PART I. FINAN
C
IAL
INFORMATION
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Item 1. Financial Statements
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Wrap Technologies, Inc.
Condensed Balance Sheets
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ASSETS
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Current assets:
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Cash
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$
10,693,479
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$
12,358,896
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Accounts
receivable
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63,042
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4,396
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Inventories,
net
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692,691
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158,267
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Prepaid
expenses and other current assets
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326,982
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114,863
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Total current assets
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11,776,194
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12,636,422
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Property and equipment, net
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146,317
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30,373
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Intangible assets, net
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152,968
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118,715
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Other assets, net
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4,317
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1,512
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Total assets
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$
12,079,796
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$
12,787,022
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LIABILITIES AND STOCKHOLDERS' EQUITY
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Current liabilities:
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Accounts
payable
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$
650,279
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$
232,915
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Accrued
liabilities
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112,727
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68,453
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Deferred
revenue
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2,402
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-
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Operating
lease liability- short term
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41,418
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-
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Deferred
and accrued officer compensation
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96,000
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96,000
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Total current liabilities
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902,826
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397,368
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Operating Lease Liability - Long Term
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41,050
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-
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Total liabilities
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943,876
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397,368
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Commitments and contingencies (Note 10)
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Stockholders' equity:
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Preferred
stock - 5,000,000 authorized; par value $0.0001 per share; none
issued and outstanding
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-
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-
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Common
stock - 150,000,000 authorized; par value $0.0001 per share;
27,364,607 shares issued and outstanding each period,
respectively
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2,736
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2,736
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Additional
paid-in capital
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17,018,301
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16,791,254
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Accumulated
deficit
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(5,885,117
)
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(4,404,336
)
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Total stockholders' equity
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11,135,920
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12,389,654
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Total liabilities and stockholders' equity
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$
12,079,796
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$
12,787,022
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See accompanying notes to condensed interim financial
statements.
Wrap T
e
chnologies, Inc.
Condensed Statements of Operations
(unaudited)
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Revenues:
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Product
sales
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$
113,953
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$
-
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Other
revenue
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3,858
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-
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Total
revenues
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117,811
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-
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Cost
of revenues
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61,220
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-
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Gross profit
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56,591
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-
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Operating expenses:
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Selling,
general and administrative
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1,157,950
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339,167
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Research
and development
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374,819
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95,985
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Total
operating expenses
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1,532,769
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435,152
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Loss
from operations
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(1,476,178
)
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(435,152
)
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Other income (expense):
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Interest
income
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25,410
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345
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Other
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(30,013
)
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(571
)
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(4,603
)
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(226
)
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Net loss
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$
(1,480,781
)
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$
(435,378
)
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Net
loss per basic common share
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$
(0.05
)
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$
(0.02
)
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Weighted
average common shares used to compute net loss per basic common
share
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27,364,607
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22,803,533
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See accompanying notes to condensed interim financial
statements.
Wrap Technologies, Inc.
Condensed Statements of
S
tockholders Equity
(unaudited)
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Balance at December 31, 2018
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27,364,607
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$
2,736
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$
16,791,254
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$
(4,404,336
)
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$
12,389,654
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Share-based compensation expense
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227,047
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227,047
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Net loss for the period
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-
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-
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-
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(1,480,781
)
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(1,480,781
)
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Balance at March 31, 2019
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27,364,607
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$
2,736
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$
17,018,301
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$
(5,885,117
)
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$
11,135,920
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Balance at December 31, 2017
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22,803,533
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$
2,280
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$
4,137,936
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$
(1,067,901
)
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$
3,072,315
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Net
loss for the period
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-
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-
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-
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(435,378
)
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(435,378
)
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Balance at March 31, 2018
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22,803,533
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$
2,280
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$
4,137,936
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$
(1,503,279
)
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$
2,636,937
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See
accompanying notes to condensed interim financial
statements.
Wrap Tech
n
ologies, Inc.
Condensed Statements of Cash Flows
(unaudited)
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Cash Flows From Operating Activities:
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Net
loss
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$
(1,480,781
)
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$
(435,378
)
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Adjustments
to reconcile net loss to net cash
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used
in operating activities:
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Depreciation
and amortization
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5,174
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2,261
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Warranty
provision
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2,297
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-
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Inventory
write-off
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(12,975
)
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-
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Amortization of operating lease asset
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5,852
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-
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Share-based
compensation
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227,047
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-
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Changes
in assets and liabilities:
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Accounts
receivable
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(58,646
)
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-
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Inventories
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(521,449
)
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(45,203
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Prepaid
expenses and other current assets
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(212,119
)
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(7,295
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Accounts
payable
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417,364
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(17,356
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Operating
lease liability
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(5,120
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-
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Accrued
liabilities and other
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41,977
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(23,384
)
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2,402
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-
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Net
cash used in operating activities
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(1,588,977
)
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(526,355
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Cash Flows From Investing Activities:
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Capital
expenditures for property and equipment
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(39,198
)
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(6,472
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Investment
in patents and trademarks
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(34,437
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-
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(2,805
)
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-
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Net
cash used in investing activities
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(76,440
)
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(6,472
)
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Net decrease in cash and cash equivalents
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(1,665,417
)
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(532,827
)
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Cash, beginning of period
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12,358,896
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3,083,976
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Cash, end of period
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$
10,693,479
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$
2,551,149
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Supplemental Disclosure of Non-Cash Investing
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and Financing Activities:
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Right-of-use
assets and liabilites recorded during period
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$
87,588
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$
-
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See accompanying notes to condensed interim financial
statements.
Notes to Unaudited Condensed Interim Financial
Statements
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1.
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ORG
ANIZATION AND
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
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Organization and Business Description
Wrap
Technologies, Inc., a Delaware corporation (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.
In
December 2017, the Company completed a self-underwritten public
offering raising gross proceeds of approximately $3.49 million from
the sale of 2,328,533 shares of Company common stock at $1.50 per
share. Three officers of the Company purchased an aggregate of
40,000 shares in the offering for an aggregate of
$60,000.
On
October 30, 2018 the Company obtained gross cash proceeds of $13.68
million and net cash proceeds of approximately $12.14 million from
the sale of 4,561,074 units (“
Units
”) for $3.00 per Unit in a
private offering. Each Unit consisted of one share of common stock
and one detachable two-year warrant to purchase one share of common
stock at an exercise price of $5.00 per share.
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, 2018 was derived from
audited financial statements, but certain information and footnote
disclosures normally included in financial statements prepared in
accordance with U.S. generally accepted accounting principles have
been condensed or omitted pursuant to such rules and regulations.
In management’s opinion, the accompanying statements reflect
adjustments necessary to present fairly the financial position,
results of operations, and cash flows for the periods indicated,
and contain adequate disclosure to make the information presented
not misleading. Adjustments included herein are of a normal,
recurring nature unless otherwise disclosed in the footnotes. The
interim financial statements and notes thereto should be read in
conjunction with the Company’s audited financial statements
and notes thereto for the year ended December 31, 2018. Results of
operations for interim periods are not necessarily indicative of
the results of operations for a full year.
The
preparation of financial statements in conformity with accounting
principles generally accepted in the United States of America
requires management to make estimates and assumptions (e.g.,
recognition and measurement of contingencies and accrued costs)
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.
Stock Based Compensation
The
Company follows the fair value recognition provisions issued by the
Financial Accounting Standards Board (“
FASB
”) in Accounting Standards
Codification (“
ASC
”) Topic 718, Stock
Compensation (“
ASC
718
”) and has adopted Accounting Standards Update
(“
ASU
”) 2018-07
for stock-based transactions with non-employees. Stock based
compensation expense recognized during the three months ended March
31, 2019 includes compensation expense for all stock-based payments
based on a grant date fair value using the Black-Scholes valuation
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.
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.
Wrap
Technologies, Inc.
Notes to Unaudited Condensed Interim Financial
Statements
|
1.
|
OR
G
ANIZATION AND SUMMARY OF
SIGNIFICANT ACCOUNTING POLICIES (continued)
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Accounts Receivable
Accounts
receivable, net consist of trade accounts receivables from the
Company’s customers, net of allowance for doubtful accounts
if deemed necessary. Accounts receivables are recorded at the
invoiced amount. The Company does not require collateral or other
security for accounts receivable. The Company periodically
evaluates the collectability of its accounts receivable and
provides an allowance for potential credit losses, based on the
historical experience. At March 31, 2019 and December 31, 2018, the
Company did not have an allowance for potential credit losses as
there were no estimated credit losses.
Net 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 and
warrants exercisable into a total of 8,084,681 shares of common
stock were outstanding at March 31, 2019. 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 March 31, 2019 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
Recently Adopted Accounting Pronouncement:
In
February 2016, the FASB issued ASU 2016-02, Leases (Topic 842),
which is intended to increase transparency and comparability among
organizations by requiring the recognition of right-of-use
(“
ROU
”) assets
and lease liabilities on the balance sheet. In July 2018, the FASB
issued additional guidance, which provided an additional transition
method for adopting the updated guidance. Under the additional
transition method, entities may elect to recognize a
cumulative-effect adjustment to the opening balance of retained
earnings in the year of adoption. The Company adopted this standard
on January 1, 2019 using this modified retrospective approach. The
adoption of the standard resulted in the recognition of a ROU asset
and lease liability of approximately $12,900 for one operating
lease as of January 1, 2019, with no impact to retained earnings.
The Company had no capital leases at March 31, 2019 or December 31,
2018.
Effective the first quarter of 2020:
In
August 2018, the FASB issued ASU No. 2018-13, Fair Value
Measurement (“
Topic
820
”): Disclosure Framework - Changes to the
Disclosure Requirements for Fair Value Measurement. The ASU
modifies the disclosure requirements in Topic 820, Fair Value
Measurement, to improve the effectiveness of fair value measurement
disclosures by removing or modifying certain disclosure
requirements and adding other requirements. This ASU is effective
for public companies for annual reporting periods and interim
periods within those annual periods beginning after December 15,
2019. The Company is currently evaluating the effect, if any, that
ASU 2018-13 will have on its financial statements.
Wrap
Technologies, Inc.
Notes to Unaudited Condensed Interim Financial
Statements
|
1.
|
ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(continued)
|
Other pronouncements:
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 standalone selling prices based on the price at which
the performance obligation is sold separately. If the standalone
selling price is not observable through past transactions, the
Company estimates the standalone selling price considering
available information such as market conditions and internally
approved pricing guidelines related to the performance
obligations.
Performance
obligations to deliver products and accessories are generally
satisfied at the point in time the Company ships the product, as
this is when the customer obtains control of the asset under our
standard terms and conditions. The Company has elected to recognize
shipping costs as an expense in cost of revenues when control has
transferred to the customer. The revenues and costs of training 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 December 31, 2018, the Company had no contract assets and no
deferred revenue related to products or training for product
delivered during the year. At March 31, 2019, the Company had
deferred revenue of $2,402 related to future training.
The
Company recognizes an asset if there are incremental costs of
obtaining a contract with a customer, such as commissions. These
costs are ascribed to or allocated to the underlying performance
obligations in the contract and amortized consistent with the
recognition timing of the revenue for any such underlying
performance obligations. The Company had no such assets at March
31, 2019 and December 31, 2018. 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
expenses.
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.
Wrap
Technologies, Inc.
Notes to Unaudited Condensed Interim Financial
Statements
Inventory is
recorded at the lower of cost or net realizable value. The cost of
substantially all of the Company’s inventory is determined by
the weighted average cost method. Inventories consisted of the
following:
|
|
|
|
|
|
|
|
|
Finished
goods
|
$
46,510
|
$
82,313
|
|
Work
in process
|
2,101
|
12,695
|
|
Raw
materials
|
644,080
|
63,259
|
|
|
$
692,691
|
$
158,267
|
|
4.
|
PROPERTY AND EQUIPMENT, NET
|
Property and
equipment including right-of-use operating lease assets consisted
of the following:
|
|
|
|
|
|
|
|
|
Right-of-Use
operating leases
|
$
87,588
|
$
-
|
|
Laboratory
equipment
|
20,345
|
13,980
|
|
Tooling
|
35,076
|
22,683
|
|
Computer
equipment
|
16,413
|
12,608
|
|
Furniture
and fixtures
|
16,250
|
9,595
|
|
|
175,672
|
58,866
|
Accumulated
depreciation and amortization
|
(29,355
)
|
(28,493
)
|
|
|
$
146,317
|
$
30,373
|
The Company recorded a
n ROU
asset and lease liability of approximately
$12,900 for one operating lease as of January 1, 2019, with no
impact to retained earnings. In January 2019 the Company recorded
an additional $17,101 ROU asset from an extension of the operating
lease and in March 2019 recorded $57,587 for a new operating lease.
See Note 7.
Depreciation
expense was $8,073 and $4,511 for the three months ended March 31,
2019 and 2018, respectively. Amortization of ROU operating lease
assets was $5,852 for the three months ended March 31,
2019.
|
5.
|
INTANGIBLE ASSETS, NET
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Patents
|
$
131,993
|
$
111,160
|
|
Trademarks
|
22,514
|
8,910
|
|
|
154,507
|
120,070
|
|
|
(1,539
)
|
(1,355
)
|
|
|
$
152,968
|
$
118,715
|
Wrap
Technologies, Inc.
Notes to Unaudited Condensed Interim Financial
Statements
|
5.
|
INTANGIBLE ASSETS, NET (continued)
|
The
costs related to issued patents will be amortized using the
straight-line method over the estimated remaining lives of issued
patents, which is 20 years from the initial filing.
An impairment charge is recognized if the carrying
amount is not recoverable and the carrying amount exceeds the fair
value of the intangible assets as determined by projected
discounted net future cash flows.
Amortization
expense was $184 for the three months ended March 31, 2019. There
was no amortization for the three months ended March 31,
2018.
|
6.
|
ACCOUNTS PAYABLE AND ACCRUED LIABILITIES
|
Accounts payable
includes $5,359 due to a related party, Syzygy Licensing, LLC
(“
Syzygy
”). See
Note 10.
Accrued
liabilities consist of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
Patent
costs
|
$
4,500
|
$
11,600
|
|
Accrued
compensation
|
105,502
|
55,493
|
|
Warranty
costs
|
2,725
|
428
|
|
Other
|
-
|
932
|
|
|
$
112,727
|
$
68,453
|
|
7.
|
OPERATING LEASE LIABILITY
|
The
Company adopted ASU 2016-02, Leases (Topic 842) on January 1, 2019
using the modified retrospective approach. The adoption of the
standard resulted in the recognition of an ROU asset and lease
liability of $12,900 for one operating lease as of January 1, 2019,
with no impact to retained earnings. Prior year amounts have not
been restated. The lease is for 1,890 square feet of improved
office, assembly and warehouse space in Las Vegas, Nevada. In
January 2019, the Company recorded an additional $17,101 ROU
remeasurement asset and liability from an extension of the
operating facility lease to December 31, 2020.
The Company has elected not to apply ASC Topic 842
to arrangements with lease terms of 12 months or
less.
In
March 2019, the Company recorded a $57,587 ROU asset and liability
for a two-year facility operating lease for 1,906 square feet of
improved office, assembly and warehouse space in Lake Forest,
California expiring in February 2021.
Due to
lack of borrowing history or ability, the Company used as its
incremental borrowing rate a low-grade debt rate published by the
Federal Reserve Bank and determined a discount rate of 7.5% for the
remeasurement in January 2019 and 6.8% for the March 2019 operating
lease. Management determined these are reasonable borrowing
rates.
Operating lease
expense for capitalized operating leases included in operating
activities was $6,651 for the three months ended March 31, 2019.
Operating lease obligations recorded on the balance sheet
are:
|
Operating
lease liability- short term
|
$
41,418
|
Operating
lease liability - long term
|
41,050
|
|
Total
Operating Lease Liability
|
$
82,468
|
Wrap
Technologies, Inc.
Notes to Unaudited Condensed Interim Financial
Statements
|
7.
|
OPERATING LEASE LIABILITY (continued)
|
Future
lease payments included in the measurement of lease liabilities on
the balance sheet at March 31, 2019 for future periods are as
follows:
|
Remainder
of 2019 (nine months)
|
$
33,194
|
|
2020
|
50,116
|
|
2021
|
5,146
|
|
Total
future minimum lease payments
|
88,456
|
|
|
(5,988
)
|
|
Total
|
$
82,468
|
The
weighted average remaining lease term is 1.9 years and the weighted
average discount rate is 7.0%.
|
8.
|
DEFERRED AND ACCRUED COMPENSATION
|
From
March 2016 through February 2017, the Company accrued monthly
compensation for the services of two officers in the aggregate
amount of $7,000 per month payable to Syzygy. In March 2017 the
Company accrued and deferred $6,000 of compensation to each of the
two officers. The balance payable to Syzygy as of March 31, 2019
was $84,000 and the accrued deferred compensation aggregated
$12,000. These balances accrue without interest. No payment terms
or schedule has been established.
|
9.
|
STOCKHOLDERS’ EQUITY AND SHARE-BASED
COMPENSATION
|
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.
Stock Options
On
March
31, 2017, the Company adopted and the Company’s shareholders
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
March 2019, the Company’s directors approved an amendment to
the Plan to increase the number of shares of common stock
authorized for issuance thereunder from 2,000,000 shares of common
stock to 4,100,000 shares of common stock (the “
Plan Increase
”). The Plan
Increase is subject to shareholder approval, and grants made by the
Company under the Plan that are contingent upon the Plan Increase
are null if shareholder approval is not obtained within one year
from the date of Board approval of the Plan
Increase.
The
Company generally recognizes stock compensation expense on the
grant date and over the period of vesting or period that services
will be provided.
The
following table summarizes stock option activity under the Plan for
the three months ended March 31, 2019:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding
January 1, 2019
|
2,067,500
|
$
1.68
|
4.44
|
$
3,063,375
|
|
Granted
|
1,000,000
|
5.41
|
5.00
|
-
|
|
Exercised
|
-
|
-
|
-
|
-
|
Forfeited,
cancelled, expired
|
-
|
-
|
-
|
-
|
|
Outstanding
March 31, 2019
|
3,067,500
|
$
2.90
|
4.45
|
$
12,887,800
|
|
Vested
and exercisable at March 31, 2019
|
225,000
|
$
1.50
|
4.15
|
$
1,260,000
|
Wrap
Technologies, Inc.
Notes to Unaudited Condensed Interim Financial
Statements
|
9.
|
STOCKHOLDERS’ EQUITY AND SHARE-BASED COMPENSATION
(continued)
|
The
Company recorded stock-based compensation in its statements of
operations for the relevant periods as follows:
|
|
|
|
|
|
|
|
|
|
|
Selling,
general and administrative
|
$
203,200
|
$
-
|
|
Research
and development
|
23,847
|
-
|
|
Total
stock-based expense
|
$
227,047
|
$
-
|
As of
March 31, 2019, total estimated compensation cost of stock options
granted but not yet vested was $2.8 million, which is expected to
be recognized over the weighted average period of 2.4
years.
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 nonemployees:
|
|
|
|
|
|
|
|
|
|
|
|
|
Expected
stock price volatility
|
49
%
|
|
Risk-free
interest rate
|
2.41
%
|
|
Forfeiture
rate
|
0
%
|
|
Expected
dividend yield
|
0
%
|
|
Expected
life of options - years
|
3.50
|
|
Weighted-average
fair value of options granted
|
$
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, as it only recently commenced trading.
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.
Warrants
The
Company has outstanding common stock purchase warrants as of March
31, 2019 as follows:
|
|
|
|
|
|
Description
|
|
|
Expiration Date
|
|
Purchase
Warrants (1)
|
4,561,074
|
$
5.00
|
October
30, 2020
|
|
Agent
Warrants
|
456,107
|
$
3.00
|
October
30, 2020
|
(1)
Warrants
to purchase 333,334 shares of common stock are held by a family
trust of Elwood G. Norris, the Company’s Chief Technology
Officer.
The
issuance of the above warrants resulted from a private offering of
Company securities consummated in October 2018. Subsequent to March
31, 2019 a total of 180,000 of the $5.00 warrants were exercised
and 22,150 of the $3.00 warrants were exercised, for cash proceeds
to the Company of $966,450.
Wrap
Technologies, Inc.
Notes to Unaudited Condensed Interim Financial
Statements
|
10.
|
COMMITMENTS AND CONTINGENCIES
|
Facility Leases
See
Note 7.
Related Party Technology License Agreement
The
Company is obligated to pay royalties and pay development and
patent costs pursuant to an exclusive Amended and Restated
Intellectual Property License Agreement dated as of September 30,
2016 with Syzygy, a company owned and controlled by
stockholders/officers Messrs. Elwood Norris and James Barnes. The
agreement provides for royalty payments of 4% of revenue from
products employing the licensed ensnarement device technology up to
an aggregate of $1,000,000 in royalties or until September 30,
2026, whichever occurs earlier. The Company recorded $4,488 for
royalties incurred during the three months ended March 31,
2019.
Suppliers
A
number of the components used in the Company’s products are
produced by outside suppliers, some of which are sourced from a
single supplier, which can magnify the risk of shortages and
decrease the Company’s ability to negotiate with suppliers on
the basis of price. 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.
At
March 31, 2019, the Company was committed for approximately $1.4
million for future component deliveries that are generally subject
to modification or rescheduling in the normal course of
business.
|
11.
|
RELATED PARTY TRANSACTIONS
|
Commencing in
October 2017, the Company began reimbursing Mr. Elwood Norris, an
officer and stockholder of the Company, $1,500 per month on a month
to month basis for laboratory facility costs, for an aggregate of
$4,500 during the three months ended March 31, 2019 and
2018.
See
Notes 1, 6, 8 and 10 for information regarding related party
transactions and information.
See
Note 9 for subsequent event information related to warrant
exercises.
Ite
m
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 and with our
audited financial statements and other information presented in our
Annual Report on Form 10-K for the year ended December 31, 2018.
The following discussion may contain forward-looking statements
that reflect our plans, estimates and beliefs. Words such as
“expects,” “anticipates,”
“intends,” “plans,” “believes,”
“seeks,” “estimates” 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. Our actual results could
differ materially from those discussed in these forward-looking
statements. Factors that could cause or contribute to these
differences include, but are not limited to, those discussed below
and elsewhere in this Quarterly Report on Form 10-Q, particularly
in the section entitled “Risk Factors.”
We are
a security technology company organized in March 2016 focused on
delivering modern policing solutions to customers, primarily
consisting of law enforcement and security personnel.
Business Highlights, Outlook and Challenges
In December 2017, we completed a self-underwritten public offering,
raising gross proceeds of approximately $3.49 million from the sale
of 2,328,533 shares of our Ccommon sStock, par value $0.0001 per
share (“
Common
Stock
”), at the public
offering price of $1.50 per share. Three officers of the Company
purchased an aggregate of 40,000 shares of Common Stock during the
offering for an aggregate purchase price of
$60,000.
On May
18, 2018
,
quotations
for our Common Stock commenced under
the WRTC ticker symbol on the OTCQB Venture Market for early stage
and developing U.S. and international companies. On December 4,
2018, our stock trading was up-listed to the Nasdaq Capital Market
also under the symbol “WRTC.”
During 2018, the U.S. Patent and Trademark Office granted the first
four U.S. patents on our BolaWrap remote restraint device and
technology. In September 2018, we commenced filing our first
foreign patent applications, targeting the European Union (17
countries) and 17 other countries. We currently have nine U.S.
patents and 19 foreign patents pending. We have additional patents
being drafted as part of our strategy to protect our innovations in
the U.S. and in targeted countries internationally.
In October 2018, we completed a private placement of equity
securities, resulting in net cash proceeds to the Company of
approximately $12,140,000. We are rapidly growing business
functions, including production, marketing, sales, distribution,
service and administration. Until we generate additional revenue
and net cash flows from operations or obtain additional financing,
we still expect to have limited personnel to accomplish these
functions and will primarily rely on our executives along with
outside consultants and suppliers for production and certain other
services. Given our limited personnel, substantial risk and
uncertainty exists with respect to whether we can timely execute
our business plan and achieve our operating objectives, including
obtaining orders from customers and introducing new products in the
future.
We began demonstrations of our first product, the BolaWrap 100
remote restraint device, in November 2017. Our product is gaining
important worldwide awareness and recognition through media
exposure, trade show participations, product demonstrations and
word of mouth as a result of positive responses to our product. We
believe that we are in the process of establishing a global brand
and the product foundation for business growth. We believe
that we have strong market opportunities for our restraint product
offering within the law enforcement, military and homeland security
business sectors. We are also developing and intend to expand our
international business.
The focus of our sales strategy is the immediate addressable
domestic market of approximately 701,000 full-time sworn law
enforcement officers in 15,300 federal, state and local law
enforcement agencies, while also beginning to explore other
markets, including military, border patrol and international
markets. According to Stratistics MRC, we participate in a segment
of the non-lethal products market expected to grow to $11.85
billion by 2023. in the U.S. We have demonstrated our BolaWrap 100
product to over 100 agencies across the country, often with media
in attendance, resulting in dozens of media reports including
television and print that have driven hundreds of inquiries from
domestic and international prospects. Over 40 law enforcement
agencies took delivery of the BolaWrap 100 devices during 2018 and
an additional 20 in the first quarter of 2019. We have delivered
over 300 devices at no cost to agencies for evaluation and feedback
and sold a limited number of small orders as we establish volume
production. We are making product updates as a result of initial
feedback, and in October 2018 announced a patent pending green line
laser accessory. We believe the enhanced version of our product
with the laser accessory will meet customer requirements and we are
taking orders for delivery in the second quarter of 2019. We
believe we can accelerate orders in 2019. However, there can be no
assurance of the timing or quantity of orders or sales in future
periods.
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.
Although we believe that we have adequate financial
resources to sustain our operations for the next year, no
assurances can be given, and we
may
need additional capital for future operations and to market and
further develop our products and introduce new products. Obtaining
any required additional financing in the future could be a
significant challenge for management, and failure to secure
necessary financing would have a material adverse effect on our
operations.
We face significant challenges in establishing, operating and
growing our business. We expect that we will need to continue to
innovate new applications for our security technology, develop new
products and technologies to meet diverse customer requirements and
identify and develop new markets for our products.
Critical Accounting Policies and Estimates
The
preparation of financial statements in accordance with accounting
principles generally accepted in the United States
(“
U.S. GAAP
”)
requires us to make estimates and judgments that affect the
reported amounts of assets, liabilities, revenue and expense, and
related disclosure of contingent assets and liabilities. We
evaluate our estimates, on an on-going basis, including those
estimates related to recognition and measurement of contingencies
and accrued costs. We base our estimates on historical experience
and on various other assumptions we believe to be reasonable under
the circumstances. Actual results may differ from these estimates
under different assumptions or conditions.
As part
of the process of preparing our financial statements, we are
required to estimate our provision for income taxes. Significant
management judgment will be required in determining our provision
for income taxes, deferred tax assets and liabilities, tax
contingencies, unrecognized tax benefits, and any required
valuation allowance, including taking into consideration the
probability of the tax contingencies being incurred. Management
assesses this probability based upon information provided by its
tax advisers, its legal advisers and similar tax cases. If at a
later time our assessment of the probability of these tax
contingencies changes, our accrual for such tax uncertainties may
increase or decrease. Our effective tax rate for annual and interim
reporting periods could be impacted if uncertain tax positions that
are not recognized are settled at an amount which differs from our
estimates.
Some of
our accounting policies require higher degrees of judgment than
others in their application. These include share-based compensation
and contingencies and, going forward, areas such as revenue
recognition, operating lease liabilities, warranty liabilities,
impairments and valuation of intangible assets.
We sell
our products to customers primarily law enforcement agencies and
foreign dealers 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 training. Our
customers do not have the right to return product unless the
product is found to be defective.
Historically,
our assumptions, judgments and estimates relative to our critical
accounting policies have not differed materially from actual
results. There were no significant changes or modification of our
critical accounting policies and estimates involving management
valuation adjustments affecting our results for the three months
ended March 31, 2019.
Operating Expense
Our
operating expense has included (i) selling, general and
administrative expense, and (ii) research and development expense.
Research and development expense comprises the costs incurred in
performing research and development activities and developing
production on our behalf, including compensation and consulting,
design and prototype costs, contract services, patent costs and
other outside expenses. The scope and magnitude of our future
research and development expense is difficult to predict at this
time and will depend on elections made regarding research projects,
staffing levels and outside consulting and contract
costs.
The
actual level of future selling, general and administrative expense
will be dependent on staffing levels, elections regarding
expenditures on sales, marketing and customer training, the use of
outside resources, public company and regulatory costs, and other
factors, some of which are outside of our control. Our operating
costs could increase as we introduce our product and expand our
research and development, production, distribution, training,
service and administrative functions in future periods. We may also
incur substantial noncash stock-based compensation costs depending
on future option grants that are impacted by stock prices and other
valuation factors. Historical expenditures are not indicative of
future expenditures.
Results of Operations
Three Months Ended March 31, 2019 Compared to Three Months Ended
March 31, 2018
We had
revenue of $117,811 primarily from deliveries to customers for the
quarter ended March 31, 2019 and none for the three months ended
March 31, 2018.
Recently,
our marketing and selling efforts have focused on creating demand
for our improved generation product with our green line laser.
Initial deliveries are anticipated in the second quarter of 2019.
We incurred promotional costs of $67,495 for the three months ended
March 31, 2019 related primarily to the cost of demonstration
products and accessories delivered to law enforcement agencies that
were expensed as marketing costs. A total of $5,801
of
such marketing costs were incurred
during the three months ended March 31, 2018.
Our
cost of revenues for the first quarter
of 2019
were
was
$61,220 resulting in a gross margin of
48%. Due to the minimal revenues and the changes being made to our
product as we establish volume manufacturing
,
such margin may not be indicative of
future margins.
In addition, our
margins vary based on the sales channels through which our products
are sold. We continue to implement product updates and changes,
including raw material and component changes that may impact
product costs. With such product updates and changes we have
limited warranty cost experience and estimated future warranty
costs can impact our gross margins. We do not believe that
historical gross profit margins should be relied upon as an
indicator of future gross profit margins.
Selling, General and Administrative Expense.
Selling,
general and administrative expense for the three-month period ended
March 31, 2019 was $1,157,950 compared to $339,167 for the
three-month period ended March 31, 2018. The most recent period
included non-cash stock-based compensation expense of $203,200 and
compensation and sales consulting costs of $501,072. There were no
non-cash stock-based compensation costs for the comparable period
in 2018, and compensation and sales consulting costs for the 2018
three-month period were $200,153. The increase in compensation and
sales consulting costs is attributable to the increase in staffing
from hiring of executives, sales and marketing employees and
consultants as we commenced the introduction of our first product
to market and made product demonstrations to law enforcement
agencies across the United States.
Travel
and entertainment costs increased from $21,000 to $100,659 for the
three months ended March 31, 2018 to March 31, 2019, respectively,
primarily as a result of product demonstration activities to law
enforcement agencies across the nation. Product promotion, trade
show and other marketing costs were $116,019 for the three months
ended March 31, 2019 compared to $17,235 for the three months ended
March 31, 2018. The period over period increase is attributable to
the commencement of direct sales activities with agencies and
demonstration products provided at no cost during the 2019
period.
Other
general and administrative costs of $237,000 during the three
months ended March 31, 2019 included legal, audit and professional
fees of $53,223, chairman and director fees and expenses of
$62,788, public company costs of $64,347 and occupancy and office
costs of $56,642. In the prior comparable three-month period, our
activities were more limited with other general and administrative
costs aggregating $100,779.
Research and Development Expense.
Research and development
expense for the three months ended March 31, 2019 was $374,819,
which included $23,847 of non-cash stock-based compensation
expense, $165,061 of compensation costs, consulting and contract
research costs of $118,714 and prototype costs of $31,338. This was
an increase from $95,985 of research and development expense for
the comparable three-month prior period ended March 31, 2018, which
included $65,263 of compensation costs, consulting and contract
research costs of $11,198 and prototype costs of $6,686. During
late 2018 and in the first quarter of 2019 we increased staffing
for internal research and used outside consulting and contract
research focused primarily on our new patent-pending green line
laser accessory. We also incurred consulting costs related to
developing systems for monitoring research and production. Our
research and development costs will vary depending on specific
research projects and levels of internal and external staffing and
prototype costs.
Net Loss.
Our net loss for the three-month period ended
March 31, 2019 was $1,480,781 compared to a net loss of $435,378
for the three-month period ended March 31, 2018, with the increase
in net loss resulting from costs associated with increased staffing
and activity after our October 2018 financing and growth of sales
and marketing activities related to the BolaWrap 100
product.
Liquidity and Capital Resources
Overview
We have experienced net losses and negative cash flows from
operations since our inception. As of March 31, 2019, we had cash
of $10,693,479, positive working capital of $10,873,368, and had
sustained cumulative losses attributable to common stockholders of
$5,885,117. We believe that our cash on hand will sustain our
operations for at least the next twelve months.
Our sole source of liquidity to date has been funding from our
stockholders and the sale of debt and equity securities. We expect
our primary source of future liquidity will be from the exercise of
stock options and warrants, the sale of products, if any, and if
required, from future equity or debt financings. Subsequent to
March 31, 2019
we
received $966,450
from the
exercise of certain common stock purchase
warrants.
Capital Requirements
In December 2017, we completed our IPO, raising gross proceeds of
approximately $3.49 million from the sale of 2,328,533 shares of
Common Stock at the public offering price of $1.50 per
share.
In October 2018, we received approximately $12.14 million in net
cash proceeds from the private sale of equity securities to certain
accredited investors.
We cannot currently estimate our future liquidity requirements or
future capital needs, which will depend on, among other things,
capital required to introduce our new product and the staffing and
support requirements, as well as the timing and amount of future
revenue and product costs. We anticipate that demands for operating
and working capital will grow as we are increasing 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, although no assurances can be given. Additionally,
no assurances can be provided that any future debt or equity
capital will be available to us under favorable terms, if at all.
Failure to quickly produce and sell products and timely obtain any
required additional capital in the future will have a material
adverse effect on the Company.
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:
●
decisions regarding
staffing, development, production, marketing and other
functions;
●
the
timing and extent of any market acceptance of our
products;
●
the
costs, timing and outcome of planned production and required
customer and regulatory compliance of our new
products;
●
the
costs of preparing, filing and prosecuting our patent applications
and defending any future intellectual property-related
claims;
●
the
costs and timing of additional product development;
●
the
costs, timing and outcome of any future warranty claims or
litigation against us associated with any of our products;
and
●
the
timing and costs associated with any new financing.
Off-Balance Sheet Arrangements
We have no off-balance sheet arrangements.
Cash Flow
Operating Activities.
During the three months ended March 31, 2019, net cash used in
operating activities was $1,588,977.
The net loss of $1,480,781 was
decreased by
non-cash expenses of $227,395
,
consisting primarily of stock compensation expense of $227,047.
Other major component changes using operating cash included a
$521,449 increase in inventories, an increase of $212,119 in
prepaid expense and other current assets and an increase of $58,646
in accounts receivable. An increase of $459,341 in accounts payable
and accrued liabilities reduced the cash used in operating
activities.
During the three months ended March 31, 2018, net cash used in
operating activities was $526,355, consisting primarily of the net
loss of $435,378.
Investing Activities.
We used $39,198 and $6,472 of cash for the purchase of property and
equipment during the three months ended March 31, 2019 and 2018,
respectively. We began capitalizing patent costs during mid-2018
and invested $34,437 in patents during the three months ended March
31, 2019.
Financing Activities.
There were no financing activities for the three months ended March
31, 2019 or 2018. Subsequent to March 31, 2019 we
received $966,450
from the exercise of certain common
stock purchase warrants.
Contractual Obligations and Commitments
We are obligated to pay to Syzygy Licensing, LLC
(“
Syzygy
”) a 4% royalty fee on future product sales
up to an aggregate amount of $1.0 million in royalties
or
until September 30, 2026, whichever occurs earlier
.
In January 2019, we extended our Las Vegas, Nevada corporate and
production facility lease through December 31, 2020. In February
2019, we entered into a two-year lease for an office and warehouse
space located in Lake Forest, California. We are committed to
aggregate lease payments on these leases of $46,281 in 2019,
$58,636 in 2020 and $5,598 in 2021.
At
March 31, 2019
,
we were
committed to approximately $1.4 million of purchase commitments for
product components. These purchase commitments are generally
subject to modification as to timing, quantities and scheduling and
in certain instances may be cancelable without
penalty.
Effects of Inflation
We do
not believe that inflation has had a material impact on our
business, revenue or operating results during the periods
presented.
Recent Accounting Pronouncements
Other
than our adoption of ASU 2016-02, Leases (Topic 842), there have
been no recent accounting pronouncements or changes in accounting
pronouncements during the period ended March 31, 2019, or
subsequently thereto, that we believe are of potential significance
to our financial statements.
Item 3. Quan
t
itative and Qualitative
Disclosures about Market Risk.
Not
applicable.
Item 4. Con
t
rols and
Procedures.
We are
required to maintain disclosure controls and procedures designed to
ensure that material information related to us, including our
consolidated subsidiaries, is recorded, processed, summarized and
reported within the time periods specified in the SEC rules and
forms.
Conclusion Regarding the Effectiveness of Disclosure Controls and
Procedures
Under
the supervision and
with the participation of our management, including our principal
executive officer and our principal financial officer, as of March
31, 2019 we conducted an evaluation of our disclosure controls and
procedures as such term is defined under Rules 13a-15(e) and
15d-15(e) promulgated under the Securities Exchange Act of 1934, as
amended
(the
“
Exchange
Act
”)
. Based on
this evaluation, our principal executive officer and our principal
financial officer concluded that our disclosure controls and
procedures
were effective at the
reasonable assurance level.
Changes in Internal Control over Financial Reporting
There
have been no changes in our internal control over financial
reporting during our fiscal quarter ended March 31, 2019, 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 periods 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.