wrap20220630

wrap20220630_10q.htm

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 June 30, 2022

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

SECURITIES EXCHANGE ACT OF 1934

For the transition period from _________ to _________

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	WRAP	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 ☒ 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). ☒ 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 ☒		Smaller reporting company ☒
		Emerging growth company ☒

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

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

As of August 8, 2022 a total of 41,081,729 shares of the Registrant’s common stock, par value $0.0001, (“Common Stock”) were issued and outstanding.

Table of Contents

WRAP TECHNOLOGIES, INC.

INDEX

PART I. FINANCIAL INFORMATION

Item 1.	Financial Statements:
	Condensed Consolidated Balance Sheets as of June 30, 2022 (unaudited) and December 31, 2021	1
	Condensed Consolidated Statements of Operations and Comprehensive Loss for the three and six months ended June 30, 2022 and 2021 (unaudited)	2
	Condensed Consolidated Statements of Stockholders Equity for the three and six months ended June 30, 2022 and 2021 (unaudited)	3
	Condensed Consolidated Statements of Cash Flows for the six months ended June 30, 2022 and 2021 (unaudited)	5
	Notes to Unaudited Condensed Consolidated Interim Financial Statements	6
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	16
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	27
Item 4.	Controls and Procedures	27

PART II. OTHER INFORMATION

Item 1.	Legal Proceedings	27
Item 1A.	Risk Factors	28
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	28
Item 3.	Defaults Upon Senior Securities	28
Item 4.	Mine Safety Disclosures	28
Item 5.	Other Information	28
Item 6.	Exhibits	28

SIGNATURES		29

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PART I. FINANCIAL INFORMATION

Item 1. Financial Statements

Wrap Technologies, Inc.

Condensed Consolidated Balance Sheets

(in thousands, except par value and share amounts)

	June 30,
	2022			December 31,
	(Unaudited)			2021
ASSETS
Current assets:
Cash and cash equivalents	$	3,643		$	4,937
Short-term investments		24,862			29,983
Accounts receivable and contract assets		1,405			3,859
Inventories, net		2,033			1,566
Prepaid expenses and other current assets		700			868
Total current assets		32,643			41,213
Property and equipment, net		907			976
Operating lease right-of-use asset, net		337			51
Intangible assets, net		1,941			1,982
Other assets		11			9
Total assets	$	35,839		$	44,231

LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable	$	1,362		$	1,779
Accrued liabilities		912			824
Customer deposits		4			43
Deferred revenue- short term		178			155
Operating lease liability - short term		102			56
Total current liabilities		2,558			2,857

Long-term liabilities:
Deferred revenue- long term		166			110
Operating lease liability - long term		248			-
Total long-term liabilities		414			110
Total liabilities		2,972			2,967

Commitments and contingencies (Note 11)

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; 40,992,161 and 40,851,945 shares issued and outstanding each period, respectively		4			4
Additional paid-in capital		92,856			91,025
Accumulated deficit		(59,976	)		(49,759	)
Accumulated other comprehensive loss		(17	)		(6	)
Total stockholders' equity		32,867			41,264
Total liabilities and stockholders' equity	$	35,839		$	44,231

See accompanying notes to unaudited condensed consolidated interim financial statements.

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Wrap Technologies, Inc.

Condensed Consolidated Statements of Operations and Comprehensive Loss

(in thousands, except share and per share amounts)

(unaudited)

	Three Months Ended June 30,						Six Months Ended June 30,
	2022			2021			2022			2021
Revenues:
Product sales	$	969		$	1,852		$	2,431		$	3,278
Other revenue		196			82			333			198
Total revenues		1,165			1,934			2,764			3,476
Cost of revenues:
Products and services		708			1,247			1,640			2,184
Restructuring inventory charge		-			747			-			747
Total cost of revenues		708			1,994			1,640			2,931
Gross profit (loss)		457			(60	)		1,124			545

Operating expenses:
Selling, general and administrative		3,764			6,579			8,370			11,557
Research and development		1,476			1,162			2,971			2,227
Total operating expenses		5,240			7,741			11,341			13,784
Loss from operations		(4,783	)		(7,801	)		(10,217	)		(13,239	)

Other income (expense):
Interest income		-			8			2			10
Other		(2	)		(6	)		(2	)		1
		(2	)		2			-			11
Net loss	$	(4,785	)	$	(7,799	)	$	(10,217	)	$	(13,228	)

Net loss per basic and diluted common share	$	(0.12	)	$	(0.20	)	$	(0.25	)	$	(0.35	)
Weighted average common shares used to compute net loss per basic and diluted common share		40,978,820			38,162,526			40,943,241			37,938,873

Comprehensive loss:
Net loss	$	(4,785	)	$	(7,799	)	$	(10,217	)	$	(13,228	)
Net unrealized gain (loss) on short-term investments		12			(4	)		(11	)		(2	)
Comprehensive loss	$	(4,773	)	$	(7,803	)	$	(10,228	)	$	(13,230	)

See accompanying notes to unaudited condensed consolidated interim financial statements.

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Wrap Technologies, Inc.

Consolidated Statements of Stockholders' Equity

(in thousands, except share amounts)

(unaudited)

										Accumulated
					*Additional*					*Other*			*Total*
	*Common Stock*				*Paid-In*		*Accumulated*			*Comprehensive*			*Stockholders'*
	*Shares*		*Amount*		*Capital*		*Deficit*			*Income (Loss)*			*Equity*

	*Three Months Ended June 30, 2022*

Balance at April 1, 2022		40,951,197	$	4	$	92,129	$	(55,191	)	$	(29	)	$	36,913
Share-based compensation expense		-		-		727		-			-			727
Common shares issued upon vesting of restricted stock units		40,964		-		-		-			-			-
Net unrealized gain on short-term investments		-		-		-		-			12			12
Net loss for the period		-		-		-		(4,785	)		-			(4,785	)
Balance at June 30, 2022		40,992,161	$	4	$	92,856	$	(59,976	)	$	(17	)	$	32,867

	Six Months Ended June 30, 2022

Balance at January 1, 2022		40,851,945	$	4	$	91,025	$	(49,759	)	$	(6	)	$	41,264
Common shares issued upon exercise of stock options		50,000		-		75		-			-			75
Share-based compensation expense		-		-		1,756		-			-			1,756
Common shares issued upon vesting of restricted stock units		90,216		-		-		-			-			-
Common shares issued for services		-		-		-		-			-			-
Net unrealized loss on short-term investments		-		-		-		-			(11	)		(11	)
Net loss for the period		-		-		-		(10,217	)		-			(10,217	)
Balance at June 30, 2022		40,992,161	$	4	$	92,856	$	(59,976	)	$	(17	)	$	32,867

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										Accumulated
					*Additional*					*Other*			*Total*
	*Common Stock*				*Paid-In*		*Accumulated*			*Comprehensive*			*Stockholders'*
	*Shares*		*Amount*		*Capital*		*Deficit*			*Income (Loss)*			*Equity*

	*Three Months Ended June 30, 2021*

Balance at April 1, 2021		37,711,698	$	4	$	72,777	$	(30,739	)	$	17		$	42,059
Common shares issued upon exercise of warrants at $6.50 per share		1,661,320		-		10,799		-			-			10,799
Common shares issued upon exercise of warrants at $5.00 per share, net of issuance costs		153,692		-		1,249		-			-			1,249
Common shares issued upon exercise of stock options		82,066		-		165		-			-			165
Common shares issued upon vesting of restricted stock units		277,614		-		-		-			-			-
Common shares issued for services		25,000		-		139		-			-			139
Share-based compensation expense		-		-		2,148		-			-			2,148
Net unrealized loss on short-term investments		-		-		-		-			(4	)		(4	)
Net loss for the period		-		-		-		(7,799	)		-			(7,799	)
Balance at June 30, 2021		39,911,390	$	4	$	87,277	$	(38,538	)	$	13		$	48,756

	Six Months Ended June 30, 2021

Balance at January 1, 2021		37,554,162	$	4	$	71,705	$	(25,310	)	$	15		$	46,414
Common shares issued upon exercise of warrants at $6.50 per share		1,661,320		-		10,799		-			-			10,799
Common shares issued upon exercise of warrants at $5.00 per share, net of issuance costs		153,692		-		1,249		-			-			1,249
Common shares issued upon exercise of stock options		157,066		-		278		-			-			278
Common shares issued upon vesting of restricted stock units		342,274		-		-		-			-			-
Common shares issued for services		42,876		-		239		-			-			239
Share-based compensation expense		-		-		3,007		-			-			3,007
Net unrealized loss on short-term investments		-		-		-		-			(2	)		(2	)
Net loss for the period		-		-		-		(13,228	)		-			(13,228	)
Balance at June 30, 2021		39,911,390	$	4	$	87,277	$	(38,538	)	$	13		$	48,756

See accompanying notes to unaudited condensed consolidated interim financial statements.

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Wrap Technologies, Inc.

Consolidated Statements of Cash Flows

(in thousands)

(unaudited)

	Six Months Ended June 30,
	2022			2021
Cash Flows From Operating Activities:
Net loss	$	(10,217	)	$	(13,228	)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation and amortization		380			219
Restructuring and other costs		-			747
Gain on sale of assets		-			(11	)
Warranty provision		45			10
Non-cash lease expense		49			46
Share-based compensation		1,756			3,007
Common shares issued for services		-			239
Provision for doubtful accounts		8			46
Changes in assets and liabilities:
Accounts receivable		2,446			(798	)
Inventories		(467	)		(713	)
Prepaid expenses and other current assets		168			(65	)
Accounts payable		(417	)		48
Operating lease liability		(41	)		(48	)
Customer deposits		(39	)		8
Accrued liabilities and other		106			53
Warranty settlement		(63	)		16
Deferred revenue		79			170
Net cash used in operating activities		(6,207	)		(10,254	)

Cash Flows From Investing Activities:
Purchase of short-term investments		(14,890	)		(25,009	)
Proceeds from maturities of short-term investments		20,000			20,000
Capital expenditures for property and equipment		(168	)		(367	)
Investment in patents and trademarks		(102	)		(96	)
Investment in long-term deposits		(2	)		-
Proceeds from long-term deposits		-			3
Net cash provided by (used in) investing activities		4,838			(5,469	)

Cash Flows From Financing Activities:
Proceeds from exercise of warrants		-			12,048
Proceeds from exercise of stock options		75			278
Repayment of debt		-			(200	)
Net cash provided by financing activities		75			12,126

Net decrease in cash and cash equivalents		(1,294	)		(3,597	)
Cash and cash equivalents, beginning of period		4,937			16,647
Cash and cash equivalents, end of period	$	3,643		$	13,050

Supplemental Disclosure of Non-Cash Investing
and Financing Activities:
Change in unrealized gain on short-term investments	$	(11	)	$	(2	)
Right-of-use asset and liability recorded during period	$	335		$	-

See accompanying notes to unaudited condensed consolidated interim financial statements.

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Wrap Technologies, Inc.

Notes to Unaudited Condensed Consolidated Interim Financial Statements

(in thousands, except per share and share amounts)

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 “WRAP”. The Company is a developer and supplier of public safety products and training services for law enforcement and security personnel. The Company’s primary product is the BolaWrap® remote restraint device. The principal markets for the Company’s proprietary products and services are in North and South America, Europe, Middle East and Asia.

Basis of Presentation

The Company’s unaudited interim condensed consolidated financial statements included herein have been prepared in accordance with the instructions to Form 10-Q and Article 8 of Regulation S-X and the rules and regulations of the Securities and Exchange Commission (“SEC”). Certain information and footnote disclosures normally included in financial statements prepared in accordance with U.S. generally accepted accounting principles (“U.S. GAAP”) have been condensed or omitted pursuant to such rules and regulations. In management’s opinion, the accompanying financial statements reflect adjustments necessary to present fairly the financial position, results of operations, and cash flows for those periods indicated, and contain adequate disclosure to make the information presented not misleading. Adjustments included herein are of a normal, recurring nature unless otherwise disclosed in the footnotes. The condensed consolidated financial statements and notes thereto should be read in conjunction with the Company’s audited financial statements and notes thereto for the year ended December 31, 2021, included in the Company’s Annual Report on Form 10-K, as filed with the SEC on March 10, 2022. The accompanying condensed consolidated balance sheet at December 31, 2021, has been derived from the audited consolidated balance sheet at December 31, 2021, contained in the above referenced Form 10-K. Results of operations for interim periods are not necessarily indicative of the results of operations for a full year.

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

Principles of Consolidation

The Company has one wholly-owned subsidiary, Wrap Reality, Inc. formed in December 2020 that sells a virtual reality (“VR”) training system primarily targeting law enforcement agencies. The consolidated financial statements include the accounts of this subsidiary after elimination of intercompany transactions and accounts.

Use of Estimates

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

Loss per Share

Basic loss per common share is computed by dividing net loss for the period by the weighted-average number of shares of Common Stock outstanding during the period. Diluted net loss per Common Share reflects the potential dilution of securities that could share in the earnings of an entity. The Company’s losses for the periods presented cause the inclusion of potential Common Stock instruments outstanding to be antidilutive. Stock options and restricted stock units exercisable or issuable for a total of 6,458,823 shares of Common Stock were outstanding at June 30, 2022. These securities are not included in the computation of diluted net loss per common share for the periods presented as their inclusion would be antidilutive due to losses incurred by the Company.

Recent Issued Accounting Guidance

In October 2021, the FASB issued ASU 2021-08 (“ASU No. 2021-08”), Business Combinations (Topic 805): Accounting for Contract Assets and Contract Liabilities from Contracts with Customers, to require that an acquirer recognize, and measure contract assets and contract liabilities acquired in a business combination in accordance with Topic 606, Revenue from Contracts with Customers. At the acquisition date, an acquirer should account for the related revenue contracts in accordance with Topic 606 as if it had originated the contracts. The amendments in this update should be applied prospectively and are effective for fiscal years beginning after December 15, 2022, including interim periods within those fiscal years. We do not expect the adoption of this standard to have a material impact on our consolidated financial statements and related disclosures.

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

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Wrap Technologies, Inc.

Notes to Unaudited Condensed Consolidated Interim Financial Statements

(in thousands, except per share and share amounts)

2.	REVENUE AND PRODUCT COSTS

On January 1, 2018, the Company adopted FASB ASC Topic 606, Revenue from Contracts with Customers (“Topic 606”) and, as it had no prior revenue or contracts with customers, there was no transition required nor any impact on prior results. Topic 606 requires entities to recognize revenue through the application of a five-step model, which includes identification of the contract, identification of the performance obligations, determination of the transaction price, allocation of the transaction price to the performance obligations and recognition of revenue as the entity satisfies the performance obligations.

The Company enters into contracts that include various combinations of products, accessories, software and services, each of which are generally distinct and are accounted for as separate performance obligations. Product sales includes BolaWrap products and accessorites. Other revenue includes VR revenues, service, training and shipping revenues.

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

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

The Company has elected to recognize shipping costs as an expense in cost of revenue when control has transferred to the customer.

Time-based VR system contracts generally include setup, training and the use of software and hardware for a fixed term, generally one to five years and support and upgrade services during the same period. The Company does not sell time-based arrangements without setup, training and support services and therefore revenues for the entire arrangement are recognized on a straight-line basis over the term. When hardware is bundled and not sold separately the Company allocates the contract transaction price to each performance obligation using the SSP of each distinct good and service in the contract.

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Wrap Technologies, Inc.

Notes to Unaudited Condensed Consolidated Interim Financial Statements

(in thousands, except per share and share amounts)

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. The Company may 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. Additionally, the Company may receive payments, most typically for service and warranty contracts, at the onset of the contract and before the services have been performed. In such instances, a deferred revenue liability is recorded. The Company recognizes these contract liabilities as revenue after all revenue recognition criteria are met. The table below details the activity in our contract liabilities during the six months ended June 30, 2022.

	Customer			Deferred
	Deposits			Revenue
Balance at January 1, 2022	$	43		$	265
Additions, net		4			148
Transfer to revenue		(43	)		(69	)
Balance at June 30, 2022	$	4		$	344
Current portion	$	4		$	178
Long-term portion	$	-		$	166

At June 30, 2022, the Company’s deferred revenue of $344 consisted of $221 related to VR training and $123 related to BolaWrap extended warranties and services. At December 31, 2021, the Company’s deferred revenue of $265 consisted of $172 related to VR training and $67 related to extended warranties.

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 June 30, 2022, and December 31 2021. 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 warranty, generally one-year, are charged to cost of products sold when revenue is recorded for the related product. Royalties are also charged to cost of products sold.

3.	FAIR VALUE MEASUREMENTS

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

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

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

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

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

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Wrap Technologies, Inc.

Notes to Unaudited Condensed Consolidated Interim Financial Statements

(in thousands, except per share and share amounts)

The following table shows the Company’s cash and cash equivalents, Money Market Funds and short-term investments by significant investment category as of June 30, 2022, and December 31, 2021.

	As of June 30, 2022
	Adjusted		Unrealized		Unrealized			Market
	Cost		Gains		Losses			Value
Level 1:
Money Market Funds	$	1,537	$	-	$	-		$	1,537
U.S. Treasury securities in short-term investments		24,879		-		(17	)		24,862
Total Financial Assets	$	26,416	$	-	$	(17	)	$	26,399

As of December 31, 2021

Adjusted

Unrealized

SEC Form 10-Q filed by Wrap Technologies Inc.