WRAP TECHNOLOGIES, INC. - Quarter Report: 2020 September (Form 10-Q)

 

UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-Q

 

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE

SECURITIES EXCHANGE ACT OF 1934

 

For the quarterly period ended September 30, 2020

Commission File Number: 000-55838

 

Wrap Technologies, Inc.

(Exact name of registrant as specified in its charter)

 

Delaware		98-0551945
(State or other jurisdiction of incorporation or organization)		(I.R.S. Employer Identification Number)

 

1817 W 4th Street

Tempe, Arizona 85281

 (Address of principal executive offices) (Zip Code)

 

(800) 583-2652

(Registrant’s Telephone Number, Including Area Code)

 

Securities registered pursuant to Section 12(b) of the Act:

 

Title of each class	Trading Symbol(s)	Name of each exchange on which registered
Common Stock, par value $0.0001 per share	WRTC	Nasdaq Capital Market

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No [ ]

 

Indicate by check mark whether the registrant has submitted every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).   [ X ] Yes   [ ] No

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

 

Large Accelerated Filer        [   ]		Accelerated filer                     [   ]
Non-accelerated filer            [X]		Smaller reporting company    [X]
		Emerging growth company    [X]

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.   [ ]

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes [ ] No [ X]

 

As of October 28, 2020 a total of 37,211,217 shares of the Registrant’s common stock, par value $0.0001, (“Common Stock”) were issued and outstanding.

 

 

 

 

WRAP TECHNOLOGIES, INC.

 

INDEX

 

PART I. FINANCIAL INFORMATION
Item 1.	Financial Statements:
	Condensed Balance Sheets as of September 30, 2020 (unaudited) and December 31, 2019		1
	Condensed Statements of Operations and Comprehensive Loss for the three and nine months ended September 30, 2020 and 2019 (unaudited)		2
	Condensed Statements of Stockholders Equity for the three and nine months ended September 30, 2020 and 2019 (unaudited)		3
	Condensed Statements of Cash Flows for the nine months ended September 30, 2020 and 2019 (unaudited)		5
	Notes to Unaudited Condensed Interim Financial Statements		6
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations		17
Item 3.	Quantitative and Qualitative Disclosures About Market Risk		25
Item 4.	Controls and Procedures		25
PART II. OTHER INFORMATION
Item 1.	Legal Proceedings		26
Item 1A.	Risk Factors		27
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds		27
Item 3.	Defaults Upon Senior Securities		27
Item 4.	Mine Safety Disclosures		27
Item 5.	Other Information		27
Item 6.	Exhibits		27
SIGNATURES			28

 

 

 

PART I. FINANCIAL INFORMATION
Item 1. Financial Statements

 

	September 30,
	2020	December 31,
	(unaudited)	2019
ASSETS
Current assets:
Cash and cash equivalents	$20,118,192	$16,983,864
Short-term investments	24,986,117	-
Accounts receivable, net	1,170,122	195,347
Inventories, net	1,950,994	2,244,541
Prepaid expenses and other current assets	300,811	250,947
Total current assets	48,526,236	19,674,699
Property and equipment, net	363,020	242,876
Operating lease right-of-use asset, net	170,397	260,931
Intangible assets, net	322,952	230,283
Other assets, net	12,681	12,681
Total assets	$49,395,286	$20,421,470
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable	$761,785	$406,967
Accrued liabilities	466,523	194,294
Customer deposits	128,143	343,724
Deferred revenue	2,484	2,684
Operating lease liability - short term	104,071	128,131
Note payable to bank - short term	230,239	-
Total current liabilities	1,693,245	1,075,800
Long-term liabilities:
Operating Lease Liability - long term	79,116	150,018
Note payable to bank - long term	185,849	-
Total long-term liabilities	264,965	150,018
Total liabilities	1,958,210	1,225,818
Commitments and contingencies (Note 12)
Stockholders' equity:
Preferred stock - 5,000,000 authorized; par value $0.0001 per share; none issued and outstanding	-	-
Common stock - 150,000,000 authorized; par value $0.0001 per share; 37,109,317 and 29,829,916 shares issued and outstanding each period, respectively	3,711	2,983
Additional paid-in capital	69,180,916	31,922,493
Accumulated deficit	(21,754,157)	(12,729,824)
Accumulated other comprehensive gain	6,606	-
Total stockholders' equity	47,437,076	19,195,652
Total liabilities and stockholders' equity	$49,395,286	$20,421,470

 

 

 

 

 

 

	Three Months		Nine Months
	Ended September 30,		Ended September 30,
	2020	2019	2020	2019
Revenues:
Product sales	$988,089	$255,973	$2,485,866	$418,874
Other revenue	18,675	12,790	42,927	27,144
Total revenues	1,006,764	268,763	2,528,793	446,018
Cost of revenues	687,991	157,786	1,658,773	254,701
Gross profit	318,773	110,977	870,020	191,317
Operating expenses:
Selling, general and administrative	3,255,464	1,878,152	7,933,261	4,547,215
Research and development	926,677	729,788	2,037,633	1,620,820
Total operating expenses	4,182,141	2,607,940	9,970,894	6,168,035
Loss from operations	(3,863,368)	(2,496,963)	(9,100,874)	(5,976,718)
Other income (expense):
Interest income	5,494	108,922	80,590	196,109
Other	(3,981)	837	(4,049)	(1,450)
	1,513	109,759	76,541	194,659
Net loss	$(3,861,855)	$(2,387,204)	$(9,024,333)	$(5,782,059)
Net loss per basic common share	$(0.11)	$(0.08)	$(0.28)	$(0.20)
Weighted average common shares used to compute net loss per basic common share	36,419,771	29,662,403	32,653,408	28,301,725
Comprehensive loss:
Net loss	$(3,861,855)	$(2,387,204)	$(9,024,333)	$(5,782,059)
Net unrealized gain on short-term investments	6,606	-	6,606	-
Comprehensive loss	$(3,855,249)	$(2,387,204)	$(9,017,727)	$(5,782,059)

 

 

 

 

 

	Three Months Ended September 30, 2020
					Accumulated
			Additional		Other	Total
	Common Stock		Paid-In	Accumulated	Comprehensive	Stockholders'
	Shares	Amount	Capital	Deficit	Gain	Equity
Balance at June 30, 2020	34,361,591	$3,436	$54,972,797	$(17,892,302)	$-	$37,083,931
Common shares issued upon exercise of warrants at $3.00 per share, net of issuance costs	102,621	10	295,029	-	-	295,039
Common shares issued upon exercise of warrants at $5.00 per share, net of issuance costs	1,742,870	174	8,365,542	-	-	8,365,716
Common shares issued upon exercise of warrants at $6.00 per share, net of issuance costs	675,000	68	3,847,432	-	-	3,847,500
Common shares issued upon exercise of warrants at $6.50 per share	177,986	18	1,102,295	-	-	1,102,313
Common shares issued upon exercise of stock options	34,250	3	51,372	-	-	51,375
Common shares issued upon vesting of restricted stock units	14,999	2	(2)	-	-	-
Stock-based compensation expense	-	-	546,451	-	-	546,451
Net unrealized gain on short-term investments	-	-	-	-	6,606	6,606
Net loss for the period	-	-	-	(3,861,855)	-	(3,861,855)
Balance at September 30, 2020	37,109,317	$3,711	$69,180,916	$(21,754,157)	$6,606	$47,437,076

 

 

	Nine Months Ended September 30, 2020
					Accumulated
			Additional		Other	Total
	Common Stock		Paid-In	Accumulated	Comprehensive	Stockholders'
	Shares	Amount	Capital	Deficit	Gain	Equity
Balance at December 31, 2019	29,829,916	$2,983	$31,922,493	$(12,729,824)	$-	$19,195,652
Sale of Common Stock and warrants at $6.00 per share in public offering, net of issuance costs	2,066,667	207	11,666,999	-	-	11,667,206
Common shares issued upon exercise of warrants at $3.00 per share, net of issuance costs	253,125	25	735,002	-	-	735,027
Common shares issued upon exercise of warrants at $5.00 per share, net of issuance costs	3,593,873	359	17,233,805	-	-	17,234,164
Common shares issued upon exercise of warrants at $6.00 per share, net of issuance costs	675,000	68	3,847,432	-	-	3,847,500
Common shares issued upon exercise of warrants at $6.50 per share	261,679	26	1,646,292	-	-	1,646,318
Common shares issued upon exercise of stock options	327,500	33	566,217	-	-	566,250
Common shares issued upon vesting of restricted stock units	101,557	10	(10)	-	-	-
Share-based compensation expense	-	-	1,562,686	-	-	1,562,686
Net unrealized gain on short-term investments	-	-	-	-	6,606	6,606
Net loss for the period	-	-	-	(9,024,333)	-	(9,024,333)
Balance at September 30, 2020	37,109,317	$3,711	$69,180,916	$(21,754,157)	$6,606	$47,437,076

 

 

 

	Three Months Ended September 30, 2019
					Accumulated
			Additional		Other	Total
	Common Stock		Paid-In	Accumulated	Comprehensive	Stockholders'
	Shares	Amount	Capital	Deficit	Gain	Equity
Balance at June 30, 2019	29,640,250	$2,964	$30,324,798	$(7,799,191)	$-	$22,528,571
Common shares issued upon exercise of warrants at $3.00 per share	25,000	2	74,998	-	-	75,000
Common shares issued upon exercise of stock options	3,750	1	5,624	-	-	5,625
Share-based compensation expense			473,657			473,657
Net loss for the period	-	-	-	(2,387,204)	-	(2,387,204)
Balance at September 30, 2019	29,669,000	$2,967	$30,879,077	$(10,186,395)	$-	$20,695,649

 

 

	Nine Months Ended September 30, 2019
					Accumulated
			Additional		Other	Total
	Common Stock		Paid-In	Accumulated	Comprehensive	Stockholders'
	Shares	Amount	Capital	Deficit	Gain	Equity
Balance at December 31, 2018	27,364,607	$2,736	$16,791,254	$(4,404,336)	$-	$12,389,654
Sale of Common Stock and warrants at $6.50 per share and placement agent warrants in public offering, net of issuance costs	1,923,076	192	11,351,022	-	-	11,351,214
Common shares issued upon exercise of warrants at $3.00 per share	87,150	9	261,441	-	-	261,450
Common shares issued upon exercise of warrants at $5.00 per share	274,167	28	1,370,807	-	-	1,370,835
Common shares issued upon exercise of stock options	20,000	2	29,998	-	-	30,000
Share-based compensation expense			1,074,555	-	-	1,074,555
Net loss for the period	-	-	-	(5,782,059)	-	(5,782,059)
Balance at September 30, 2019	29,669,000	$2,967	$30,879,077	$(10,186,395)	$-	$20,695,649

 

 

 

 

 

	For the Nine Months
	Ended September 30,
	2020	2019
Cash Flows From Operating Activities:
Net loss	$(9,024,333)	$(5,782,059)
Adjustments to reconcile net loss to net cash
used in operating activities:
Depreciation and amortization	90,885	20,949
Warranty provision	17,013	10,776
Inventory obsolescence	-	(130,591)
Non-cash lease expense	90,534	50,957
Share-based compensation	1,562,686	1,074,555
Provision for doubtful accounts	10,140	-
Changes in assets and liabilities:
Accounts receivable	(984,915)	(91,109)
Inventories	293,547	(1,685,059)
Prepaid expenses and other current assets	(49,864)	29,705
Accounts payable	354,818	508,457
Operating lease liability	(94,962)	(34,035)
Customer deposits	(215,581)	238,510
Accrued liabilities and other	254,544	76,669
Deferred compensation	-	(96,000)
Warranty settlement	2,398	-
Deferred revenue	(200)	2,288
Net cash used in operating activities	(7,693,290)	(5,805,987)
Cash Flows From Investing Activities:
Purchase of short-term investments	(24,979,511)	-
Capital expenditures for property and equipment	(202,432)	(197,873)
Investment in patents and trademarks	(101,266)	(95,536)
Long-term deposits	-	(11,169)
Net cash used in investing activities	(25,283,209)	(304,578)
Cash Flows From Financing Activities:
Sale of Common Stock and warrants	12,400,002	12,499,994
Offering costs paid on sale of Common Stock and warrants	(732,796)	(1,148,780)
Proceeds from exercise of warrants	24,479,654	1,632,285
Offering costs paid on exercise of warrants	(1,016,645)	-
Proceeds from exercise of stock options	566,250	30,000
Proceeds from bank note	414,362	-
Net cash provided by financing activities	36,110,827	13,013,499
Net increase in cash and cash equivalents	3,134,328	6,902,934
Cash and cash equivalents, beginning of period	16,983,864	12,358,896
Cash and cash equivalents, end of period	$20,118,192	$19,261,830
Supplemental Disclosure of Non-Cash Investing
and Financing Activities:
Change in unrealized gain on short-term investments	$6,606	$-
Right-of-use assets and liabilites recorded during period	$-	$341,000
Issuance costs relating to warrants issued to public offering selling agent	$-	$205,894

 

 

 

 

 

1.	ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

 

Organization and Business Description

 

Wrap Technologies, Inc., a Delaware corporation (the “Company”, “we”, “us”, and “our”), is a publicly traded company with our Common Stock, par value $0.0001 per share (“Common Stock”) listed on the Nasdaq Capital Market (“Nasdaq”) under the trading symbol “WRTC”. The Company is a developer of security products designed for use by law enforcement and security personnel. The Company’s first product is the BolaWrap® 100 remote restraint device that discharges an eight-foot bola style Kevlar® tether to entangle a subject at a range of 10-25 feet. The principal markets for the Company’s proprietary products are in North and South America, Europe, Middle East and Asia.

 

Basis of Presentation and Use of Estimates

 

The Company’s unaudited interim financial statements and related notes included herein have been prepared in accordance with accounting principles generally accepted in the United States of America (“US GAAP”) for interim financial information and in accordance with Article 8 of Regulation S-X and the rules and regulations of the Securities and Exchange Commission (“SEC”). The condensed balance sheet at December 31, 2019 was derived from audited financial statements but certain information and footnote disclosures normally included in financial statements prepared in accordance with US GAAP have been condensed or omitted pursuant to such rules and regulations. In management’s opinion, the accompanying statements reflect adjustments necessary to present fairly the financial position, results of operations, and cash flows for the periods indicated, and contain adequate disclosure to make the information presented not misleading. Adjustments included herein are of a normal, recurring nature unless otherwise disclosed in the footnotes. The interim financial statements and notes thereto should be read in conjunction with the Company’s audited financial statements and notes thereto for the year ended December 31, 2019. Results of operations for interim periods are not necessarily indicative of the results of operations for a full year.

 

The preparation of financial statements in conformity with US GAAP requires management to make estimates and assumptions (e.g., stock-based compensation valuation, allowance for doubtful accounts, valuation of inventory and intangible assets, warranty reserve, accrued costs and recognition and measurement of contingencies) that affect the reported amounts of assets and liabilities, and disclosure of contingent assets and liabilities at the date of the financial statements and affect the reported amounts of revenues and expenses during the reporting period. Actual results could materially differ from those estimates.

 

Where necessary, the prior year’s information has been reclassified to conform to the current year presentation.

 

Concentrations of Risk and Uncertainties

 

Credit Risk – Financial instruments that potentially subject the Company to concentration of credit risk consisted primarily of cash and cash equivalents, U.S. treasury bills and accounts receivable from customers. The Company maintains its cash and cash equivalent deposits at two domestic financial institutions. The Company is exposed to credit risk in the event of default by a financial institution to the extent that cash and cash equivalents are in excess of the amount insured by the Federal Deposit Insurance Corporation. The Company places its cash and cash equivalents with high-credit quality financial institutions. To date, the Company has not experienced any losses on its cash and cash equivalents.

 

Concentrations of Accounts Receivable and Revenue – The Company has recently commenced sales activities with a limited number of customers. The Company may experience concentrations in both accounts receivable and revenue due to the timing of sales and collections of related payments.

 

 

 

Concentration of Suppliers – The Company relies on a limited number of component suppliers and contract suppliers. In particular, a single supplier is currently the sole manufacturer of the Company’s laser assembly with some parts sole sourced from other suppliers. If supplier shortages occur, or quality problems arise, then production schedules could be significantly delayed or costs significantly increased, which could in turn have a material adverse effect on the Company’s financial condition, results of operation and cash flows.

Impact of COVID-19 - In March 2020, the World Health Organization declared the outbreak of a novel coronavirus (“COVID-19”) as a pandemic which continues to spread throughout the United States and the World. The COVID-19 pandemic has impacted and could further impact our operations and the operations of our customers and suppliers as a result of quarantines, facility closures, illnesses, and travel and logistics restrictions. The extent to which the COVID-19 pandemic further impacts our business, results of operations, and financial condition will depend on future developments, which are highly uncertain and cannot be predicted, including, but not limited to the duration, spread, severity, and impact of the COVID-19 pandemic, the effects of the COVID-19 pandemic on our customers and suppliers and the remedial actions and stimulus measures adopted by federal, state, and local governments, and to what extent normal economic and operating conditions can resume. Even after the COVID-19 pandemic has subsided, the Company may continue to experience adverse impacts to its business as a result of any economic recession or depression that has occurred or may occur in the future.

 

Cash and Cash Equivalents

 

The Company considers all highly liquid investments purchased with original maturities of three months or less from the purchase date to be cash equivalents. Cash equivalents consist primarily of amounts invested in Money Market Funds and United States (“U.S.”) Treasury bills and are stated at fair value.

 

Short-Term Investments

 

The Company’s short-term investments consist of U.S. Treasury bills with original maturities beyond three months at the date of purchase and one year or less from the balance sheet date. As of September 30, 2020, all of the Company’s short-term investments were classified as available-for-sale and are carried at estimated fair value with any unrealized gains and losses, unrelated to credit loss factors, included in other comprehensive (loss) income in our condensed statements of stockholders’ equity.

 

We adopted Accounting Standards Codification (“ASC”) Topic 326 issued by the Financial Accounting Standards Board (“FASB”) effective January 1, 2020, and applied the credit loss guidance related to short-term investments prospectively as we had no historical short-term investments. Because we do not have any history of losses for our short-term investments, our expected loss allowance methodology is developed using published or estimated credit default rates for similar investments and current and future economic and market conditions. Any unrealized losses related to credit loss factors are now recorded through an allowance for credit losses in other (expense) income, in our condensed consolidated statements of operations, rather than as a reduction to the amortized cost basis in other comprehensive (loss) income, when a decline in fair value has resulted from a credit loss. We determine realized gains or losses on the sale of investments on a specific identification method, and record such gains or losses as other (expense) income, in our condensed statements of operations. We did not record a credit loss reserve for short-term investments during the quarter ended September 30, 2020.

 

Stock-Based Compensation

 

The Company follows the fair value recognition provisions issued by FASB in ASC Topic 718, Stock Compensation (“ASC 718”) and has adopted Accounting Standards Update (“ASU”) 2018-07 for stock-based transactions with non-employees. Stock-based compensation expense recognized during the three and nine months ended September 30, 2020 includes stock option and restricted stock unit compensation expense. The grant date fair value of stock options is determined using the Black-Scholes option-pricing model. The grant date is the date at which an employer and employee or non-employee reach a mutual understanding of the key terms and conditions of a stock-based payment award. The Black-Scholes option-pricing model requires inputs including the market price of the Company’s Common Stock on the date of grant, the term that the stock options are expected to be outstanding, the implied stock volatilities of several publicly-traded peers over the expected term of stock options, risk-free interest rate and expected dividend. Each of these inputs is subjective and generally requires significant judgment to determine. The grant date fair value of restricted stock units is based upon the market price of the Company’s Common Stock on the date of the grant. The fair value of stock-based compensation is amortized to compensation expense over the vesting term.

 

 

 

Revenue Recognition

 

In May 2014, the FASB issued ASU 2014-09, Revenue from Contracts with Customers (“ASU 2014-09”) and ASC Subtopic 340-40, Other Assets and Deferred Costs - Contracts with Customers (“ASC 340-40”), (collectively, “Topic 606”). On January 1, 2018, the Company adopted Topic 606 and, as it had no prior revenue or contracts with customers, there was no transition required nor any impact on prior results. ASU 2014-09 requires entities to recognize revenue through the application of a five-step model, which includes identification of the contract, identification of the performance obligations, determination of the transaction price, allocation of the transaction price to the performance obligations and recognition of revenue as the entity satisfies the performance obligations. See Note 2 for additional information.

 

Accounts Receivable and Allowance for Doubtful Accounts

 

The Company’s expected loss allowance methodology for accounts receivable is developed using historical collection experience, when available any published or estimated credit default rates for entities that represent our customer base, current and future economic and market conditions and a review of the current status of customers' trade accounts receivables. Additionally, specific allowance amounts are established to record the appropriate provision for customers that have a higher probability of default. Our monitoring activities include account reconciliation, dispute resolution, payment confirmation, consideration of customers' financial condition and macroeconomic conditions. Balances are written off when determined to be uncollectible.

 

There was no allowance for doubtful accounts recorded at December 31, 2019. At September 30, 2020 the Company had an allowance of $10,140 resulting in part from global uncertainty resulting from the COVID-19 virus. If a major customer’s creditworthiness deteriorates, or actual defaults exceed our historical experience, such allowance estimates could change and impact our future reported financial results.

 

Inventories

 

Inventories are valued at the lower of cost or net realizable value. The cost of substantially all the Company’s inventory is determined by the FIFO cost method. Inventory is comprised of raw materials, assemblies and finished products intended for sale to customers. The Company evaluates the need for reserves for excess and obsolete inventories determined primarily based upon estimates of future demand for the Company’s products.

 

Loss per Share

 

Basic loss per common share is computed by dividing net loss for the period by the weighted-average number of shares of common stock outstanding during the period. Diluted net loss per common share reflects the potential dilution of securities that could share in the earnings of an entity. The Company’s losses for the periods presented cause the inclusion of potential common stock instruments outstanding to be antidilutive. Stock options, restricted stock units and warrants exercisable or issuable for a total of 7,615,959 shares of Common Stock were outstanding at September 30, 2020. These securities are not included in the computation of diluted net loss per common share for the periods presented as their inclusion would be antidilutive due to losses incurred by the Company.

 

Income Taxes

 

Until its conversion to a corporation on March 31, 2017, the Company was treated as a partnership for federal and state income tax purposes and did not incur income taxes. Instead, its losses were included in the income tax returns of the member partners. No income tax expense was recorded for period ended September 30, 2020 due to losses incurred.

 

Deferred tax assets and liabilities are determined based on temporary differences between the bases of certain assets and liabilities for income tax and financial reporting purposes.

 

The Company maintains a valuation allowance with respect to deferred tax assets. The Company establishes a valuation allowance based upon the potential likelihood of realizing the deferred tax asset and taking into consideration the Company’s financial position and results of operations for the current period. Future realization of the deferred tax benefit depends on the existence of sufficient taxable income within the carry-forward period under the Federal tax laws. Changes in circumstances, such as the Company generating taxable income, could cause a change in judgment about the realizability of the related deferred tax asset. Any change in the valuation allowance will be included in income in the year of the change in estimates.

 

 

 

Recent Issued Accounting Guidance

 

Adopted the First Quarter of 2020:

In August 2018, the FASB issued ASU No. 2018-13, Fair Value Measurement (“Topic 820”): Disclosure Framework - Changes to the Disclosure Requirements for Fair Value Measurement. The ASU modifies the disclosure requirements in Topic 820, Fair Value Measurement, to improve the effectiveness of fair value measurement disclosures by removing or modifying certain disclosure requirements and adding other requirements. This ASU is effective for public companies for annual reporting periods and interim periods within those annual periods beginning after December 15, 2019. The adoption of this standard in the first quarter ended March 31, 2020 had no impact on the Company’s financial statements or disclosures.

 

In June 2016, the FASB issued ASU No. 2016-13, Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments which was further updated and clarified by the FASB through issuance of additional related ASUs. Under ASU 2016-13, existing guidance on reporting credit losses for trade and other receivables and available for sale debt securities have been replaced with a new forward-looking “expected loss” model that has resulted in the earlier recognition of allowances for losses. The adoption of these standards in the first quarter ended March 31, 2020 had no impact on the Company’s financial statements or disclosures. As part of our assessment of the adequacy of our allowances for credit losses, we consider a number of factors including, but not limited to, customer credit ratings, bankruptcy filings, published or estimated credit default rates, age of receivables, expected loss rates and collateral exposures.

 

Other Pronouncements:

In December 2019, the FASB issued Accounting Standards Update 2019-12, Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes (“ASU 2019-12”), which is intended to simplify various aspects related to accounting for income taxes. ASU 2019-12 removes certain exceptions to the general principles in Topic 740 and also clarifies and amends existing guidance to improve consistent application. ASU 2019-12 is effective for fiscal years beginning after December 15, 2020, with early adoption permitted. We do not expect that the adoption of this ASU will have a significant impact on our financial statements.

 

The Company has reviewed other recently issued, but not yet effective, accounting pronouncements and does not believe the future adoptions of any such pronouncements will be expected to cause a material impact on its financial condition or the results of operations.

 

2.	REVENUE AND PRODUCT COSTS

 

The Company enters into contracts that include various combinations of products, accessories and services, such as training, each of which are generally distinct and are accounted for as separate performance obligations.

 

A performance obligation is a promise in a contract to transfer a distinct good or service to a customer and is the unit of account in Topic 606. For contracts with a single performance obligation, the entire transaction price is allocated to the single performance obligation. For contracts with multiple performance obligations, the Company allocates the contract transaction price to each performance obligation using the Company’s estimate of the standalone selling price (“SSP”) of each distinct good or service in a contract. The Company determines the SSP based on the price at which the performance obligation is sold separately. If the SSP is not observable through past transactions, the Company estimates the standalone selling price considering available information such as market conditions and internally approved pricing guidelines related to the performance obligations.

 

Performance obligations to deliver products and accessories are generally satisfied at the point in time the Company ships the product, as this is when the customer obtains control of the asset under our standard terms and conditions. Periodically, certain customers request bill and hold transactions for future delivery as scheduled and designated by them. In such cases, revenue is not recognized until after control, title and risk of ownership has transferred which is generally when the customer has requested such transaction under normal billing and payment terms and has been notified that the product (i) has been completed according to customer specifications, (ii) has passed our quality control inspections, and (iii) has been tagged and packed for shipment, separated from our inventory and ready for physical transfer to the customer. The value associated with custodial storage services is deemed immaterial in the context of such contracts and in total, and accordingly, none of the transaction price is allocated to such service.

 

The Company has elected to recognize shipping costs as an expense in cost of revenue when control has transferred to the customer. The revenue and cost of training associated with a customer contract are recognized when the training is completed, generally following delivery of related products.

 

 

The timing of revenue recognition may differ from the timing of invoicing to customers. The Company generally has an unconditional right to consideration when customers are invoiced, and a receivable is recorded. A contract asset is recognized when revenue is recognized prior to invoicing, or a contract liability (deferred revenue) when revenue will be recognized subsequent to invoicing. At September 30, 2020 the Company had deferred revenue of $2,484 related to future training and extended warranties.

 

The Company may also receive consideration, per terms of a contract, from customers prior to transferring goods to the customer. The Company records customer deposits as a contract liability.

 

The Company recognizes an asset if there are incremental costs of obtaining a contract with a customer such as commissions. These costs are ascribed to or allocated to the underlying performance obligations in the contract and amortized consistent with the recognition timing of the revenue for any such underlying performance obligations. The Company had no such assets at September 30, 2020 and December 31, 2019. The Company will apply the practical expedient to expense any sales commissions related to performance obligations with an amortization of one year or less when incurred within selling, general and administrative expense.

 

Estimated costs for the Company’s standard one-year warranty are charged to cost of products sold when revenue is recorded for the related product. Royalties are also charged to cost of products sold.

 

3.	FINANCIAL INSTRUMENTS

Assets and liabilities recorded at fair value on a recurring basis in the Balance Sheets and assets and liabilities measured at fair value on a non-recurring basis or disclosed at fair value, are categorized based upon the level of judgment associated with inputs used to measure their fair values. The accounting guidance for fair value provides a framework for measuring fair value and requires certain disclosures about how fair value is determined. Fair value is defined as the price that would be received upon the sale of an asset or paid to transfer a liability (an exit price) in an orderly transaction between market participants at the measurement date. The accounting guidance also establishes a three-level valuation hierarchy that prioritizes the inputs to valuation techniques used to measure fair value based upon whether such inputs are observable or unobservable. Observable inputs reflect market data obtained from independent sources, while unobservable inputs reflect market assumptions made by the reporting entity. The three-level hierarchy for the inputs to valuation techniques is briefly summarized as follows: 

Level 1—Inputs are unadjusted, quoted prices in active markets for identical assets or liabilities at the measurement date;

Level 2—Inputs are observable, unadjusted quoted prices in active markets for similar assets or liabilities, unadjusted quoted prices for identical or similar assets or liabilities in markets that are not active, or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the related assets or liabilities; and 

Level 3—Unobservable inputs that are significant to the measurement of the fair value of the assets or liabilities that are supported by little or no market data.

The Company’s cash equivalent Money Market Funds and short-term investments consisting of U.S. Treasury bill securities are classified as Level 1 because they are valued using quoted market prices.

 

 

 

The following tables show the Company’s cash and cash equivalents, Money Market Funds and short-term investments by significant investment category as of September 30, 2020. The Company only had cash and cash equivalents, including Money Market Funds of $16,618,498 at December 31, 2019 all which were considered Level 1.

 

	As of September 30, 2020
	Adjusted	Unrealized	Unrealized	Market
	Cost	Gains	Losses	Value
Level 1:
Money Market Funds	$6,534,798	$-	$-	$6,534,798
U.S. Treasury securities considered cash equivalents	9,999,125	-	-	9,999,125
U.S. Treasury securities in short-term investments	24,979,511	6,606		24,986,117
Total Financial Assets	$41,513,434	$6,606	$-	$41,520,040

 

The Company did not recognize any credit losses related to available-for-sale investments for the first nine months of 2020 and 2019. All of the Company’s U.S. Treasury debt securities classified as available for sale as of September 30, 2020, have maturities within one year.

 

The Company may sell certain of its short-term investments prior to their stated maturities for reasons including, but not limited to, managing liquidity, credit risk, duration and asset allocation. 

There were no liabilities measured at fair value on a recurring basis as of September 30, 2020 and December 31, 2019. There have been no transfers between fair value measurement levels during the nine months ended September 30, 2020 and 2019. In addition, there were no assets or liabilities measured at fair value on a non-recurring basis as of September 30, 2020 and December 31, 2019.

 

4.	INVENTORIES, NET

 

Inventory is recorded at the lower of cost or net realizable value. The cost of substantially all the Company’s inventory is determined by the FIFO cost method. Inventories consisted of the following:

 

	September 30,	December 31,
	2020	2019
Finished goods	$847,101	$653,323
Work in process	20,331	413
Raw materials	1,083,562	1,590,805
Inventories - net	$1,950,994	$2,244,541

 

5.	PROPERTY AND EQUIPMENT, NET

 

Property and equipment consisted of the following:

 

	September 30,	December 31,
	2020	2019
Laboratory equipment	$142,123	$44,454
Tooling	80,936	59,004
Computer equipment	132,245	83,368
Furniture, fixtures and improvements	162,736	128,782
	518,040	315,608
Accumulated depreciation	(155,020)	(72,732)
	$363,020	$242,876

 

Depreciation expense was $34,998 and $82,288 for the three and nine months ended September 30, 2020 and was $8,175 and $20,361 for the three and nine months ended September 30, 2019, respectively.

 

 

 

6.	INTANGIBLE ASSETS, NET

 

Intangible assets consisted of the following:

 

	September 30,	December 31,
	2020	2019
Patents	$260,694	$176,425
Trademarks	74,916	57,919
	335,610	234,344
Accumulated amortization	(12,658)	(4,061)
	$322,952	$230,283

 

Amortization expense was $3,301 and $8,597 for the three and nine months ended September 30, 2020 and was $201 and $588 for the three and nine months ended September 30, 2019, respectively.

 

7.	ACCOUNTS PAYABLE AND ACCRUED LIABILITIES

 

Accounts payable includes $36,973 and $18,809 due to related party Syzygy Licensing, LLC (“Syzygy”) as of September 30, 2020 and December 31, 2019, respectively. Accounts payable at September 30, 2020 also included $10,000 due to related party V3 Capital Partners, LLC. See Notes 12 and 13 for additional related party information.

 

Accrued liabilities consist of the following:

 

	September 30,	December 31,
	2020	2019
Patent and legal costs	$15,550	$9,851
Accrued compensation	401,770	144,193
Warranty costs	33,334	13,923
Consulting costs	-	7,500
Taxes and other	15,869	18,827
	$466,523	$194,294

 

8.

LEASES

 

The Company adopted ASU 2016-02, Leases (Topic 842) on January 1, 2019 using the modified retrospective approach. The Company has elected not to apply ASC Topic 842 to arrangements with lease terms of 12 months or less.

 

Amortization of Right of Use operating lease assets was $30,734 and $90,534 for the three and nine months ended September 30, 2020 and was $28,746 and $50,957 for the three and nine months ended September 30, 2019, respectively.

 

Operating lease expense for capitalized operating leases included in operating activities was $34,322 and $102,965 for the three and nine months ended September 30, 2020 and was $34,682 and $60,278 for the three and nine months ended September 30, 2019, respectively. Operating lease obligations recorded on the balance sheet at September 30, 2020 are:

 

Operating lease liability- short term	$104,071
Operating lease liability - long term	79,116
Total Operating Lease Liability	$183,187

 

Future lease payments included in the measurement of lease liabilities on the balance sheet at September 30, 2020 for future periods are as follows:

 

Remainder of 2020 (three months)	$36,181
2021	101,406
2022	57,328
Total future minimum lease payments	194,915
Less imputed interest	(11,728)
Total	$183,187

 

The weighted average remaining lease term is 1.69 years and the weighted average discount rate is 7.0%.

 

The Company does not have any finance leases.

 

 

 

9.	NOTE PAYABLE TO BANK

 

On May 1, 2020, the Company received loan proceeds of $414,362 from Bank of America, N.A. (the “Lender”), as a potentially forgivable loan (the “PPP Loan”) from the U.S. Small Business Administration pursuant to the Paycheck Protection Program (the “PPP”) enacted by Congress under Division A, Title 1 of the Coronavirus Aid, Relief, and Economic Security Act (15 U.S.C. 636(a)(36)) (the “CARES Act”), which was enacted March 27, 2020.

 

The PPP Loan, which was in the form of a Promissory Note dated May 1, 2020 by the Company in favor of Lender (the “PPP Note”), has a two-year term and bears interest at a rate of 1% per annum. Monthly principal and interest payments are deferred for six months after the date of disbursement of the PPP Loan. Beginning seven months from the date of the PPP Note, the Company is required to make monthly payments of principal and interest of approximately $23,320. The Company recorded accrued interest of $1,726 at September 30, 2020. The PPP Loan may be repaid at any time prior to maturity with no prepayment penalties. The PPP Note contains events of default and other provisions customary for a loan of this type.

 

Under the terms of the CARES Act, PPP Loan participants can apply for and be granted forgiveness for all or a portion of loans granted under the PPP. Under the terms of the PPP, PPP loans and accrued interest are forgivable during specified periods, as long as the borrower uses the loan proceeds for eligible purposes, including payroll, benefits, rent and utilities, and maintains its payroll levels. The amount of loan forgiveness will be reduced if the borrower terminates employees or reduces salaries during the covered eight or 24-week period. The Company believes it used the PPP Loan proceeds for purposes consistent with the PPP and filed an application for forgiveness in October 2020. The Company anticipates that all or a majority of the loan amount may be forgiven, but there is no assurance provided that the Company will obtain forgiveness of the PPP Loan in whole or part.

 

10.	STOCKHOLDERS’ EQUITY

 

The Company’s authorized capital consists of 150,000,000 shares of Common Stock, par value $0.0001 per share, and 5,000,000 shares of preferred stock, par value $0.0001 per share (“Preferred Stock”).

 

2020 Follow-On Public Offering

 

On June 2, 2020, the Company consummated a follow-on public offering (the “Unit Offering”) whereby the Company offered and sold certain securities consisting of one share of Common Stock and one detachable two-year warrant to purchase one share of Common Stock at an exercise price of $6.00 per share (a “Unit”) at the public offering price of $6.00 per Unit. Pursuant to the Unit Offering, the Company sold 2,066,667 Units, resulting in the Company’s receipt of gross cash proceeds of $12.4 million and net cash proceeds of $11.67 million after deduction of commissions and offering costs.

 

Summary of Stock Purchase Warrants

 

The following table summarizes warrant activity during the nine months ended September 30, 2020:

 

	Number	Average Purchase Price Per Share
Shares purchasable under outstanding warrants at December 31, 2019	6,620,620	$5.41
Stock purchase warrants issued	2,066,667	$6.00
Stock purchase warrants exercised	(4,783,677)	$5.12
Shares purchasable under outstanding warrants at September 30, 2020	3,903,610	$6.08

 

During the nine months ended September 30, 2020 the Company received gross proceeds of $24,479,654 from the exercise of warrants and paid $1,016,645 as an agent fee to facilitate exercise of certain warrants resulting in net proceeds of $23,463,009.

 

 

The Company has outstanding Common Stock purchase warrants as of September 30, 2020 as follows:

 

	Number of	Exercise Price
Description	Common Shares	Per Share
Purchase Warrants	621,367	$5.00
Agent Warrants	75,333	$3.00
Purchase Warrants	1,661,397	$6.50
Agent Warrants	153,846	$8.125
Purchase Warrants	1,391,667	$6.00
	3,903,610

 

Subsequent to September 30, 2020 a total of 101,900 warrants were exercised for gross proceeds of $358,834.

 

11.	STOCK-BASED COMPENSATION

 

On March 31, 2017, the Company adopted, and the stockholders approved the 2017 Stock Incentive Plan (the “Plan”) authorizing 2,000,000 shares of Company Common Stock for issuance as stock options and restricted stock units to employees, directors or consultants. In May 2019, the stockholders ratified an increase in the Plan authorizing an additional 2,100,000 shares of Common Stock and in June 2020 ratified a further authorization of 1,900,000 shares of Common Stock for a total of 6,000,000 shares subject to the Plan.

 

The Company generally recognizes stock-based compensation expense on the grant date and over the period of vesting or period that services will be provided.

 

Stock Options

 

The following table summarizes stock option activity for the nine months ended September 30, 2020:

 

		Weighted Average
	Options on		Remaining	Aggregate
	Common	Exercise	Contractual	Intrinsic
	Shares	Price	Term	Value
Outstanding December 31, 2019	2,928,750	$2.96	3.71
Granted	731,336	$7.65	-
Exercised	(327,500)	$1.73	-
Forfeited, cancelled, expired	(50,000)	$3.00	-
Outstanding September 30, 2020	3,282,586	$4.13	4.48	$10,221,541
Vested and exercisable at September 30, 2020	2,042,500	$2.56	2.87	$8,597,238

 

 

 

The Company uses the Black-Scholes option pricing model to determine the fair value of the options granted.

 

	For the Nine Months
	Ended September 30,
	2020	2019
Expected stock price volatility	46%	49%
Risk-free interest rate	0.38%	2.41%
Forfeiture rate	0%	0%
Expected dividend yield	0%	0%
Expected life of options - years	6.15	3.50
Weighted-average fair value of options granted	$3.43	$2.06

 

Estimated volatility is a measure of the amount by which the Company’s stock price is expected to fluctuate each year during the expected life of awards. The Company’s estimated volatility was based on an average of the historical volatility of peer entities whose stock prices were publicly available. The Company’s calculation of estimated volatility is based on historical stock prices of these peer entities over a period equal to the expected life of the awards. The Company uses the historical volatility of peer entities due to the lack of sufficient historical data of its stock price.

 

The risk-free interest rate assumption is based upon observed interest rates on zero coupon U.S. Treasury bonds whose maturity period is appropriate for the term of the options. The dividend yield of zero is based on the fact that the Company has never paid cash dividends and has no present intention to pay cash dividends. The Company calculates the expected life of the options using the Simplified Method for the employee stock options as the Company does not have sufficient historical data.

 

Restricted Stock Units

 

The Plan provides for the grant of restricted stock units (“RSUs”). On January 16, 2020 the Company granted 73,392 service-based RSUs to officers and directors vesting over a period of three years that are settled in shares of the Company’s Common Stock as the RSUs become vested. On April 1, 2020 the Company granted 122,222 service-based RSUs to employees vesting over a period of three years that are settled in shares of the Company’s Common Stock as the RSUs become vested. Also, on April 1, 2020 the Company granted an officer 35,211 performance-based RSUs. In July and September 2020, the Company granted 52,160 service-based RSU’s to employees vesting over three and four year periods that are settled in shares of the Company’s Common Stock as the RSUs become vested.

 

The following table summarizes RSU activity under the Plan for the nine months ended September 30, 2020:

 

		Weighted Average	Weighted Average
	Service-Based	Grant Date	Vesting
	RSU's	Fair Value	Period
Unvested at January 1, 2020	308,087	$6.77
Granted - service based	248,374	$6.03	3.02 Years
Granted - performance based	35,211	$4.26
Vested	(101,557)	$6.77
Forfeited and cancelled	(60,352)	$7.24
Unvested at September 30, 2020	429,763	$6.08

 

The Company recorded stock-based compensation for options and RSUs in its statements of operations for the relevant periods as follows:

 

	For the Three Months		For the Nine Months
	Ended September 30,		Ended September 30,
	2020	2019	2020	2019
Selling, general and administrative	$468,241	$438,834	$1,393,375	$987,251
Research and development	78,210	34,823	169,311	87,304
Total stock-based expense	$546,451	$473,657	$1,562,686	$1,074,555

 

As of September 30, 2020, total estimated compensation cost of stock options and RSUs granted but not yet vested was $5.4 million which is expected to be recognized over the weighted average period of 2.6 years.

 

 

 

12.	COMMITMENTS AND CONTINGENCIES

 

Facility Leases

See Note 8.

 

Related Party Technology License Agreement

The Company is obligated to pay royalties and pay development and patent costs pursuant to that certain exclusive Amended and Restated Intellectual Property License Agreement dated as of September 30, 2016, by and between the Company and Syzygy (the “Syzygy Agreement”), a company owned and controlled by Mr. Elwood Norris and Mr. James Barnes, both of whom are stockholders and officers of the Company. The Syzygy Agreement provides for royalty payments of 4% of revenue from products employing the licensed ensnarement device technology up to an aggregate of $1,000,000 in royalties or until September 30, 2026, whichever occurs earlier. The Company recorded payments under the Syzygy Agreement of $36,973 and $90,440 for royalties incurred during the three and nine months ended September 30, 2020 and $9,915 and $16,634 incurred for the three and nine months ended September 30, 2019, respectively.

 

Purchase Commitments

At September 30, 2020 the Company was committed for approximately $0.5 million for future component deliveries and contract services that are generally subject to modification or rescheduling in the normal course of business.

 

Shareholder Litigation

On September 23, 2020, Carone Cobden filed a putative class action complaint against the Company, former Chief Executive Officer David Norris (“Norris”), Chief Financial Officer James A. Barnes (“Barnes”) and President Thomas Smith (“Smith”) in the United States District Court for the Central District of California, docketed as Case No. 2-20-cv-08760-DMG-PVCx (the “Complaint”). The class period in the Complaint is defined as July 31, 2020 through September 23, 2020.  The Complaint alleges that the named defendants, in their capacities as officers of the Company, knowingly made false or misleading statements or omissions regarding trials of the Company’s BolaWrap product conducted by the Los Angeles Police Department (the “BolaWrap Pilot Program”). The Complaint further alleges that the conduct of the named defendants artificially inflated the price of the Company’s traded securities, and that the disclosure of certain adverse information to the public led to a decline in the market value of the Company’s securities.  The Complaint alleges violations of Sections 10(b) and 20(a) of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), and Rule 10b-5 promulgated thereunder. 

 

On October 1, 2020, Joseph Mercurio filed a second putative class action complaint against the Company, Norris, Smith, and Barnes in the United States District Court for the Central District of California, which contains substantially the same factual allegations and legal claims as set forth in the Complaint, and is docketed as Case No. 2-20-cv-09030-DMG-PVCx.  

 

On October 15, 2020, Paula Earley filed a third putative class action complaint against the Company, Smith, Norris, Barnes, Chief Strategy Officer Mike Rothans, and Chief Executive Officer Marc Thomas in the United States District Court for the Central District of California, which contains substantially the same factual allegations and legal claims as set forth in the Complaint, but defines the class period as April 29, 2020 through September 23, 2020, and alleges that the named defendants made additional false or misleading statements in connection with BolaWrap and the BolaWrap Pilot Program.  The complaint is docketed as Case No. 2-20-cv-09444-DMG-PVCx.

 

On October 20, 2020, the Hon. Dolly M. Gee issued an order to show cause why the above-described cases should not be consolidated under the caption In re Wrap Technologies, Inc. Securities Exchange Act Litigation, Case No. 20-8760-DMG (PVCx), with a single consolidated class action complaint or designated operative complaint.  As such, the Company expects that these cases will be consolidated, and that plaintiffs in these cases will file a consolidated amended complaint following the selection of a lead plaintiff pursuant to 15 U.S.C. § 78u-4(a)(3)(B). The Company believes that these cases are without merit and intends to vigorously defend against the claims raised therein.

 

13.	RELATED PARTY TRANSACTIONS