UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended
SECURITIES EXCHANGE ACT OF 1934
For the transition period from _________ to _________
Commission File Number:
Wrap Technologies, Inc.
(Exact name of registrant as specified in its charter)
| | | |
| (State or other jurisdiction of incorporation or organization) | (I.R.S. Employer Identification Number) |
(Address of principal executive offices) (Zip Code)
(
(Registrant’s Telephone Number, Including Area Code)
Securities registered pursuant to Section 12(b) of the Act:
| Title of each class | Trading Symbol(s) | Name of each exchange on which registered |
| | | |
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.
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). ☒
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
| Large Accelerated Filer ☐ | Accelerated filer ☐ | |
| | Smaller reporting company | |
| Emerging growth company |
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
As of October 27, 2021 a total of
INDEX
Item 1. Financial Statements
Wrap Technologies, Inc.
Condensed Consolidated Balance Sheets
(in thousands, except par value and share amounts)
| September 30, | ||||||||
| 2021 | December 31, | |||||||
| (Unaudited) | 2020 | |||||||
| ASSETS | ||||||||
| Current assets: | ||||||||
| Cash and cash equivalents | $ | $ | ||||||
| Short-term investments | ||||||||
| Accounts receivable, net | ||||||||
| Inventories, net | ||||||||
| Prepaid expenses and other current assets | ||||||||
| Total current assets | ||||||||
| Property and equipment, net | ||||||||
| Operating lease right-of-use asset, net | ||||||||
| Intangible assets, net | ||||||||
| Other assets | ||||||||
| Total assets | $ | $ | ||||||
| LIABILITIES AND STOCKHOLDERS' EQUITY | ||||||||
| Current liabilities: | ||||||||
| Accounts payable | $ | $ | ||||||
| Accrued liabilities | ||||||||
| Customer deposits | ||||||||
| Deferred revenue- short term | ||||||||
| Operating lease liability - short term | ||||||||
| Business acquisition liability - short term | ||||||||
| Total current liabilities | ||||||||
| Long-term liabilities: | ||||||||
| Deferred revenue- long term | ||||||||
| Operating Lease Liability - long term | ||||||||
| Business acquisition liability - long term | ||||||||
| Total long-term liabilities | ||||||||
| Total liabilities | ||||||||
| Commitments and contingencies (Note 12) | ||||||||
| Stockholders' equity: | ||||||||
| Preferred stock - authorized; par value $ per share; issued and outstanding | ||||||||
| Common stock - authorized; par value $ per share; and shares issued and outstanding each period, respectively | ||||||||
| Additional paid-in capital | ||||||||
| Accumulated deficit | ( | ) | ( | ) | ||||
| Accumulated other comprehensive income | ||||||||
| Total stockholders' equity | ||||||||
| Total liabilities and stockholders' equity | $ | $ | ||||||
See accompanying notes to condensed consolidated interim financial statements.
Condensed Consolidated Statements of Operations and Comprehensive Loss
(in thousands, except share and per share amounts)
(unaudited)
| Three Months Ended September 30, | Nine Months Ended September 30, | |||||||||||||||
| 2021 | 2020 | 2021 | 2020 | |||||||||||||
| Revenues: | ||||||||||||||||
| Product sales | $ | $ | $ | $ | ||||||||||||
| Other revenue | ||||||||||||||||
| Total revenues | ||||||||||||||||
| Cost of revenues: | ||||||||||||||||
| Products and services | ||||||||||||||||
| Product line exit expense | ||||||||||||||||
| Total cost of revenues | ||||||||||||||||
| Gross profit | ||||||||||||||||
| Operating expenses: | ||||||||||||||||
| Selling, general and administrative | ||||||||||||||||
| Research and development | ||||||||||||||||
| Total operating expenses | ||||||||||||||||
| Loss from operations | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||
| Other income (expense): | ||||||||||||||||
| Investment income | ||||||||||||||||
| Other | ( | ) | ( | ) | ||||||||||||
| Net loss | $ | ( | ) | $ | ( | ) | $ | ( | ) | $ | ( | ) | ||||
| Net loss per basic and diluted common share | $ | ( | ) | $ | ( | ) | $ | ( | ) | $ | ( | ) | ||||
| Weighted average common shares used to compute net loss per basic and diluted common share | ||||||||||||||||
| Comprehensive loss: | ||||||||||||||||
| Net loss | $ | ( | ) | $ | ( | ) | $ | ( | ) | $ | ( | ) | ||||
| Net unrealized gain (loss) on short-term investments | ( | ) | ( | ) | ||||||||||||
| Comprehensive loss | $ | ( | ) | $ | ( | ) | $ | ( | ) | $ | ( | ) | ||||
See accompanying notes to condensed consolidated interim financial statements.
Condensed Consolidated Statements of Stockholders' Equity
(in thousands, except share amounts)
(Unaudited)
| Three Months Ended September 30, 2021 | ||||||||||||||||||||||||
| Accumulated | ||||||||||||||||||||||||
| Additional | Other | Total | ||||||||||||||||||||||
| Common Stock | Paid-In | Accumulated | Comprehensive | Stockholders' | ||||||||||||||||||||
| Shares | Amount | Capital | Deficit | Income | Equity | |||||||||||||||||||
| Balance at June 30, 2021 | $ | $ | $ | ( | ) | $ | $ | |||||||||||||||||
| Common shares issued upon exercise of stock options | ||||||||||||||||||||||||
| Common shares issued upon vesting of restricted stock units | ||||||||||||||||||||||||
| Share-based compensation expense | - | |||||||||||||||||||||||
| Net unrealized loss on short-term investments | - | ( | ) | ( | ) | |||||||||||||||||||
| Net loss for the period | - | ( | ) | ( | ) | |||||||||||||||||||
| Balance at September 30, 2021 | $ | $ | $ | ( | ) | $ | $ | |||||||||||||||||
| Nine Months Ended September 30, 2021 | ||||||||||||||||||||||||
| Accumulated | ||||||||||||||||||||||||
| Additional | Other | Total | ||||||||||||||||||||||
| Common Stock | Paid-In | Accumulated | Comprehensive | Stockholders' | ||||||||||||||||||||
| Shares | Amount | Capital | Deficit | Income | Equity | |||||||||||||||||||
| Balance at January 1, 2021 | $ | $ | $ | ( | ) | $ | $ | |||||||||||||||||
| Common shares issued upon exercise of warrants at $ per share | ||||||||||||||||||||||||
| Common shares issued upon exercise of warrants at $ per share | ||||||||||||||||||||||||
| Common shares issued upon exercise of stock options | ||||||||||||||||||||||||
| Common shares issued upon vesting of restricted stock units | ||||||||||||||||||||||||
| Common shares issued for services | ||||||||||||||||||||||||
| Share-based compensation expense | - | |||||||||||||||||||||||
| Net unrealized loss on short-term investments | - | ( | ) | ( | ) | |||||||||||||||||||
| Net loss for the period | - | ( | ) | ( | ) | |||||||||||||||||||
| Balance at September 30, 2021 | $ | $ | $ | ( | ) | $ | $ | |||||||||||||||||
| Three Months Ended September 30, 2020 | ||||||||||||||||||||||||
| Accumulated | ||||||||||||||||||||||||
| Additional | Other | Total | ||||||||||||||||||||||
| Common Stock | Paid-In | Accumulated | Comprehensive | Stockholders' | ||||||||||||||||||||
| Shares | Amount | Capital | Deficit | Income | Equity | |||||||||||||||||||
| Balance at June 30, 2020 | $ | $ | $ | ( | ) | $ | $ | |||||||||||||||||
| Common shares issued upon exercise of warrants at $ per share, net of issuance costs | ||||||||||||||||||||||||
| Common shares issued upon exercise of warrants at $ per share, net of issuance costs | ||||||||||||||||||||||||
| Common shares issued upon exercise of warrants at $ per share, net of issuance costs | ||||||||||||||||||||||||
| Common shares issued upon exercise of warrants at $ per share, net of issuance costs | ||||||||||||||||||||||||
| Common shares issued upon exercise of stock options | ||||||||||||||||||||||||
| Common shares issued upon vesting of restricted stock units | ||||||||||||||||||||||||
| Share-based compensation expense | - | |||||||||||||||||||||||
| Net unrealized gain on short-term investments | - | |||||||||||||||||||||||
| Net loss for the period | - | ( | ) | ( | ) | |||||||||||||||||||
| Balance at September 30, 2020 | $ | $ | $ | ( | ) | $ | $ | |||||||||||||||||
| Nine Months Ended September 30, 2020 | ||||||||||||||||||||||||
| Accumulated | ||||||||||||||||||||||||
| Additional | Other | Total | ||||||||||||||||||||||
| Common Stock | Paid-In | Accumulated | Comprehensive | Stockholders' | ||||||||||||||||||||
| Shares | Amount | Capital | Deficit | Income | Equity | |||||||||||||||||||
| Balance at January 1, 2020 | $ | $ | $ | ( | ) | $ | $ | |||||||||||||||||
| Sale of common stock and warrants at $ per share in public offering, net of issuance costs | ||||||||||||||||||||||||
| Common shares issued upon exercise of warrants at $ per share, net of issuance costs | ||||||||||||||||||||||||
| Common shares issued upon exercise of warrants at $ per share, net of issuance costs | ||||||||||||||||||||||||
| Common shares issued upon exercise of warrants at $ per share, net of issuance costs | ||||||||||||||||||||||||
| Common shares issued upon exercise of warrants at $ per share, net of issuance costs | ||||||||||||||||||||||||
| Common shares issued upon exercise of stock options | ||||||||||||||||||||||||
| Common shares issued upon vesting of restricted stock units | ||||||||||||||||||||||||
| Share-based compensation expense | - | |||||||||||||||||||||||
| Net unrealized gain on short-term investments | - | |||||||||||||||||||||||
| Net loss for the period | - | ( | ) | ( | ) | |||||||||||||||||||
| Balance at September 30, 2020 | $ | $ | $ | ( | ) | $ | $ | |||||||||||||||||
See accompanying notes to condensed consolidated interim financial statements.
Condensed Consolidated Statements of Cash Flows
(in thousands)
(unaudited)
| Nine Months Ended September 30, | ||||||||
| 2021 | 2020 | |||||||
| Cash Flows From Operating Activities: | ||||||||
| Net loss | $ | ( | ) | $ | ( | ) | ||
| Adjustments to reconcile net loss to net cash used in operating activities: | ||||||||
| Depreciation and amortization | ||||||||
| Product line exit expense | ||||||||
| Gain on sale of assets | ( | ) | ||||||
| Warranty provision | ||||||||
| Software impairment charge | ||||||||
| Change in contingent liability | ( | ) | ||||||
| Non-cash lease expense | ||||||||
| Share-based compensation | ||||||||
| Common shares issued for services | ||||||||
| Provision for doubtful accounts | ||||||||
| Changes in assets and liabilities: | ||||||||
| Accounts receivable | ( | ) | ( | ) | ||||
| Inventories | ( | ) | ||||||
| Prepaid expenses and other current assets | ( | ) | ||||||
| Accounts payable | ||||||||
| Operating lease liability | ( | ) | ( | ) | ||||
| Customer deposits | ( | ) | ||||||
| Accrued liabilities and other | ||||||||
| Warranty settlement | ||||||||
| Deferred revenue | ||||||||
| Net cash used in operating activities | ( | ) | ( | ) | ||||
| Cash Flows From Investing Activities: | ||||||||
| Purchase of short-term investments | ( | ) | ( | ) | ||||
| Proceeds from maturities of short-term investments | ||||||||
| Capital expenditures for property and equipment | ( | ) | ( | ) | ||||
| Investment in patents and trademarks | ( | ) | ( | ) | ||||
| Purchase of intangible assets | ( | ) | ||||||
| Proceeds from long-term deposits | ||||||||
| Net cash used in investing activities | ( | ) | ( | ) | ||||
| Cash Flows From Financing Activities: | ||||||||
| Sale of common stock and warrants | ||||||||
| Offering costs paid on sale of common stock and warrants | ( | ) | ||||||
| Proceeds from exercise of warrants | ||||||||
| Offering costs paid on exercise of warrants | ( | ) | ||||||
| Proceeds from exercise of stock options | ||||||||
| Proceeds from bank note | ||||||||
| Repayment of debt | ( | ) | ||||||
| Net cash provided by financing activities | ||||||||
| Net (decrease) increase in cash and cash equivalents | ( | ) | ||||||
| Cash and cash equivalents, beginning of period | ||||||||
| Cash and cash equivalents, end of period | $ | $ | ||||||
| Supplemental Disclosure of Non-Cash Investing and Financing Activities: | ||||||||
| Change in unrealized gain on short-term investments | $ | ( | ) | $ | ||||
See accompanying notes to condensed consolidated interim financial statements.
| 1. |
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 $
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 (“U.S. GAAP”) 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 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 expense 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 revenue and expense during the reporting period. Actual results could materially differ from those estimates.
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
Exit Activity Expense
During the second quarter ended June 30, 2021 the Company recorded $
The $
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 also 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 EXPENSE |
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” or “SSPs”) of each distinct good or service in a contract. The Company determines SSPs based on the relative SSP. If the SSP is not observable through past transactions, the Company estimates the SSP considering available information such as market conditions and internally approved pricing guidelines related to the performance obligations.
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 September 30, 2021 the Company’s deferred revenue totaled $
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 such assets at September 30, 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 expense 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;
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 September 30, 2021 and December 31, 2020.
| As of September 30, 2021 | ||||||||||||||||
| Adjusted | Unrealized | Unrealized | Market | |||||||||||||
| Cost | Gains | Losses | Value | |||||||||||||
| Level 1: | ||||||||||||||||
| Money Market Funds | $ | $ | $ | $ | ||||||||||||
| U.S. Treasury securities considered cash equivalents | ||||||||||||||||
| U.S. Treasury securities in short-term investments | ||||||||||||||||
| Total Financial Assets | $ | $ | $ | $ | ||||||||||||
| As of December 31, 2020 | ||||||||||||||||
| Adjusted | Unrealized | Unrealized | Market | |||||||||||||
| Cost | Gains | Losses | Value | |||||||||||||
| Level 1: | ||||||||||||||||
| Money Market Funds | $ | $ | $ | $ | ||||||||||||
| U.S. Treasury securities considered cash equivalents | ||||||||||||||||
| U.S. Treasury securities in short-term investments | ||||||||||||||||
| Total Financial Assets | $ | $ | $ | $ | ||||||||||||
Unrealized gains or losses resulting from our short-term investments are recorded in accumulated other comprehensive gain or loss. As of September 30, 2021, $
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.
| 4. | INVENTORIES, NET |
Inventory is recorded at the lower of cost or net realizable value. The cost of substantially all the Company’s inventory is determined by the FIFO cost method. Inventories consisted of the following:
| September 30, | December 31, | |||||||
| 2021 | 2020 | |||||||
| Finished goods | $ | $ | ||||||
| Work in process | ||||||||
| Raw materials | ||||||||
| Inventories, net | ||||||||
| Less allowance for obsolescence | ( | ) | ||||||
| Inventories - net | $ | $ | ||||||
As part of product line exit costs (see Note 1) end of life raw material costs aggregating $
| 5. | PROPERTY AND EQUIPMENT, NET |
Property and equipment consisted of the following:
| September 30, | December 31, | |||||||
| 2021 | 2020 | |||||||
| Production and lab equipment | $ | $ | ||||||
| Tooling | ||||||||
| Computer equipment | ||||||||
| Furniture, fixtures and improvements | ||||||||
| Accumulated depreciation | ( | ) | ( | ) | ||||
| Property and equipment, net | $ | $ | ||||||
Depreciation expense was $
As part of product line exit costs (see Note 1) unamortized production tooling costs of $
| 6. | INTANGIBLE ASSETS, NET |
Intangible assets consisted of the following:
| September 30, | December 31, | |||||||
| 2021 | 2020 | |||||||
| Amortizable intangible assets: | ||||||||
| Patents | $ | $ | ||||||
| Trademarks | ||||||||
| Software | ||||||||
| Other | ||||||||
| Accumulated amortization | ( | ) | ( | ) | ||||
| Total amortizable | ||||||||
| Indefinite life assets (non-amortizable) | ||||||||
| Total intangible assets, net | $ | $ |
| |||||
Amortization expense was $
At September 30, 2021, future amortization expense is as follows:
| 2021 (3 months) | $ | |||
| 2022 | ||||
| 2023 | ||||
| 2024 | ||||
| 2025 | ||||
| Thereafter | ||||
| Total estimated amortization expense | $ |
| 7. | ACCOUNTS PAYABLE AND ACCRUED LIABILITIES |
Accounts payable includes $
Accrued liabilities consist of the following:
| September 30, | December 31, | |||||||
| 2021 | 2020 | |||||||
| Patent and legal costs | $ | $ | ||||||
| Accrued compensation | ||||||||
| Warranty costs | ||||||||
| Consulting costs | ||||||||
| Taxes and other | ||||||||
| $ | $ | |||||||
| 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 $
Operating lease expense for capitalized operating leases included in operating activities was $
Operating lease obligations recorded on the balance sheet at September 30, 2021 are:
| Operating lease liability- short term | $ | |||
| Operating lease liability - long term | ||||
| Total Operating Lease Liability | $ |
Future lease payments included in the measurement of lease liabilities on the balance sheet at September 30, 2021 for future periods are as follows:
| 2021 (3 months) | $ | |||
| 2022 | ||||
| Total future minimum lease payments | ||||
| Less imputed interest | ( | ) | ||
| Total | $ |
The weighted average remaining lease term is years and the weighted average discount rate is
The Company does not have any finance leases.
| 9. | OTHER LIABILITIES |
The Company’s other liabilities at September 30, 2021 consisted of operating lease liabilities (see Note 8). Other liabilities at December 31, 2020 included operating lease liabilities (see Note 8) and business acquisition liabilities totaling $
During the quarter ended September 30, 2021 the Company eliminated the contingent consideration, a recurring Level 3 measurement, and recorded a $
| 10. | STOCKHOLDERS’ EQUITY |
The Company’s authorized capital consists of
Summary of Stock Purchase Warrants
The following table summarizes warrant activity during the nine months ended September 30, 2021:
| Number | Average Price Per Share | |||||||
| Shares purchasable under outstanding warrants at December 31, 2020 | $ | |||||||
| Stock purchase warrants issued | ||||||||
| Stock purchase warrants exercised | ( | ) | $ | |||||
| Stock purchase warrants expired | ( | ) | $ | |||||
| Shares purchasable under outstanding warrants at September 30, 2021 | $ | |||||||
The Company has outstanding Common Stock purchase warrants as of September 30, 2021 as follows:
| Number of | Exercise Price | ||||||||
| Description | Common Shares | Per Share | Expiration Date | ||||||
| Purchase Warrants | $ | | |||||||
| 11. | SHARE-BASED COMPENSATION |
On March 31, 2017, the Company adopted, and the stockholders approved, the 2017 Stock Incentive Plan (the “Plan”) authorizing
The Company generally recognizes share-based compensation expense on the grant date and over the period of vesting or period that services will be provided.
Stock Options
The following table summarizes stock option activity for the nine months ended September 30, 2021:
| Weighted Average | ||||||||||||||||
| Options on | Remaining | Aggregate | ||||||||||||||
| Common | Exercise | Contractual | Intrinsic | |||||||||||||
| Shares | Price | Term | Value | |||||||||||||
| Outstanding December 31, 2020 | $ | |||||||||||||||
| Granted | $ | |||||||||||||||
| Exercised | ( | ) | $ | |||||||||||||
| Forfeited, cancelled, expired | ( | ) | $ | |||||||||||||
| Outstanding September 30, 2021 | $ | $ | ||||||||||||||
| Exercisable September 30, 2021 | $ | $ | ||||||||||||||
Options outstanding at December 31, 2020 included
The Company recorded $
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 Nine Months | ||||||||
| Ended September 30, | ||||||||
| 2021 | 2020 | |||||||
| Expected stock price volatility | % | % | ||||||
| Risk-free interest rate | % | % | ||||||
| Forfeiture rate | % | % | ||||||
| Expected dividend yield | % | % | ||||||
| Expected life of options - years | ||||||||
| Weighted-average fair value of options granted | $ | $ | ||||||
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 Company accounts for actual forfeitures as they occur. The dividend yield of 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 nine months ended September 30, 2021:
| Weighted Average | Weighted Average | ||||||||
| Service-Based | Grant Date | Vesting | |||||||
| RSU's | Fair Value | Period (in Years) | |||||||
| Unvested at December 31, 2020 | $ | ||||||||
| Granted - service based | $ | ||||||||
| Vested | ( | ) | $ | ||||||
| Forfeited and cancelled | ( | ) | $ | ||||||
| Unvested at September 30, 2021 | $ | | |||||||
Compensation expense for RSUs was $
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 September 30, | Nine Months Ended September 30, | |||||||||||||||
| 2021 | 2020 | 2021 | 2020 | |||||||||||||
| Selling, general and administrative | $ | $ | $ | $ | ||||||||||||
| Research and development | ||||||||||||||||
| Total share-based expense | $ | $ | $ | $ | ||||||||||||
As of September 30, 2021, total estimated compensation expense of stock options granted and outstanding but not yet vested was $
| 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
Purchase Commitments
At September 30, 2021 the Company was committed for approximately $
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.
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. Briefing on the motion to dismiss is now complete, and the motion is currently under submission before Judge Gee. The Company believes that the Securities Action is without merit and will continue 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 will 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 September 30, 2021 the Company had provision for liability under existing litigation.
| 13. | RELATED PARTY TRANSACTIONS |
Commencing in October 2017 the Company began reimbursing Mr. Elwood Norris, a former officer and current stockholder of the Company, $
See Notes 7, 11 and 12 for additional information on related party transactions and obligations.
| 14. | MAJOR CUSTOMERS AND RELATED INFORMATION |
For the three months ended September 30, 2021, revenues from distributors accounted for approximately
For the nine months ended September 30, 2021, revenues from distributors accounted for approximately
At September 30, 2021, accounts receivable from distributors accounted for
The following table summarizes revenues by geographic region. Revenues are attributed to countries based on customer’s delivery location.
| For the Three Months | For the Nine Months | |||||||||||||||
| Ended September 30, | Ended September 30, | |||||||||||||||
| 2021 | 2020 | 2021 | 2020 | |||||||||||||
| Americas | $ | $ | $ | $ | ||||||||||||
| Europe, Middle East and Africa | ||||||||||||||||
| Asia Pacific | ( | ) | ||||||||||||||
| $ | $ | $ | $ | |||||||||||||
| 15. | SUBSEQUENT EVENTS |
In October 2021 we released a new generation product, the BolaWrap 150. The BolaWrap 150 is electronically deployed and is more robust, smaller, lighter and simpler to deploy than the BolaWrap 100 that is being phased out.
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.
Item 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. For purposes of Management's Discussion and Analysis within this Report, all monetary amounts are stated in thousands except for par values and per share amounts, unless otherwise stated.
Overview
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. In October 2021 we released a new generation product, the BolaWrap 150. The BolaWrap 150 is electronically deployed and is more robust, smaller, lighter and simpler to deploy than the BolaWrap 100 that is being phased out.
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 and over 12 million police officers in over 100 countries we are targeting globally. 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 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 50 countries. We have established an active distributor network with 14 domestic distributors representing all 50 states and Puerto Rico. We have distribution agreements with 47 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 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 nine months 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. 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.
We grew our business in the first nine months of 2021 with revenues increasing 109% from the first nine months of 2020. Third quarter revenues increased 79% over the prior year 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. As of September 30, 2021 over 940 agencies have received BolaWrap training with over 3,250 training officers at those agencies certified as BolaWrap instructors and qualified to train the rest of their departments. This represents a 113% increase in agencies and a 140% increase in training officers compared to December 31, 2020.
With the acquisition of the NSENA, Inc. ("NSENA") business in December 2020 and rebranding of the NSENA business as 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. We plan to increase marketing activities for our virtual reality solution as our platform enhancements are introduced to market.
At September 30, 2021 we had backlog of approximately $63 expected to be delivered in the next twelve months. We had deferred revenue of $240 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.
During the second quarter of 2021, we began to wind down our production line for the BolaWrap 100 product line and in the third quarter completed a shift to a new production process for the next generation BolaWrap 150 product that required new tooling, new production equipment and processes and additional licensing. We recorded $747 of product line exit costs related to this change in production activities in the second quarter.
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 continue to face significant challenges in operating and growing our business related to the global impact of the novel coronavirus (“COVID-19”). COVID-19 impact includes continued travel restrictions, quarantines, “stay-at-home” and “shelter-in-place” orders, shutdowns and slowdowns of certain businesses around the world and impacts on supply chains and logistics. 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 continue to impose 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 are put back in place after having been lifted. These factors negatively impacted our operations and results of operations for 2020 and the first nine months of 2021. We expect that the evolving COVID-19 pandemic, associated travel restrictions and social distancing requirements, especially international, may 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 balance 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; |
| ● |
Disruption to our supply chain caused by distribution and other logistical issues, which may further delay our ability to deliver product to customers beyond 2021; 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. |
We also may be adversely affected by continued 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 and deliver our products and services, including as a result of travel restrictions, logistic and supply chain challenges, 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 expense. 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, estimates of product line exit costs, 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.
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 and the aging of accounts 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 expense 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.
Exit Expense. Our product line exit expense included estimates of end of product life raw material write offs, costs of noncancelable raw material purchase orders and retirement of unamortized production tooling costs. We make these estimates based on current production plans and these judgments and estimates have an impact on our financial statements.
Accrued Expense. 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. Other than the planned production change requiring a new estimate of exit expense, 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 September 30, 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 Expenses
Our operating expenses include (i) selling, general and administrative expense, (ii) research and development expense, and in the most recent fiscal quarter, (iii) product line exit 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 expense. 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 expense, and other factors, some of which are outside of our control. We do not expect any significant further material restructuring and other costs.
We expect our operating costs, excluding restructuring and other 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 share-based compensation costs depending on future option and restricted stock unit grants that are impacted by stock prices and other valuation factors. Historical expenditures are not indicative of future expenditures.
Results of Operations
Three Months Ended September 30, 2021 Compared to Three Months Ended September 30, 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 September 30, |
Change |
|||||||||||||||
| 2021 |
2020 |
$ | % |
|||||||||||||
| Revenues: |
||||||||||||||||
| Product sales |
$ | 1,719 | $ | 988 | $ | 731 | 74 | % | ||||||||
| Other revenue |
86 | 19 | 67 | 353 | % | |||||||||||
| Total revenues |
1,805 | 1,007 | 798 | 79 | % | |||||||||||
| Cost of revenues: |
||||||||||||||||
| Products and services |
1,094 | 688 | 406 | 59 | % | |||||||||||
| Product line exit expense |
- | - | - | - | ||||||||||||
| Total cost of revenues |
1,094 | 688 | 406 | 59 | % | |||||||||||
| Gross profit (loss) |
711 | 319 | 392 | 123 | % | |||||||||||
| Operating expenses: |
||||||||||||||||
| Selling, general and administrative |
4,654 | 3,255 | 1,399 | 43 | % | |||||||||||
| Research and development |
2,076 | 927 | 1,149 | 124 | % | |||||||||||
| Total operating expenses |
6,730 | 4,182 | 2,548 | 61 | % | |||||||||||
| Loss from operations |
$ | (6,019 | ) | $ | (3,863 | ) | $ | (2,156 | ) | 56 | % | |||||
Revenue
We reported revenue of $1,805 for the three months ended September 30, 2021 as compared to $1,007 for the quarter ended September 30, 2020, a 79% increase over the prior year. We believe our sales during the third 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 also believe some customers delayed purchase decisions during the quarter in anticipation of the introduction of our second generation product, the BolaWrap 150.
We incurred product promotional costs of $183 during the three months ended September 30, 2021 related primarily to the cost of demonstration and training products and accessories delivered to law enforcement agencies that were expensed as marketing costs. A total of $261 of such product marketing costs were incurred during the three months ended September 30, 2020. While we continue broad training activities our increased number of successful field uses and brand awareness reduces the need for demonstration product.
We had $240 of deferred revenue at September 30, 2021, of which $152 related to virtual reality training and $88 related to BolaWrap extended warranties and training services.
We believe we can substantially grow sales in future periods; however, the impact of the COVID-19 pandemic has created much uncertainty in the global marketplace by restricting our ability to travel internationally and, to a more limited extent, domestically. We are therefore unable to predict at this time whether our sales will continue to increase materially during the remainder of the fiscal year ending December 31, 2021 due to these uncertainties. Although no assurances can be given, we do believe, however, that the challenges to substantially increasing sales caused by COVID-19 will abate as the rate of vaccinations increase globally, especially given the number of BolaWrap trials currently ongoing and the current environment where non-lethal options are being widely considered by law enforcement domestically and internationally.
At September 30, 2021, we had backlog of $63 expected to be delivered in the next twelve months. Distributor and customer orders for future deliveries are generally subject to modification, rescheduling or in some instance’s cancellation in the normal course of business. Since we generally ship domestic product from inventory shortly after order period backlog generally varies depending on larger foreign orders.
Gross Profit
Our cost of revenue for the three months ended September 30, 2021 was $1,094 resulting in a gross margin of 39%. The gross margin for the three months ended September 30, 2020 was 32%.
Due to our limited history of revenue historical margins may not be indicative of future margins. During the third quarter ended September 30, 2021, we began production of our new generation BolaWrap 150 product with different material inputs and manufacturing processes such that historical margins may not be indicative of future margins. We expect that the BolaWrap 150, after a startup period, will have higher margins than historical production. Our margins also vary based on the sales channels through which our products are sold and product mix. Currently, our cassettes have lower margins than BolaWrap devices. We 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 (“SG&A”) expense for the three months ended September 30, 2021 increased by $1,399 when compared to the three months ended September 30, 2020.
The largest driver of this increase was related to an increase of $624 in share-based compensation, related to incentives for management and employees.
Other SG&A expense increases included a $607 increase in cash compensation, recruiting and consultancy costs resulting from planned growth in personnel over the prior year and a $136 increase in public company related expense. In addition, our travel costs related to sales, demonstrations and training increased by $88 as a result of increased travel by sales and training personnel. In the third quarter of 2020, we had virtually no travel expense due to the COVID-19 pandemic and the various travel restrictions that were in place. Despite the growth in the third quarter of 2021, we are still well below historical norms for our travel expense but expect travel expense to increase as international travel restrictions ease.
The increase in SG&A expense was partially offset by a $296 decrease in advertising and promotional product expense resulting from reduced demonstration product costs and a planned shift in production efforts to a new generation product.
Research and Development Expense
Research and development expense increased by $1,149 for the three months ended September 30, 2021, compared to the comparable three-month period in fiscal 2020. We incurred a $132 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 September 30, 2021 compared to the prior year included a $301 increase in cash compensation costs resulting from an increase in headcount primarily associated with product development. Outside consulting costs increased by $417 for the three months ended September 30, 2021, primarily due to costs related to the development of our next generation BolaWrap 150 product, initiatives to develop new products and increased development of virtual reality software. Prototype related costs for three months ended September 30, 2021 were $251 comparable to $274 for the prior comparable three-month period. 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.
Net Loss
Loss from operations during the three months ended September 30, 2021 increased by $2,156 compared to the three months ended September 30, 2020, resulting, primarily, from increased share-based compensation and increased operating costs due to increased personnel, public company costs, research and development efforts and supporting activities.
Nine Months Ended September 30, 2021 Compared to Nine Months Ended September 30, 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.
| Nine Months Ended September 30, |
Change |
|||||||||||||||
| 2021 |
2020 |
$ | % |
|||||||||||||
| Revenues: |
||||||||||||||||
| Product sales |
$ | 4,997 | $ | 2,486 | $ | 2,511 | 101 | % | ||||||||
| Other revenue |
283 | 43 | 240 | 558 | % | |||||||||||
| Total revenues |
5,280 | 2,529 | 2,751 | 109 | % | |||||||||||
| Cost of revenues: |
||||||||||||||||
| Products and services |
3,276 | 1,659 | 1,617 | 97 | % | |||||||||||
| Product line exit expense |
747 | - | 747 | - | ||||||||||||
| Total cost of revenues |
4,023 | 1,659 | 2,364 | 142 | % | |||||||||||
| Gross profit (loss) |
1,257 | 870 | 387 | 44 | % | |||||||||||
| Operating expenses: |
||||||||||||||||
| Selling, general and administrative |
16,210 | 7,933 | 8,277 | 104 | % | |||||||||||
| Research and development |
4,303 | 2,038 | 2,265 | 111 | % | |||||||||||
| Total operating expenses |
20,513 | 9,971 | 10,542 | 106 | % | |||||||||||
| Loss from operations |
$ | (19,256 | ) | $ | (9,101 | ) | $ | (10,155 | ) | 112 | % | |||||
Revenue
We reported revenue of $5,280 for the nine months ended September 30, 2021 as compared to $2,529 for the nine months ended September 30, 2020, a 109% increase over the prior year. We believe our sales during the first nine months 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 also believe some customers delayed purchase decisions during the third quarter in anticipation of the second generation product, the BolaWrap 150.
We incurred product promotional costs of $862 during the nine months ended September 30, 2021 related primarily to the cost of demonstration and training products and accessories delivered to law enforcement agencies that were expensed as marketing costs. A total of $575 of such product marketing costs were incurred during the nine months ended September 30, 2020. We are responding to increased demand for training as a result of expanded product and brand awareness and increased successful field use by agencies.
We had $240 of deferred revenue at September 30, 2021, of which $152 related to virtual reality training and $88 related to BolaWrap extended warranties and training services.
We believe we can substantially grow sales in future periods; however, the impact of the COVID-19 pandemic has created much uncertainty in the global marketplace by restricting our ability to travel internationally and, to a more limited extent, domestically. We are therefore unable to predict at this time whether our sales will continue to increase materially during the remainder of the fiscal year ending December 31, 2021 due to these uncertainties. Although no assurances can be given, we do believe, however, that the challenges to substantially increasing sales caused by COVID-19 will abate as the rate of vaccinations increase globally, especially given the number of BolaWrap trials currently ongoing and the current environment where non-lethal options are being widely considered by law enforcement domestically and internationally.
Gross Profit
Our cost of revenue for the nine months ended September 30, 2021 was $4,023 and included $747 of restructuring inventory charge. Excluding this non-cash $747 charge, the gross margin for the nine months ended September 30, 2021 was 38%. The gross margin for the nine months ended September 30, 2020 was 34%. During the third quarter ended September 30, 2021, we began production of our new generation BolaWrap 150 product with different material inputs and manufacturing processes such that historical margins may not be indicative of future margins. We have limited warranty cost experience and estimated future warranty costs can impact our gross margins.
Selling, General and Administrative Expense
SG&A expense for the nine months ended September 30, 2021 increased by $8,277 compared to the nine months ended September 30, 2020.
The largest driver of this increase was related to an increase of $2,329 in share-based compensation, of which $1,397 was for director compensation. The remaining $932 was incentive for management and employees.
We continue to invest in our marketing and promotion, which augments the media attention we receive from external sources, such as news broadcasts. During the first nine months of 2021, we incurred increases of $407 related to public relations initiatives and $62 related to advertising and promotional products.
For the first nine months of 2021, our public reporting expense increased by $1,467. This includes shareholder activism costs of $818 in connection with actions by a former 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 costs in 2020. This matter was settled in March 2021 and we do not expect significant additional costs during the rest of 2021.
Other SG&A expense increases included a $2,920 increase in cash compensation, recruiting and consultancy costs resulting from our planned growth in personnel over the prior year. In addition, our travel costs related to sales, demonstrations and training increased by $339 as a result of increased travel by sales and training personnel. In the second and third quarters of 2020, we had virtually no travel due to the COVID-19 pandemic and the various travel restrictions that were in place. Despite the growth in 2021 to date, we are still well below historical norms for our travel expense but expect travel expense to increase as international travel restrictions ease.
Research and Development Expense
Research and development expense increased by $2,265 for the nine months ended September 30, 2021, compared to the comparable nine-month period in fiscal 2020. We incurred a $419 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 nine months ended September 30, 2021 compared to the prior year included a $636 increase in cash compensation costs resulting from an increase in headcount primarily associated with product development. Outside consulting costs increased by $917 for the nine months ended September 30, 2021, primarily due to costs related to a new generation BolaWrap product, initiatives to develop new products and increased development of virtual reality scenarios. The increase in research and development expense is partially offset by the decrease of $66 relating to prototype related costs for nine months ended September 30, 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.
Net Loss
The $19,256 loss from operations during the nine months ended September 30, 2021 increased by $10,155 compared to the nine months ended September 30, 2020, resulting, primarily, from increased share-based compensation and increased operating costs due to increased personnel, marketing and selling, public company costs and supporting activities. We also incurred a one-time non-cash product line exit expense of $747 during the period that we do not expect to recur.
Liquidity and Capital Resources
Overview
We have experienced net losses and negative cash flows from operations since our inception. As of September 30, 2021, we had cash and cash equivalents of $9,858, short-term investments of $30,004, positive working capital of $42,869 and had sustained cumulative losses attributable to stockholders of $44,530. We believe that our cash on hand and short-term investments will sustain our operations for at least the next twelve months from the date of this Report.
During the nine months ended September 30, 2021 we received $13,726 of proceeds from the exercise of previously issued stock purchase warrants and from the exercise of 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 new products and the operational staffing and support requirements, as well as the timing and amount of future revenue and product costs. We anticipate that demands for operating and working capital may grow depending on decisions on staffing, development, production, marketing, training and other functions and based on other factors outside of our control. We believe we have sufficient capital to sustain our operations for the next twelve months.
Our future capital requirements, cash flows and results of operations could be affected by, and will depend on, many factors, some of which are currently unknown to us, including, among other things:
| ● |
The impact and effects of the global outbreak of the COVID-19 pandemic, and other potential pandemics or contagious diseases or fear of such outbreaks; |
| ● |
Decisions regarding staffing, development, production, marketing and other functions; |
| ● |
The timing and extent of market acceptance of our products; |
| ● |
Costs, timing and outcome of planned production and required customer and regulatory compliance of our products; |
| ● |
Costs of preparing, filing and prosecuting our patent applications and defending any future intellectual property-related claims; |
| ● |
Costs and timing of additional product development; |
| ● |
Costs, timing and outcome of any future warranty claims or litigation against us associated with any of our products; |
| ● |
Ability to collect accounts receivable; and |
| ● |
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:
| ● |
Volatility in the capital markets; and |
| ● |
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 nine months ended September 30, 2021, net cash used in operating activities was $13,729. The net loss of $19,220 was decreased by non-cash expense of $5,879 consisting primarily of share-based compensation expense of $4,310, restructuring inventory charges of $747, depreciation and amortization expense of $336 and shares issued for services of $239. Other major component changes using operating cash included an increase of $1,414 in accounts receivable and an increase in inventories of $160. An increase of $773 in accounts payable and accrued expense and an increase of $224 in deferred revenue reduced the cash used in operating activities.
During the nine months ended September 30, 2020, net cash used in operating activities was $7,693. The net loss of $9,024 was decreased by non-cash expense of $1,771 consisting primarily of stock-based compensation expense of $1,563. Other major component changes using operating cash included an increase of $985 in accounts receivable, a $216 decrease in customer deposits and a $50 increase in prepaid expense and other current assets. A decrease of $294 in inventories and an increase of $610 in accounts payable and accrued liabilities reduced the cash used in operating activities.
Investing Activities
During the nine months ended September 30, 2021, we used $30,014 of cash to purchase short-term investments and we had proceeds from maturities of short-term investments of $25,000. We purchased $25,000 of short-term investments during the nine months ended September 30, 2020.
We used $811 and $202 of cash for the purchase of property and equipment during the nine months ended September 30, 2021 and 2020, respectively. We invested $129 and $101 in patents during the nine months ended September 30, 2021 and 2020, respectively.
Financing Activities
During the nine months ended September 30, 2021, we received $12,048 from previously issued stock purchase warrants and $1,678 in proceeds from the exercise of previously issued stock options, and repaid $275 in debt relating to the acquisition of NSENA in December 2020.
During the nine months ended September 30, 2020 we received $11,667 of net proceeds resulting from the consummation of a registered offering of our Common Stock in June 2020, and obtained $24,029 of net proceeds from the exercise of previously issued warrants and stock options. We also obtained $414 in proceeds from a U.S. Small Business Administration Promissory Note pursuant to the Paycheck Protection Program of the Coronavirus Aid, Relief, and Economic Security Act during the period.
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 our facility lease of $24 in 2021 and $58 in 2022.
At September 30, 2021 the Company was committed for approximately $713 for future component deliveries and contract services that are generally subject to modification or rescheduling in the normal course of business.
Effects of Inflation
We do not believe that inflation has had a material impact on our business, revenue or operating results during the periods presented.
Recent Accounting Pronouncements
There have been no recent accounting pronouncements or changes in accounting pronouncements during the period ended September 30, 2021, or subsequently thereto, that we believe are of potential significance to our financial statements.
Item 3. Quantitative and Qualitative Disclosures about Market Risk.
Not applicable.
Item 4. Controls and Procedures.
We are required to maintain disclosure controls and procedures designed to ensure that material information related to us, including our consolidated subsidiaries, is recorded, processed, summarized and reported within the time periods specified in the SEC rules and forms.
Conclusion Regarding the Effectiveness of Disclosure Controls and Procedures
Under the supervision and with the participation of our management, including our principal executive officer and our principal financial officer, as of September 30, 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 September 30, 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.
Item 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.
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. Briefing on the motion to dismiss is now complete, and the motion is currently under submission before Judge Gee. The Company believes that the Securities Action is without merit and will continue 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 will 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 September 30, 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.
Except as set forth below, management is not aware of any material changes to the risk factors discussed in Part 1, Item 1A, of the Annual Report on Form 10-K for the year ended December 31, 2020. In addition to the following risk factors and other information set forth in this Quarterly Report on Form 10-Q, you should carefully consider the risk factors discussed in Part 1, Item 1A, of the Annual Report on Form 10-K for the year ended December 31, 2020 and subsequent reports filed pursuant to the Exchange Act which could materially and adversely affect the Company’s business, financial condition, results of operations, and stock price. The risks described in the Annual Report on Form 10-K and subsequent reports filed pursuant to the Exchange Act are not the only risks facing the Company. Additional risks and uncertainties not presently known to management, or that management presently believes not to be material, may also result in material and adverse effects on our business, financial condition, and results of operations.
We may experience difficulties in integrating and transitioning from the BolaWrap 100 to the BolaWrap 150.
The success of the Company's new product, the BolaWrap 150, depends on a number of factors including, but not limited to, timely and successful product development, market acceptance, the Company’s ability to manage the risks associated with new product production ramp-up issues, the effective management of purchase commitments and inventory levels in line with anticipated product demand, the availability of products in appropriate quantities and costs to meet anticipated demand, and the risk that new products may have quality or other defects or deficiencies in the early stages of introduction.
The continued spread of COVID-19 and uncertain market conditions may adversely affect our business, financial condition and results of operations.
The Company’s business, operating results and financial condition could continue to be adversely affected due to the COVID-19 pandemic. The extent to which the COVID-19 continues to impact our operations or those of our third-party partners will depend on future developments, which are highly uncertain and cannot be predicted with confidence at this time, 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.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
No unregistered securities were issued during the three months ended September 30, 2021 that were not previously reported.
Item 3. Defaults Upon Senior Securities
None.
Item 4. Mine Safety Disclosures
Not Applicable.
None.
| 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 |
Inline XBRL Instance Document - the instance document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document |
|
| 101.SCH |
Inline XBRL Taxonomy Extension Schema Document |
|
| 101.CAL |
Inline XBRL Taxonomy Extension Calculation Linkbase Document |
|
| 101.DEF |
Inline XBRL Taxonomy Extension Definition Linkbase Document |
|
| 101.LAB |
Inline XBRL Taxonomy Extension Label Linkbase Document |
|
| 101.PRE |
Inline XBRL Taxonomy Extension Presentation Linkbase Document |
|
| 104 |
Cover Page Interactive Data File (embedded within the Inline XBRL Document and include in Exhibit 101) |
* Filed concurrently herewith
Pursuant to the requirements of the Securities Exchange Act of 1934, as amended, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
| October 28, 2021 |
WRAP TECHNOLOGIES, INC.
By: /s/ JAMES A. BARNES James A. Barnes Chief Financial Officer, Secretary and Treasurer (Principal Accounting Officer) |