted earnings per share calculation in certain areas. This
guidance is effective for fiscal years, and interim periods within
those fiscal years, beginning after December 15, 2021, with early
adoption permitted. The Company is currently evaluating the impact
of this standard on its financial statements and related
disclosures.
The Company has reviewed other
recently issued, but not yet effective, accounting pronouncements
and does not believe the future adoptions of any such
pronouncements will be expected to cause a material impact on its
financial condition or the results of operations.
|
2.
|
REVENUE AND
PRODUCT COSTS
|
On January 1, 2018, the Company
adopted FASB ASC Topic 606, Revenue from contracts with customers
(“Topic 606”)
and, as it had no prior revenue or contracts with customers, there
was no transition required nor any impact on prior results. Topic
606 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.
The Company enters into contracts
that include various combinations of products, accessories,
software and services, each of which are generally distinct and are
accounted for as separate performance obligations.
A
performance obligation is a promise in a contract to transfer a
distinct good or service to a customer, and is the unit of account
in Topic 606.
For contracts with a
single performance obligation, the entire transaction price is
allocated to the single performance obligation.
For
contracts with multiple performance obligations, the Company
allocates the contract transaction price to each performance
obligation using the Company’s estimate of the standalone
selling price (“
SSP
”) of each distinct good or
service in a contract.
The Company
determines standalone selling prices based on the relative
standalone selling price. If the standalone selling price is not
observable through past transactions, the Company estimates the
standalone selling price considering available information such as
market conditions and internally approved pricing guidelines
related to the performance obligations.
A performance obligation is a promise in a
contract to transfer a distinct good or service to a customer, and
is the unit of account in Topic 606.
For contracts with a single performance
obligation, the entire transaction price is allocated to the single
performance obligation.
For contracts with multiple
performance obligations, the Company allocates the contract
transaction price to each performance obligation using the
Company’s estimate of the standalone selling price
(“
SSP
”) of each
distinct good or service in a contract.
The Company determines standalone selling prices
based on the relative stand alone selling price. If the standalone
selling price is not observable through past transactions, the
Company estimates the standalone selling price considering
available information such as market conditions and internally
approved pricing guidelines related to the performance
obligations.
-6-
Wrap Technologies, Inc.
Notes to
Unaudited Condensed Consolidated Interim Financial
Statements
(in thousands, except per share and
share amounts)
Most of the
Company’s products and accessories are sold through domestic
and international distributors. Performance obligations to deliver
products and accessories are generally satisfied at the point in
time the Company ships the product, as this is when the customer
obtains control of the asset under our standard terms and
conditions. Periodically, certain customers request bill and
hold transactions for future delivery as scheduled and designated
by them. In such cases, revenue is not recognized until after
control, title and risk of ownership has transferred which is
generally when the customer has requested such transaction under
normal billing and payment terms and has been notified that the
product (i) has been completed according to customer
specifications, (ii) has passed quality control inspections, and
(iii) has been tagged and packed for shipment, separated from other
inventory and ready for physical transfer to the customer. The
value associated with custodial storage services is deemed
immaterial in the context of such contracts and in total, and
accordingly, none of the transaction price is allocated to such
service.
The Company has
elected to recognize shipping costs as an expense in cost of
revenue when control has transferred to the customer.
Time-based virtual reality system contracts
generally include setup, training and the use of software and
hardware for a fixed term, generally one to five years and support
and upgrade services during the same period. The Company does not
sell time-based arrangements without setup, training and support
services and therefore revenues for the entire arrangement are
recognized on a straight-line basis over the term. When hardware is
bundled and not sold separately the
Company allocates the
contract transaction price to each performance obligation using the
SSP of each distinct good and service in the contract.
The
timing of revenue recognition may differ from the timing of
invoicing to customers. The Company generally has an unconditional
right to consideration when customers are invoiced, and a
receivable is recorded. A contract asset is recognized when revenue
is recognized prior to invoicing, or a contract liability (deferred
revenue) when revenue will be recognized subsequent to invoicing.
At March 31, 2021 the Company’s deferred revenue totaled
$172, of which $137 related to virtual reality training and $35
related to extended product warranties. At December 31, 2020 the
Company’s deferred revenue totaled $16, of which $14 related
to virtual reality training and $2 related to extended product
warranties.
The Company may
also receive consideration, per terms of a contract, from customers
prior to transferring goods to the customer. The Company records
customer deposits as a contract liability.
The Company recognizes an asset if
there are incremental costs of obtaining a contract with a customer
such as commissions. These costs are ascribed to or allocated to
the underlying performance obligations in the contract and
amortized consistent with the recognition timing of the revenue for
any such underlying performance obligations. The Company had no
such assets at March 31, 2021 and December 31, 2020. The Company
applies 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.
|
FAIR VALUE
MEASUREMENTS
|
Assets and
liabilities recorded at fair value on a recurring basis in the
Condensed Consolidated Balance Sheets and assets and liabilities
measured at fair value on a non-recurring basis or disclosed at
fair value, are categorized based upon the level of judgment
associated with inputs used to measure their fair values. The
accounting guidance for fair value provides a framework for
measuring fair value and requires certain disclosures about how
fair value is determined. Fair value is defined as the price that
would be received upon the sale of an asset or paid to transfer a
liability (an exit price) in an orderly transaction between market
participants at the measurement date. The accounting guidance also
establishes a three-level valuation hierarchy that prioritizes the
inputs to valuation techniques used to measure fair value based
upon whether such inputs are observable or unobservable. Observable
inputs reflect market data obtained from independent sources, while
unobservable inputs reflect market assumptions made by the
reporting entity. The three-level hierarchy for the inputs to
valuation techniques is briefly summarized as
follows:
Level 1
—Inputs are unadjusted, quoted prices in
active markets for identical assets or liabilities at the
measurement date;
-7-
Wrap Technologies, Inc.
Notes to
Unaudited Condensed Consolidated Interim Financial
Statements
(in thousands, except per share and
share amounts)
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.
Instruments Measured at Fair Value on a Recurring
Basis
The
Company’s cash equivalent Money Market Funds and short-term
investments consisting of U.S. Treasury bill securities are
classified as Level 1 because they are valued using quoted
market prices.
The following
table shows the Company’s cash and cash equivalents, Money
Market Funds and short-term investments by significant investment
category as of March 31, 2021 and December 31,
2020.
|
|
As of
March 31, 2021
|
|||
|
|
Adjusted
|
Unrealized
|
Unrealized
|
Market
|
|
|
Cost
|
Gains
|
Losses
|
Value
|
|
Level
1:
|
|
|
|
|
|
Money
Market Funds
|
$
1,035
|
$
-
|
$
-
|
$
1,035
|
|
U.S.
Treasury securities considered cash equivalents
|
-
|
-
|
-
|
-
|
|
U.S.
Treasury securities in short-term investments
|
34,983
|
17
|
-
|
35,000
|
|
Total
Financial Assets
|
$
36,018
|
$
17
|
$
-
|
$
36,035
|
|
|
As of
December 31, 2020
|
|||
|
|
Adjusted
|
Unrealized
|
Unrealized
|
Market
|
|
|
Cost
|
Gains
|
Losses
|
Value
|
|
Level
1:
|
|
|
|
|
|
Money
Market Funds
|
$
6,035
|
$
-
|
$
-
|
$
6,035
|
|
U.S.
Treasury securities considered cash equivalents
|
9,998
|
-
|
-
|
9,998
|
|
U.S.
Treasury securities in short-term investments
|
24,979
|
15
|
-
|
24,994
|
|
Total
Financial Assets
|
$
41,012
|
$
15
|
$
-
|
$
41,027
|
Unrealized gains or
losses resulting from our short-term investments are recorded in
accumulated other comprehensive gain or loss. As of March 31,
2021,
$17 was recorded to
accumulated other comprehensive gain.
Our financial instruments also
include accounts receivable, accounts payable, accrued liabilities
and business acquisition liabilities. Due to the short-term nature
of these instruments, their fair values approximate their carrying
values on the balance sheet.
-8-
Wrap Technologies, Inc.
Notes to
Unaudited Condensed Consolidated Interim Financial
Statements
(in thousands, except per share and
share amounts)
|
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:
|
|
March
31,
|
December
31,
|
|
|
2021
|
2020
|
|
Finished
goods
|
$
1,688
|
$
1,249
|
|
Work in
process
|
26
|
64
|
|
Raw
materials
|
1,866
|
1,342
|
|
Inventories, net
|
$
3,580
|
$
2,655
|
|
5.
|
PROPERTY AND
EQUIPMENT, NET
|
Property and equipment consisted of
the following:
|
|
March
31,
|
December
31,
|
|
|
2021
|
2020
|
|
Production and lab
equipment
|
$
148
|
$
148
|
|
Tooling
|
173
|
81
|
|
Computer
equipment
|
249
|
180
|
|
Furniture, fixtures and
improvements
|
160
|
165
|
|
|
730
|
574
|
|
Accumulated
depreciation
|
(267
)
|
(217
)
|
|
Property
and equipment, net
|
$
463
|
$
357
|
|
|
|
|
Depreciation expense was
$56 and $22
for the three
months ended March 31, 2021 and 2020, respectively.
-9-
Wrap Technologies, Inc.
Notes to
Unaudited Condensed Consolidated Interim Financial
Statements
(in thousands, except per share and
share amounts)
|
6.
|
INTANGIBLE
ASSETS, NET
|
Intangible assets consisted of the
following:
|
|
March
31,
|
December
31,
|
|
|
2021
|
2020
|
|
Amortizable intangible
assets:
|
|
|
|
Patents
|
$
304
|
$
280
|
|
Trademarks
|
115
|
84
|
|
Purchased software
|
662
|
662
|
|
Other
|
50
|
50
|
|
|
1,131
|
1,076
|
|
Accumulated
amortization
|
(71
)
|
(23
)
|
|
Total
amortizable
|
1,060
|
1,053
|
|
Indefinite life assets
(non-amortizable)
|
344
|
344
|
|
Total
intangible assets, net
|
$
1,404
|
$
1,397
|
Amortization expense was
$48 and $3
for the three months
ended March 31, 2021 and 2020, respectively.
At March 31, 2021, future
amortization expense is as follows:
|
2021 (9
months)
|
$
139
|
|
2022
|
152
|
|
2023
|
147
|
|
2024
|
147
|
|
2025
|
147
|
|
Thereafter
|
328
|
|
Total
estimated amortization expense
|
$
1,060
|
-10-
Wrap Technologies, Inc.
Notes to
Unaudited Condensed Consolidated Interim Financial
Statements
(in thousands, except per share and
share amounts)
|
7.
|
ACCOUNTS PAYABLE
AND ACCRUED LIABILITIES
|
Accounts payable includes $104 and
$53 due to related party Syzygy Licensing, LLC (“
Syzygy
”) as of March 31, 2021 and
December 31, 2020, respectively. Accounts payable at December 31,
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:
|
|
March
31,
|
December
31,
|
|
|
2021
|
2020
|
|
Patent
and legal costs
|
$
70
|
$
65
|
|
Accrued
compensation
|
443
|
563
|
|
Warranty
costs
|
58
|
48
|
|
Consulting costs
|
-
|
2
|
|
Taxes
and other
|
22
|
43
|
|
Accrued
liabilities
|
$
593
|
$
721
|
|
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
$25 and
$30
for the three months ended March 31, 2021 and 2020,
respectively.
Operating lease expense for
capitalized operating leases included in operating activities was
$28 and $31
for the three
months ended March 31, 2021 and 2020, respectively. Operating lease
obligations recorded on the balance sheet at March 31, 2021
are:
|
Operating lease
liability- short term
|
$
91
|
|
Operating lease
liability - long term
|
32
|
|
Total Operating Lease
Liability
|
$
123
|
-11-
Wrap Technologies, Inc.
Notes to
Unaudited Condensed Consolidated Interim Financial
Statements
(in thousands, except per share and
share amounts)
Future lease payments included in
the measurement of lease liabilities on the balance sheet at March
31, 2021 for future periods are as follows:
|
2021 (9
months)
|
72
|
|
2022
|
57
|
|
Total future minimum
lease payments
|
129
|
|
Less imputed
interest
|
(6
)
|
|
Total
|
$
123
|
The weighted average remaining lease
term is 1.33 years, and the weighted average discount rate is
7.0%.
The Company does not have any
finance leases.
|
9.
|
OTHER
LIABILITIES
|
The
Company’s other liabilities at March 31, 2021 and December
31, 2020 included operating lease liabilities (see Note 8) and
business acquisition liabilities totaling $198 of which $175
related to short term business liabilities and $23 related to
contingent consideration recorded as a long-term business
acquisition liability on our balance sheet.
|
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
”).
-12-
Wrap Technologies, Inc.
Notes to
Unaudited Condensed Consolidated Interim Financial
Statements
(in thousands, except per share and
share amounts)
Summary
of Stock Purchase Warrants
The following table summarizes
warrant activity during the three months ended March 31,
2021:
|
|
Number
|
Average
Purchase
Price
Per Share
|
|
Shares
purchasable under outstanding warrants at December 31,
2020
|
3,206,910
|
$
6.36
|
|
Stock
purchase warrants issued
|
-
|
-
|
|
Stock
purchase warrants exercised
|
-
|
-
|
|
Shares
purchasable under outstanding warrants at March 31,
2021
|
3,206,910
|
$
6.36
|
The Company has outstanding Common
Stock purchase warrants as of March 31, 2021 as
follows:
|
|
Number
of
|
Exercise
Price
|
|
|
Description
|
Common
Shares
|
Per
Share
|
Expiration
Date
|
|
Purchase
Warrants
|
1,661,397
|
$
6.50
|
June 18,
2021
|
|
Agent
Warrants
|
153,846
|
$
8.125
|
June 18,
2021
|
|
Purchase
Warrants
|
1,391,667
|
$
6.00
|
June 1,
2022
|
|
|
3,206,910
|
|
|
Subsequent Stock
Issuance
In April 2021 the Company issued
25,000 shares valued at $139 for payment of legal services included
in accounts payable at March 31, 2021.
|
11.
|
SHARE-BASED
COMPENSATION
|
On March 31, 2017, the Company
adopted, and the stockholders approved, the 2017 Stock Incentive
Plan (the “
Plan
”) authorizing 2,000,000
shares of Company Common Stock for issuance as stock options and
restricted stock units 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.
At March 31, 2021 there were 545,055 shares of Common Stock
available for grant under the Plan.
-13-
Wrap Technologies, Inc.
Notes to
Unaudited Condensed Consolidated Interim Financial
Statements
(in thousands, except per share and
share amounts)
In
April 2021, the Board of the Company approved, subject to
stockholder ratification, an increase in the Plan authorizing an
additional 1,500,000 shares of Common Stock to a total of 7,500,000
shares.
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 three months ended March 31,
2021:
|
|
|
Weighted
Average
|
|
|
|
|
Options
on
|
|
Remaining
|
Aggregate
|
|
|
Common
|
Exercise
|
Contractual
|
Intrinsic
|
|
|
Shares
|
Price
|
Term
|
Value
|
|
Outstanding December 31,
2020
|
3,931,586
|
$
4.41
|
4.80
|
|
|
Granted
|
577,500
|
$
5.28
|
|
|
|
Exercised
|
(75,000
)
|
$
1.50
|
|
|
|
Forfeited, cancelled,
expired
|
(10,000
)
|
$
5.42
|
|
|
|
Outstanding March 31,
2021
|
4,424,086
|
$
4.57
|
5.39
|
$
5,533,110
|
|
Exercisable March 31,
2021
|
2,116,917
|
$
2.86
|
2.49
|
$
5,181,463
|
Options
outstanding at December 31, 2020 and March 31, 2021 include 100,000
of performance-based options
exercisable at $5.46 per share
with vesting based on achieving certain virtual reality revenue
targets by December 1, 2024. The
Company has not recorded share-based compensation expense related
to these options. All other o
ptions are
service-based.
The Company uses the Black-Scholes
option pricing model to determine the fair value of the options
granted. The following table summarizes the assumptions used to
compute the fair value of options granted to employees and
non-employees:
|
|
For the
Three Months
|
|
|
|
Ended
March 31,
|
|
|
|
2021
|
2020
|
|
Expected
stock price volatility
|
50
%
|
n/a
|
|
Risk-free interest rate
|
0.89
%
|
n/a
|
|
Forfeiture rate
|
0
%
|
n/a
|
|
Expected
dividend yield
|
0
%
|
n/a
|
|
Expected
life of options - years
|
5.70
|
n/a
|
|
Weighted-average fair value of
options granted
|
$
2.42
|
n/a
|
-14-
Wrap Technologies, Inc.
Notes to
Unaudited Condensed Consolidated Interim Financial
Statements
(in thousands, except per share and
share amounts)
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”
). The following table
summarizes RSU activity under the Plan for the three months ended
March 31, 2021:
|
|
|
Weighted
Average
|
Weighted
Average
|
|
|
Service-Based
|
Grant
Date
|
Vesting
|
|
|
RSU's
|
Fair
Value
|
Period
|
|
Unvested
at December 31, 2020
|
428,006
|
$
6.13
|
|
|
Granted - service
based
|
37,500
|
$
5.38
|
|
|
Vested
|
(64,660
)
|
$
4.72
|
|
|
Forfeited and
cancelled
|
-
|
|
|
|
Unvested
at March 31, 2021
|
400,846
|
$
6.29
|
2.18
Years
|
Subsequent Stock
Awards
In April 2021
the Board of Directors granted a stock award pursuant to the Plan
of 31,250 shares to each of its five directors with a grant date
value of $5.56 per share for prior services. Stock expense of $869
will be recognized as of the grant date.
In April 2021
the Board of Directors granted each of its four non-executive
directors an RSU grant of 10,882 shares vesting during the balance
of 2021 with a grant date value of $5.56 per share. The $242 total
stock compensation expense will be recognized over the 2021 vesting
period.
Also, in April
2021 the Board of Directors granted Scot Cohen, the Company’s
Executive Chairman, a ten-year stock option exercisable for 100,000
shares of Common Stock at an exercise price of $5.56 per share
vesting during the balance of 2021. The $254 stock compensation
expense will be recognized over the 2021 vesting
period.
Upon the
appointment of four additional new directors in April 2021 the
Board of Directors granted each new director a stock option
exercisable for 30,000 shares of Common Stock at an exercise price
of $5.04 per share vesting over two years. The $292 total stock
compensation expense will be recognized over the two-year vesting
period. Each new director was also granted an RSU grant of 8,403
shares vesting during the balance of 2021 with a grant date value
of $5.04 per share. The $169 total stock compensation expense will
be recognized over the 2021vesting period.
-15-
Wrap Technologies, Inc.
Notes to
Unaudited Condensed Consolidated Interim Financial
Statements
(in thousands, except per share and
share amounts)
Share-Based
Compensation Expense
The Company
recorded share-based compensation for options and RSUs in its
statements of operations for the relevant periods as
follows:
|
|
Three
Months Ended March 31,
|
|
|
|
2021
|
2020
|
|
Selling,
general and administrative
|
$
602
|
$
429
|
|
Research
and development
|
257
|
38
|
|
Total
share-based expense
|
$
859
|
$
467
|
As of March 31, 2021, total
estimated compensation cost of stock options granted and
outstanding but not yet vested was $5,419 which is expected to be
recognized over the weighted average period of 2.7 years. As of
March 31, 2021, total estimated compensation cost of RSUs granted
and outstanding but not yet vested was $2,027 which is expected to
be recognized over the weighted average period of 2.2
years.
|
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 stockholders/officers Messrs. Elwood Norris
and 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
$51 and $25
for royalties under
the Syzygy Agreement incurred during the three months ended March
31, 2021 and 2020, respectively.
Purchase
Commitments
At March 31, 2021 the Company was
committed for approximately $1,380 for future component deliveries
and contract services that are generally subject to modification or
rescheduling in the normal course of business.
Securities
Litigation
On
September 23, 2020, Carone Cobden filed a putative class action
complaint against the Company, former Chief Executive Officer David
Norris (“
Norris
”), Chief Financial Officer, James A. Barnes
(“
Barnes
”), and President, Thomas Smith
(“
Smith
”) in the United States District Court for
the Central District of California, docketed as Case No.
2-20-cv-08760-DMG-PVCx (the “
Cobden
Complaint
”). The
Cobden Complaint alleges that the named defendants, in their
capacities as officers of the Company, knowingly made false or
misleading statements or omissions regarding trials of the
Company’s BolaWrap product conducted by the Los Angeles
Police Department (the “
BolaWrap Pilot
Program
”). The
Cobden Complaint also alleges that the conduct of the named
defendants artificially inflated the price of the Company’s
traded securities, and that the disclosure of certain adverse
information to the public led to a decline in the market value of
the Company’s securities. The Cobden Complaint
further alleges violations of Sections 10(b) and 20(a) of the
Exchange Act, and Rule 10b-5 promulgated thereunder, and defines
the class period as July 31, 2020 through September 23,
2020.
-16-
Wrap Technologies, Inc.
Notes to
Unaudited Condensed Consolidated Interim Financial
Statements
(in thousands, except per share and
share amounts)
On
October 1, 2020, Joseph Mercurio filed a second putative class
action complaint against the Company, Norris, Smith, and Barnes in
the same court, which contains substantially the same factual
allegations and legal claims as set forth in the Cobden Complaint,
and is docketed as Case No. 2-20-cv-09030-DMG-PVCx (the
“
Mercurio
Complaint
”). On October 15, 2020, Paula
Earley filed a third putative class action complaint against the
Company, Smith, Norris, Barnes, Chief Strategy Officer Mike Rothans
(“Rothans”), and former Chief Executive Officer, Marc
Thomas (“
Thomas
”) in the same court, which contains many of
the same factual allegations and legal claims as set forth in the
Cobden and Mercurio Complaints, but defines the class period as
April 29, 2020 through September 23, 2020, and alleges additional
false or misleading statements in connection with BolaWrap and the
BolaWrap Pilot Program (the “
Earley
Complaint
”). The
Earley Complaint is docketed as Case No.
2-20-cv-09444-DMG-PVCx.
On
November 3, 2020, the Hon. Dolly M. Gee consolidated
the three above-mentioned cases under the
caption
In re Wrap Technologies, Inc.
Securities Exchange Act Litigation
, Case No. 20-8760-DMG (PVCx) (the
“
Securities
Action
”). On
January 7, 2021, the Court appointed a lead plaintiff in the
Securities Action, who designated its attorneys as lead
counsel. On January 21, 2021, Judge Gee ordered that a
consolidated amended complaint be filed in the Securities Action on
or before March 12, 2021, with defendants’ motion to dismiss
to be filed on or before April 26, 2021, and a hearing on the
motion to dismiss to be held on July 23, 2021. On March 12,
2021, lead plaintiff filed an amended complaint, naming the
Company, Norris, Thomas, Smith, and Barnes as defendants. Those
defendants jointly filed a motion to dismiss on April 26, 2021. The
Company believes that the Securities Action is without merit and
intends to vigorously defend against the claims raised
therein.
Shareholder
Derivative Litigation
On
November 13, 2020, Naresh Rammohan filed a shareholder derivative
action in the United States District Court for the Central District
of California against Smith, Barnes, Rothans, Thomas, Norris, and
Messrs. Scot Cohen, Patrick Kinsella, Michael Parris, and Wayne
Walker, alleging unjust enrichment, breach of fiduciary duty, waste
of corporate assets, and contribution claims under the Securities
Exchange Act of 1934, docketed as Case No. 2:20-cv-10444-DMG-PVCx
(the “
Rammohan
Complaint
”). The
Rammohan Complaint names the Company as a nominal defendant and
recites many of the allegations set forth in the Securities Action
relating to the BolaWrap Pilot Program. On January 20, 2021,
Ray Westerman filed a second derivative complaint in the same court
against the same parties, alleging breach of fiduciary duty and
contribution claims under the Securities Exchange Act of 1934,
docketed as Case No. 2:21-cv-00550-DMG-PVCx (the
“
Westerman
Complaint
”). On
January 22, 2021, Jesse Lowe filed a third derivative complaint in
the same court against the same parties, alleging breach of
fiduciary duty and asserting various claims under the Securities
Exchange Act of 1934, docketed as Case No. 2:21-cv-00597-DMG-PVCx
(the “
Lowe
Complaint
”).
The
above-mentioned derivative cases were each been transferred to
Judge Gee as cases related to the Securities Action. On
February 16, 2021, Judge Gee issued an order consolidating these
cases under the caption
In re Wrap Technologies, Inc.
Shareholder Derivative Litigation
, Case No. 2:20-10444-DMG-PVCx, (the
“
Derivative
Action
”), and stayed the
Derivative Action pending the resolution of the motion to dismiss
in the Securities Action. On March 9, 2021, the Lowe
Complaint was designated as the operative complaint in the
Derivative Action. As with the Securities Action, the Company
believes that the Derivative Action is without merit and intends to
vigorously defend against the claims raised
therein.
Other
Legal Information
The Company may
at times be involved in other litigation in the ordinary course of
business. The Company will, from time to time, when appropriate in
management’s estimation, record adequate reserves in the
Company’s consolidated financial statements for pending
litigation. Currently, other than described above there are no
other pending material legal proceedings to which the Company is a
party or to which any of its property is subject. At March 31, 2021
the Company had no provision for liability under existing
litigation.
|
13.
|
RELATED PARTY
TRANSACTIONS
|
Commencing in October 2017 the
Company began reimbursing Mr. Elwood Norris, an officer and
stockholder of the Company, $1.5 per month on a month-to-month
basis for laboratory facility costs, for an aggregate of $4.5
during the three months ended March 31, 2021 and 2020,
respectively.
See Notes 7, 11 and 12 for
additional information on related party transactions and
obligations.
-17-
Wrap Technologies, Inc.
Notes to
Unaudited Condensed Consolidated Interim Financial
Statements
(in thousands, except per share and
share amounts)
|
14.
|
MAJOR CUSTOMERS
AND RELATED INFORMATION
|
For the three months ended March 31,
2021, revenues from three distributors accounted for approximately
28%, 22% and 10% of revenues with no other single customer
accounting for more than 10% of total revenues. At March 31, 2021,
accounts receivable from three distributors accounted for 37%, 17%
and 16% of accounts receivable with no other single customer
accounting for more than 10% of the accounts receivable
balance.
For the three months ended March 31,
2020, revenues from two distributors accounted for approximately
43% and 37% of revenues with no other single customer accounting
for more than 10% of total revenues. These distributors accounted
for 18% and 33% of accounts receivable at March 31,
2020.
The following table summarizes
revenues by geographic region. Revenues are attributed to countries
based on customer’s delivery location.
|
|
For the
Three Months
|
|
|
|
Ended
March 31,
|
|
|
|
2021
|
2020
|
|
Americas
|
$
626
|
$
109
|
|
Europe,
Middle East and Africa
|
877
|
309
|
|
Asia
Pacific
|
39
|
272
|
|
|
$
1,542
|
$
690
|
|
15.
|
SUBSEQUENT
EVENTS
|
See Notes 10
and 11 for subsequent stock and stock plan information. 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.
-18-
I
tem 2. Management'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, 2020. 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 Quarterly Report. Except as required by law, we
undertake no obligation to update any forward-looking statements to
reflect events or circumstances after the date of such
statements.
We are
a global public safety technology and services company
organized in March 2016 delivering modern policing solutions to law
enforcement and security personnel.
We
began product sales of our first public safety product, the
BolaWrap 100 remote restraint device, in late
2018.
The immediate addressable domestic
market for our solutions consists of approximately 900,000
full-time sworn law enforcement officers
at over 15,300 federal, state and local
law
enforcement agencies.
We are also
exploring other domestic markets, including military and private
security. Our international focus is on countries with the largest
police forces. The 100 largest international police agencies are
estimated to have over 12.1 million law enforcement personnel.
According to
Statistics MRC, a market research consulting
firm, we participate in a segment of the non-lethal products global
market expected to grow to $11.85 billion by 2023.
We focus our efforts on the
following products, services and solutions:
BolaWrap Remote Restraint Device
–
is a hand-held remote
restraint device that discharges an eight-foot bola style Kevlar
tether to entangle an individual at a range of 10-25 feet. BolaWrap
100 assists law enforcement to safely and effectively control
encounters early in the use of force continuum without resorting to
painful force options.
Wrap Reality
– is a law
enforcement training system employing immersive computer graphics
virtual reality with proprietary software-enabled content. It
allows up to two participants to enter
a simulated training environment simultaneously, and customized
weapons controllers enable trainees to engage in strategic decision
making along the force continuum.
In addition to the United States
domestic law enforcement market, we have shipped our restraint
products to 41 countries. We have established an active distributor
network with
14 domestic distributors
representing all 50 states and Puerto Rico. We have distribution
agreements with 38 international distributors. We focus significant
sales, training and business development efforts to support our
distribution network.
We focus significant resources on
research and development innovations and continue to enhance our
products and plan to introduce new products. We believe we have
established a strong branding and market presence globally and have
established significant competitive advantages in our
markets.
Business Outlook and Challenges
Our products and solutions continue
to gain worldwide awareness and recognition through social media,
media exposure, trade shows, product demonstrations and word of
mouth as a result of positive responses from agencies and early
adoption and deployment success. We believe the Wrap is gaining
traction as a recognized global brand, with innovative technology
and an initial product foundation achieved through aggressive
marketing and public relations. We believe that we have strong
market opportunities for our remote restraint solution throughout
the world in the law enforcement and security sectors as a result
of increasing demands for less lethal policing and increasing
threats posed by non-compliant subjects.
During the first quarter of 2021 the
Company received an increased number of field reports of successful
BolaWrap usage from law enforcement agencies. Many agencies
consider BolaWrap as a very low level, or non-reportable, use of
force option and, accordingly, many uses are not reported to us.
Others are considered evidence and are also not shared. But some
law enforcement agencies have shared bodycam footage of their field
uses, some of which we are allowed to use in our marketing
activities. We believe increased reports of avoiding escalation
will help grow revenues in the future.
-19-
We grew
our business in the first quarter of 2021 with revenues increasing
123% from the first quarter of 2020, and we continue to expand our
business, both domestically and internationally, through direct and
distributor sales. We have a robust and
growing pipeline of
market opportunities for our restraint product offering and
training services within the law enforcement, military and homeland
security business sectors domestically and internationally. Social
trends demanding more compassionate and safe policing practices are
expected to continue to drive our global business.
We are pursuing large business prospects
internationally and also pursuing business with large police
agencies in the U.S. It is difficult to anticipate how long
it will take to close these opportunities, or if they will
ultimately come to fruition especially given the uncertainty of
COVID-19 and social unrest, as discussed below.
To
support our increased sales and distribution activities we have
developed and offer robust training and class materials that
certify law enforcement officers and trainers as BolaWrap
instructors in the use and limitations of the BolaWrap in
conjunction with modern policing tactics for de-escalation of
encounters.
We believe that law enforcement trainers and
officers that have seen demonstrations or have been trained about
our products are more supportive of their department’s
purchase and deployment of product.
Over 620 agencies at March 31, 2021 had received
BolaWrap training with over 1,960 training officers at those
agencies certified as BolaWrap instructors qualified to train the
rest of their departments. This represents a 41% increase in
agencies and a 44% increase in training officers versus December
31, 2020.
With
the December 2020 acquisition and rebranding of Wrap Reality, we
have continued to market our virtual reality system while
working to integrate previous scenarios into a robust platform
employing BolaWrap and additional de-escalation techniques into new
Wrap Reality scenarios. We also seek to enhance the Wrap Reality
experience through software and platform innovation. In late March
2021 we signed a five-year pre-paid subscription sale, with a
renewal option after five years, to our Wrap Reality training
simulator to a police agency.
At
March 31, 2021
we had backlog
of approximately $232 expected to be delivered in the next twelve
months. We had deferred revenue of $172 expected to be recognized
generally over the next five years. Distributor and customer orders
for future deliveries are generally subject to modification,
rescheduling or in some instances, cancellation in the normal
course of business.
Since inception in March 2016, we have generated significant losses
from operations and anticipate that we will continue to generate
significant losses from operations for the foreseeable
future.
We believe that we have adequate financial resources
to sustain our operations for the next year
.
We expect that
we will need to continue to innovate new applications for our
public safety technology, develop new products and technologies to
meet diverse customer requirements and identify and develop new
markets for our products.
Impact of
COVID-19 and Social Unrest on our Business
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. The
COVID-19 pandemic
has resulted in a substantial curtailment of business activities
worldwide and is causing weakened economic conditions, both in the
United States and many countries abroad. As part of intensifying
efforts to contain the spread of COVID-19, many companies and
state, local and foreign governments have imposed restrictions,
including shelter-in-place orders and travel bans. While some of
these companies and jurisdictions have started to relax such
restrictions, in some cases, the restrictions were put back in
place after having been lifted. These factors have negatively
impacted our operations and results of operations for 2020 and the
first quarter of 2021. We expect that the evolving COVID-19
pandemic, associated travel restrictions and social distancing
requirements, especially international, will continue to have an
adverse impact on our results of operations. While the ultimate
economic impact of the COVID-19 pandemic is highly uncertain, we
expect that our business and results of operations, including our
revenues, earnings and cash flows from operations, will be
adversely impacted for at least the next two quarters of 2021,
including as a result of:
●
Delays in our ability to
travel and train, especially internationally;
●
Greater funding challenges
for our customer base, which may adversely affect timing of
anticipated contracts and new customer sales;
●
Possible disruption to our
supply chain caused by distribution and other logistical issues,
which may further delay our ability to deliver product to
customers; and
●
Potential decrease in
productivity of our employees or those of our customers or
suppliers due to travel bans or restrictions, work-from-home or
shelter-in-place policies and orders.
-20-
We may be adversely affected by
increasing social unrest, protests against racial inequality,
protests against police brutality and movements such as
“Defund the Police”. These events may directly or
indirectly affect police agency budgets and funding available to
current and potential customers. Participants in these events may
also attempt to create the perception that our solutions are
contributing to the perceived problems or ineffective as a
solution, which may adversely affect us, our business and results
of operations, including our revenues, earnings and cash flows from
operations.
It is currently not possible to
predict the magnitude or duration of the COVID-19 pandemic’s
impact on our business or the future impact of the recent, ongoing
and possible future unrest. The extent to which these events impact
our business will depend on numerous evolving factors that we may
not be able to control or accurately predict, including without
limitation:
●
the duration and scope of
the challenges created by the COVID-19 pandemic or by ongoing
social unrest;
●
governmental, business and
individuals’ actions that have been and continue to be taken
in response to these events;
●
the impact of the COVID-19
pandemic and social unrest on economic activity and actions taken
in response;
●
the effect on our customers
and demand for our products and services;
●
our ability to continue to
sell our products and services, including as a result of travel
restrictions and people working from home, or restrictions on
access to our potential customers;
●
the ability of our
customers to pay for our products and services;
●
any closures of our
facilities and the facilities of our customers and suppliers;
and
●
the degree to which our
employees or those of our customers or suppliers become ill with
COVID-19.
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 later
our assessment of the probability of these tax contingencies
changes, our accrual for such tax uncertainties may increase or
decrease. Our effective tax rate for annual and interim reporting
periods could be impacted if uncertain tax positions that are not
recognized are settled at an amount which differs from our
estimates.
Some of our accounting policies
require higher degrees of judgment than others in their
application. These include share-based compensation and
contingencies and areas such as revenue recognition, allowance for
doubtful accounts, valuation of inventory and intangible assets,
operating lease liabilities, warranty liabilities and
impairments.
Revenue Recognition
. We sell our
products to customers including law enforcement agencies, domestic
distributors and international distributors and revenue from such
transactions is recognized in the periods that products are shipped
(free on board (“
FOB
”) shipping point) or received
by customers (FOB destination), when the fee is fixed or
determinable and when collection of resulting receivables is
reasonably assured. We identify customer performance obligations,
determine the transaction price, allocate the transaction price to
the performance obligations and recognize revenue as we satisfy the
performance obligations. Our primary performance obligations are
products/accessories and virtual reality software licensing or
sale. Our customers do not have the right to return product unless
the product is found to be defective.
-21-
Share-Based Compensation.
We follow the fair value
recognition provisions issued by the Financial Accounting Standards
Board (“
FASB
”)
in Accounting Standards Codification (“
ASC
”) Topic 718, Stock
Compensation (“
ASC
718
”) and we adopted Accounting Standards Update
(“
ASU
”) 2018-07
for share-based transactions with non-employees. Share-based
compensation expense recognized during 2020 and 2019 includes stock
option and restricted stock unit compensation expense.
The grant date fair
value of stock options is determined using the Black-Scholes
option-pricing model.
The grant date is the date at which an
employer and employee or non-employee reach a mutual understanding
of the key terms and conditions of a share-based payment award.
The
Black-Scholes option-pricing model requires inputs including the
market price of the Company’s Common Stock on the date of
grant, the term that the stock options are expected to be
outstanding, the implied stock volatilities of several publicly
traded peers over the expected term of stock options, risk-free
interest rate and expected dividend. Each of these inputs is
subjective and generally requires significant judgment to
determine.
The grant date fair
value of restricted stock units is based upon the market price of
the Company’s Common Stock on the date of the grant.
We determine the amount of share-based compensation expense
based on awards that we ultimately expect to vest and account for
forfeitures as they occur.
The fair value of
share-based compensation is amortized to compensation expense over
the vesting term.
Allowance for Doubtful Accounts.
Our
products are sold to customers in many different markets and
geographic locations. We estimate our bad debt reserve on a
case-by-case basis due to a limited number of customers mostly
government agencies or well-established distributors. We base these
estimates on many factors including customer credit worthiness,
past transaction history with the customer, current economic
industry trends and changes in customer payment terms. Our
judgments and estimates regarding collectability of accounts
receivable have an impact on our financial statements.
Valuation of Inventory
. Our inventory
is comprised of raw materials, assemblies and finished products. We
must periodically make judgments and estimates regarding the future
utility and carrying value of our inventory. The carrying value of
our inventory is periodically reviewed and impairments, if any, are
recognized when the expected future benefit from our inventory is
less than carrying value.
Valuation of Intangible Assets.
Intangible assets consisted of (a) capitalized legal fees and
filing costs related to obtaining patents and trademarks, (b)
customer agreements, tradenames, software, non-solicitation and
non-compete agreements acquired in business combinations and valued
at fair value at the acquisition date, and (c) the purchase cost of
indefinite-lived website domains. We must make judgments and
estimates regarding the future utility and carrying value of
intangible assets. The carrying values of such assets are
periodically reviewed and impairments, if any, are recognized when
the expected future benefit to be derived from an individual
intangible asset is less than carrying value. This generally could
occur when certain assets are no longer consistent with our
business strategy and whose expected future value has
decreased.
Accrued Expenses.
We establish a
warranty reserve based on anticipated warranty claims at the time
product revenue is recognized. This reserve requires us to make
estimates regarding the amount and costs of warranty repairs we
expect to make over a period of time. Factors affecting warranty
reserve levels include the number of units sold, anticipated cost
of warranty repairs, and anticipated rates of warranty claims. We
have very limited history to make such estimates and warranty
estimates have an impact on our financial statements. Warranty
expense is recorded in cost of revenues. We evaluate the adequacy
of this reserve each reporting period.
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 period ended March 31,
2021.
Segment and
Related Information
The Company operates as a single
segment. The Company’s chief operating decision maker is its
Chief Executive Officer, who manages operations for purposes of
allocating resources. Refer to Note
14
, Major Customers and Related
Information, in our financial statements for further
discussion.
Operating
Expense
Our operating expense includes (i)
selling, general and administrative expense, and (ii) research and
development expense. Research and development expense is comprised
of the costs incurred in performing research and development
activities and developing production on our behalf, including
compensation and consulting, design and prototype costs, contract
services, patent costs and other outside expenses. The scope and
magnitude of our future research and development expense is
difficult to predict at this time and will depend on elections made
regarding research projects, staffing levels and outside consulting
and contract costs. The future level of selling, general and
administrative expense will be dependent on staffing levels,
elections regarding expenditures on sales, marketing and customer
training, the use of outside resources, public company and
regulatory costs, and other factors, some of which are outside of
our control.
-22-
We expect our operating costs will
increase as we expand product distribution activities and expand
our research and development, production, distribution, training,
service and administrative functions in the near term. We may also
incur substantial non-cash stock-based compensation costs depending
on future option and restricted stock unit grants that are impacted
by stock prices and other valuation factors. Historical
expenditures are not indicative of future
expenditures.
Results of
Operations
Three Months Ended March 31, 2021 Compared to Three Months Ended
March 31, 2020
The following table sets forth for
the periods indicated certain items of our condensed consolidated
statement of operations. The financial information and the
discussion below should be read in conjunction with the financial
statements and notes contained in this Report.
|
|
Three
Months Ended March 31,
|
Change
|
||
|
|
|
2020
|
$
|
%
|
|
Revenues:
|
|
|
|
|
|
Product
sales
|
$
1,427
|
$
675
|
$
752
|
111
%
|
|
Other
revenue
|
115
|
15
|
100
|
667
%
|
|
Total
revenues
|
1,542
|
690
|
852
|
123
%
|
|
Cost of
revenues
|
937
|
406
|
531
|
131
%
|
|
Gross
profit
|
605
|
284
|
321
|
113
%
|
|
|
|
|
|
|
|
Operating
expenses:
|
|
|
|
|
|
Selling, general and
administrative
|
4,978
|
2,140
|
2,838
|
133
%
|
|
Research and
development
|
1,065
|
534
|
531
|
99
%
|
|
Total
operating expenses
|
6,043
|
2,674
|
3,369
|
126
%
|
|
Loss
from operations
|
$
(5,438
)
|
$
(2,390
)
|
$
(3,048
)
|
128
%
|
Revenue
We reported
revenue of $1,542 for the three months ended March 31, 2021 as
compared to $690 for the quarter ended March 31, 2020, a 123%
increase over the prior year. We believe our sales during the first
quarter of 2021 were negatively impacted by the COVID-19 pandemic
as we were limited in our ability to make product demonstrations
and conduct training primarily internationally. We incurred product
promotional costs of $298 during the three months ended March 31,
2021 related to the cost of demonstration products and accessories
delivered to law enforcement agencies that were expensed as
marketing costs. A total of $186 of such product marketing costs
were incurred during the three months ended March 31,
2020.
-23-
We had
$172 of deferred revenue at March 31, 2021, of which $137
related to virtual reality training and $35 related to extended
warranties.
We believe we
can grow sales in the future; however, the impact of the COVID-19
pandemic has created much uncertainty in the global marketplace. We
are unable to predict the impact on demand for our products in
future periods. We expect sales levels may be uneven as we
grow both our domestic and international customer base and as well
as from the continued impact of COVID-19 restrictions. While we
plan for increased revenues during 2021, there can be no assurance,
especially given the uncertainties of the COVID-19 pandemic, that
we can achieve revenue growth.
At March 31,
2021, we had backlog of $132 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 March 31, 2021 was
$937 resulting in a gross margin of 39%. The gross margin
for the three months ended March 31, 2020 was 41%.
Due to our
limited history of revenue and startup costs incurred to establish
volume manufacturing, historical margins may not be indicative of
future margins. In addition, our margins vary based on the
sales channels through which our products are sold and product mix.
Currently, our cartridges have lower margins than BolaWrap devices;
however, we have implemented initiatives to improve gross margins
attributable to our cartridges. We continue to implement product
updates and revisions, including raw material and component changes
that may impact product costs. With such product updates and
revisions, we have limited warranty cost experience and estimated
future warranty costs can impact our gross margins.
Selling,
General and Administrative Expense
Selling,
general and administrative expense for the three months ended March
31, 2021 increased by $2,838 when compared to the three months
ended March 31, 2020. We incurred a $173 increase in
non-cash stock-based compensation expense allocated to selling,
general and administrative expense that totaled $602 during
the three months ended March 31, 2021 as compared to $429 during
the three months ended March 31, 2020. Other increases included a
$794 increase in cash compensation and recruiting costs
resulting from an increase in headcount over the prior year and a
$1,011 increase in public company related costs. Marketing and
promotion costs increased $140 due primarily to promotional
products and online advertising. Travel efforts resumed during the
first quarter ended March 31, 2021; however, due to the COVID-19
pandemic, travel was still limited. Our travel costs related to
sales, demonstrations and training increased by $38 from the
quarter ended March 31, 2020 as a result of increased sales and
training personnel muted by COVID-19 restrictions.
During the quarter ended March 31,
2021 public company costs of $1,205 included shareholder activism
and related costs of $803 in connection with actions by an
executive officer/shareholder seeking changes in the composition of
our Board of Directors and candidates to stand for election at the
2021 Annual Shareholders’ Meeting, changes to the Executive
Chairman position as well as other related matters. There were no
comparable shareholder activism costs in 2020 and this matter was
settled in March 2021 and we do not expect significant additional
costs during 2021.
Research
and Development Expense
Research and
development expense increased by $531 for the three months
ended March 31, 2021, when compared to the comparable period in
fiscal 2020. We incurred a $219 period over period increase in
non-cash share-based compensation expense allocated to research and
development expense as a result of new award grants to new
personnel and vesting timing. The increase in costs during the
three months ended March 31, 2021 when compared to the prior year
included a $158 increase in cash compensation costs resulting
from an increase in headcount primarily associated with product
development. Outside consulting costs increased by $132 for
the three months ended March 31, 2021, primarily due to initiatives
to improve our products, develop new products and increased
development of virtual reality scenarios. The increase in research
and development expense is partially offset by the decrease of $24
relating to prototype related costs for three months ended March
31, 2021, compared to the comparable period in 2020. We expect our
research and development costs to increase in the future as we add
staff and expand our research initiatives in response to market
opportunities.
-24-
Net
Loss
Loss from
operations during the three months ended March 31, 2021 increased
by $3,048 when compared to the three months ended March 31, 2020,
resulting, primarily, from increased operating costs due to
increased personnel, marketing and selling, public company costs
and supporting activities.
Liquidity and
Capital Resources
Overview
We have
experienced net losses and negative cash flows from operations
since our inception. As of March 31, 2021, we had cash and cash
equivalents of $2,000, short-term investments of $35,000 positive
working capital of $40,124 and had sustained cumulative losses
attributable to stockholders of $30,739. 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
three months ended March 31, 2021 we received $113 of proceeds from
the exercise of previously issued stock options.
Our primary
source of liquidity to date has been funding from our stockholders
from the sale of equity securities and the exercise of derivative
securities, consisting of options and warrants. We expect our
primary source of future liquidity will be from the sale of
products, exercise of stock options and warrants and if required
from future equity or debt financings.
Capital Requirements
Due in part to
the volatility caused by COVID-19, we do not have a high degree of
confidence in our estimates for our future liquidity requirements
or future capital needs, which will depend on, among other things,
capital required to introduce our products and the staffing and
support requirements, as well as the timing and amount of future
revenue and product costs. We anticipate that demands for operating
and working capital may grow depending on decisions on staffing,
development, production, marketing, training and other functions
and based on other factors outside of our control. We believe we
have sufficient capital to sustain our operations for the next
twelve months.
Our future
capital requirements, cash flows and results of operations could be
affected by, and will depend on, many factors, some of which are
currently unknown to us, including, among other
things:
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●
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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;
|
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●
|
The timing and extent of market
acceptance of our products;
|
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●
|
Costs, timing and outcome of planned
production and required customer and regulatory compliance of our
products;
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-25-
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Costs of preparing, filing and
prosecuting our patent applications and defending any future
intellectual property-related claims;
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●
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Costs and timing of additional
product development;
|
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●
|
Costs, timing and outcome of any
future warranty claims or litigation against us associated with any
of our products;
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●
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Ability to collect accounts
receivable; and
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●
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Timing and costs associated with any
new financing.
|
Principal factors that could affect
our ability to obtain cash from external sources including from
exercise of outstanding warrants and options include:
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●
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Volatility in the capital markets;
and
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●
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Market price and trading volume of
our Common Stock.
|
Off-Balance Sheet Arrangements
We have no
off-balance sheet arrangements.
Cash Flow
Operating Activities
During
the three months ended March 31, 2021, net cash used in operating
activities was $4,444.
The net loss of $5,429 was decreased by
non-cash expense of $1,085 consisting primarily of share-based
compensation expense of $859 and shares issued for services of
$100. Other major component changes using operating cash included
an increase of $341 in accounts receivable, an increase in
inventories of $924, and a $136 decrease in accrued liabilities. An
increase of $1,168 in accounts payable and an increase of
$156 in deferred revenue reduced the cash used in operating
activities.
During
the three months ended March 31, 2020, net cash used in operating
activities was $2,238.
The net loss of $2,346 was decreased by
non-cash expense of $546 consisting primarily of stock-based
compensation expense of $467. Other major component changes using
operating cash included a $44 increase in inventories, an increase
of $198 in accounts receivable, a $149 decrease in customer
deposits and a $94 increase in prepaid expense and other current
assets. An increase of $78 in accounts payable and accrued
liabilities reduced the cash used in operating
activities.
Investing Activities
During the
three months ended March 31, 2021, we used $25,003 of cash to
purchase short-term investments and we had proceeds from maturities
of short-term investments of $15,000. We had no short-term
investment activity during the three months ended March 31,
2020.
-26-
We used $160
and $20 of cash for the purchase of property and equipment during
the three months ended March 31, 2021 and 2020, respectively. We
invested $56 and $34 in patents during the three months ended March
31, 2021 and 2020, respectively.
Financing Activities
During the
three months ended March 31, 2021, we received $113 in proceeds
from the exercise of previously issued stock options, and repaid
$100 in debt relating to the NSENA purchase.
We received
$801 of net proceeds from the exercise of previously issued
warrants and stock options during the three months ended March 31,
2020.
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 $91 in
2021 and $32 in 2022.
At March 31,
2021 the Company was committed for approximately $1,380 for future
component deliveries and contract services that are generally
subject to modification or rescheduling in the normal course of
business.
Pursuant to the
NSENA Asset Purchase Agreement, dated December 14, 2020 we are
obligated to pay to NSENA cash consideration of $100 on June 15,
2021 and $75 on September 15, 2021. In addition, Wrap Reality
assumed $15 of liabilities related to funds received by NSENA but
unearned on existing revenue related contract arrangements. As
additional earn-out consideration, Wrap Reality has agreed to pay
NSENA 10% of net revenues (or a lesser amount equal to 50% of
direct profit) from specific identified prospects that become
revenue customers before September 30, 2021, but only on amounts
collected to June 30, 2022.
Effects of
Inflation
We do not believe that inflation has
had a material impact on our business, revenue or operating results
during the periods presented.
Recent Accounting
Pronouncements
There have been no recent accounting
pronouncements or changes in accounting pronouncements during the
period ended March 31, 2021, or subsequently thereto, that we
believe are of potential significance to our financial
statements.
Item 3.
Q
uantitative and Qualitative Disclosures
about Market Risk.
Not applicable.
-27-
Item 4.
C
ontrols and Procedures.
We are required to maintain
disclosure controls and procedures designed to ensure that material
information related to us, including our consolidated subsidiaries,
is recorded, processed, summarized and reported within the time
periods specified in the SEC rules and forms.
Conclusion
Regarding the Effectiveness of Disclosure Controls and
Procedures
Under the supervision and with the
participation of our management, including our principal executive
officer and our principal financial officer, as of March 31, 2021
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 March 31, 2021, that have materially affected, or are
reasonably likely to materially affect, our internal control over
financial reporting. Our process for evaluating controls and
procedures is continuous and encompasses constant improvement of
the design and effectiveness of established controls and procedures
and the remediation of any deficiencies, which may be identified
during this process.
Because of the inherent limitations
of internal control over financial reporting, including the
possibility of collusion or. improper management override of
controls, material misstatements due to error or fraud may not be
prevented or detected. on a timely basis. Also, projections of any
evaluation of the effectiveness of the internal control over
financial reporting to future period are subject to the risk that
the controls may become inadequate because of changes in
conditions, or that the degree of compliance with the policies or
procedures may deteriorate.
PART II. OTHER
INFORMATION
I
tem 1. Legal Proceedings
Securities
Litigation
On
September 23, 2020, Carone Cobden filed a putative class action
complaint against the Company, former Chief Executive Officer David
Norris (“
Norris
”), Chief Financial Officer, James A. Barnes
(“
Barnes
”), and President, Thomas Smith
(“
Smith
”) in the United States District Court for
the Central District of California, docketed as Case No.
2-20-cv-08760-DMG-PVCx (the “
Cobden
Complaint
”). The
Cobden Complaint alleges that the named defendants, in their
capacities as officers of the Company, knowingly made false or
misleading statements or omissions regarding trials of the
Company’s BolaWrap product conducted by the Los Angeles
Police Department (the “
BolaWrap Pilot
Program
”). The
Cobden Complaint also alleges that the conduct of the named
defendants artificially inflated the price of the Company’s
traded securities, and that the disclosure of certain adverse
information to the public led to a decline in the market value of
the Company’s securities. The Cobden Complaint
further alleges violations of Sections 10(b) and 20(a) of the
Exchange Act, and Rule 10b-5 promulgated thereunder, and defines
the class period as July 31, 2020 through September 23,
2020.
On
October 1, 2020, Joseph Mercurio filed a second putative class
action complaint against the Company, Norris, Smith, and Barnes in
the same court, which contains substantially the same factual
allegations and legal claims as set forth in the Cobden Complaint,
and is docketed as Case No. 2-20-cv-09030-DMG-PVCx (the
“
Mercurio
Complaint
”). On October 15, 2020, Paula
Earley filed a third putative class action complaint against the
Company, Smith, Norris, Barnes, Chief Strategy Officer Mike Rothans
(“Rothans”), and former Chief Executive Officer, Marc
Thomas (“
Thomas
”) in the same court, which contains many of
the same factual allegations and legal claims as set forth in the
Cobden and Mercurio Complaints, but defines the class period as
April 29, 2020 through September 23, 2020, and alleges additional
false or misleading statements in connection with BolaWrap and the
BolaWrap Pilot Program (the “
Earley
Complaint
”). The
Earley Complaint is docketed as Case No.
2-20-cv-09444-DMG-PVCx.
-28-
On
November 3, 2020, the Hon. Dolly M. Gee consolidated
the three above-mentioned cases under the
caption
In re Wrap Technologies, Inc.
Securities Exchange Act Litigation
, Case No. 20-8760-DMG (PVCx) (the
“
Securities
Action
”). On
January 7, 2021, the Court appointed a lead plaintiff in the
Securities Action, who designated its attorneys as lead
counsel. On January 21, 2021, Judge Gee ordered that a
consolidated amended complaint be filed in the Securities Action on
or before March 12, 2021, with defendants’ motion to dismiss
to be filed on or before April 26, 2021, and a hearing on the
motion to dismiss to be held on July 23, 2021. On March 12,
2021, lead plaintiff filed an amended complaint, naming the
Company, Norris, Thomas, Smith, and Barnes as defendants. Those
defendants jointly filed a motion to dismiss on April 26, 2021. The
Company believes that the Securities Action is without merit and
intends to vigorously defend against the claims raised
therein.
Shareholder
Derivative Litigation
On
November 13, 2020, Naresh Rammohan filed a shareholder derivative
action in the United States District Court for the Central District
of California against Smith, Barnes, Rothans, Thomas, Norris, and
Messrs. Scot Cohen, Patrick Kinsella, Michael Parris, and Wayne
Walker, alleging unjust enrichment, breach of fiduciary duty, waste
of corporate assets, and contribution claims under the Securities
Exchange Act of 1934, docketed as Case No. 2:20-cv-10444-DMG-PVCx
(the “
Rammohan
Complaint
”). The
Rammohan Complaint names the Company as a nominal defendant and
recites many of the allegations set forth in the Securities Action
relating to the BolaWrap Pilot Program. On January 20, 2021,
Ray Westerman filed a second derivative complaint in the same court
against the same parties, alleging breach of fiduciary duty and
contribution claims under the Securities Exchange Act of 1934,
docketed as Case No. 2:21-cv-00550-DMG-PVCx (the
“
Westerman
Complaint
”). On
January 22, 2021, Jesse Lowe filed a third derivative complaint in
the same court against the same parties, alleging breach of
fiduciary duty and asserting various claims under the Securities
Exchange Act of 1934, docketed as Case No. 2:21-cv-00597-DMG-PVCx
(the “
Lowe
Complaint
”).
The
above-mentioned derivative cases were each been transferred to
Judge Gee as cases related to the Securities Action. On
February 16, 2021, Judge Gee issued an order consolidating these
cases under the caption
In re Wrap Technologies, Inc.
Shareholder Derivative Litigation
, Case No. 2:20-10444-DMG-PVCx, (the
“
Derivative
Action
”), and stayed the
Derivative Action pending the resolution of the motion to dismiss
in the Securities Action. On March 9, 2021, the Lowe
Complaint was designated as the operative complaint in the
Derivative Action. As with the Securities Action, the Company
believes that the Derivative Action is without merit and intends to
vigorously defend against the claims raised
therein.
Other Legal
Proceeding Information
We may become
subject to other legal proceedings, as well as demands and claims
that arise in the normal course of our business, including claims
of alleged infringement of third-party patents and other
intellectual property rights, breach of contract, employment law
violations, and other matters and matters involving requests for
information from us or our customers under federal or state law.
Such claims, even if not meritorious, could result in the
expenditure of significant financial and management resources. We
make a provision for a liability relating to legal matters when it
is both probable that a liability has been incurred and the amount
of the loss can be reasonably estimated. These provisions are
reviewed and adjusted to include the impacts of negotiations,
estimated settlements, legal rulings, advice of legal counsel, and
other information and events pertaining to a particular matter. At
March 31, 2021 we had no provision for liability under existing
litigation.
An unfavorable outcome on any
litigation matters could require payment of substantial damages,
or, in connection with any intellectual property infringement
claims, could require us to pay ongoing royalty payments or could
prevent us from selling certain of our products. As a result, a
settlement of, or an unfavorable outcome on, any of the matters
referenced above or other litigation matters or legal proceedings
could have a material adverse effect on our business, operating
results, financial condition and cash flows.
Item 1A. Risk
F
actors
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,
2020, as filed with SEC on March 4, 2021. 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
.
-29-
Additionally,
the continued spread of COVID-19 and uncertain market conditions
may adversely affect our business, financial condition and results
of operations.
Item 2.
U
nregistered Sales of Equity Securities and
Use of Proceeds
On March 19, 2021 we issued 17,876
shares of Common Stock at $5.59 per share for the amount of
$100,000 in consideration of services. These shares were issued
pursuant to Section 4(2) under the Securities Act of 1933, as
amended,
which provides exemption from
registration for transactions that are not public
offerings.
No other unregistered securities
were issued during the three months ended March 31, 2021 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.
-30-
Item 6.
E
xhibits
|
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
-31-
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.
|
|
WRAP
TECHNOLOGIES, INC.
|
|
|
|
|
|
|
|
|
April 29,
2021
|
By:
|
/s/
JAMES A. BARNES
|
|
|
|
|
James A. Barnes |
|
|
|
|
Chief Financial Officer, Secretary
and Treasurer
(Principal Accounting
Officer)
|
|
-32-
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