wrap20230630

wrap20230630_10q.htm

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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, 2023

☐ 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 9, 2023 a total of 41,968,389 shares of the Registrant’s common stock, par value $0.0001, (“Common Stock”) were issued and outstanding.

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WRAP TECHNOLOGIES, INC.

INDEX

PART I. FINANCIAL INFORMATION		Page

Item 1.	Financial Statements:
	Condensed Consolidated Balance Sheets as of June 30, 2023 (unaudited) and December 31, 2022	1
	Condensed Consolidated Statements of Operations and Comprehensive Loss for the three and six months ended June 30, 2023 and 2022 (unaudited)	2
	Condensed Consolidated Statements of Stockholders’ Equity for the three and six months ended June 30, 2023 and 2022 (unaudited)	3
	Condensed Consolidated Statements of Cash Flows for the six months ended June 30, 2023 and 2022 (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	15
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, 2023			December 31, 2022
ASSETS
Current assets:
Cash and cash equivalents	$	11,688		$	5,330
Short-term investments		6,500			13,949
Accounts receivable and contract assets, net		1,949			2,830
Inventories, net		6,520			3,975
Prepaid expense and other current assets		722			775
Total current assets		27,379			26,859
Property and equipment, net		588			758
Operating lease right-of-use asset, net		232			285
Intangible assets, net		2,588			2,569
Other assets		69			100
Total assets	$	30,856		$	30,571

LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable	$	1,928		$	1,419
Accrued liabilities		8,562			1,463
Customer deposits		3			-
Deferred revenue- short term		211			166
Operating lease liability - short term		113			108
Total current liabilities		10,817			3,156

Long-term liabilities:
Deferred revenue- long term		129			167
Operating lease liability - long term		135			193
Total long-term liabilities		264			360
Total liabilities		11,081			3,516

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; 41,910,687 and 41,175,993 shares issued and outstanding at June 30, 2023 and December 31, 2022, respectively		4			4
Additional paid-in capital		96,182			94,333
Accumulated deficit		(76,411	)		(67,376	)
Accumulated other comprehensive loss		-			94
Total stockholders' equity		19,775			27,055
Total liabilities and stockholders' equity	$	30,856		$	30,571

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,
	2023			2022			2023			2022
Revenue:
Product sales	$	1,034		$	969		$	1,650		$	2,431
Other revenue		168			196			263			333
Total revenue		1,202			1,165			1,913			2,764
Cost of revenue		534			708			893			1,640
Gross profit (loss)		668			457			1,020			1,124

Operating expense:
Selling, general and administrative		4,745			3,764			8,286			8,370
Research and development		1,002			1,476			2,073			2,971
Total operating expense		5,747			5,240			10,359			11,341
Loss from operations		(5,079	)		(4,783	)		(9,339	)		(10,217	)

Other income (expense):
Interest income		88			-			324			2
Other		(16	)		(2	)		(20	)		(2	)
Total other income (expense)		72			(2	)		304			-
Net loss	$	(5,007	)	$	(4,785	)	$	(9,035	)	$	(10,217	)

Net loss per basic and diluted common share	$	(0.12	)	$	(0.12	)	$	(0.22	)	$	(0.25	)
Weighted average common shares used to compute net loss per basic and diluted common share		41,709,718			40,978,820			41,483,669			40,943,241

Comprehensive loss:
Net loss	$	(5,007	)	$	(4,785	)	$	(9,035	)	$	(10,217	)
Net unrealized gain (loss) on short-term investments		-			12			-			(11	)
Comprehensive loss	$	(5,007	)	$	(4,773	)	$	(9,035	)	$	(10,228	)

See accompanying notes to unaudited condensed consolidated interim financial statements.

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Wrap Technologies, Inc.

Condensed Consolidated Statements of Stockholders' Equity

(in thousands, except share amounts)

(unaudited)

Three Months Ended June 30, 2023

										Accumulated
					Additional					Other		Total
	Common Stock				Paid-In		Accumulated			Comprehensive		Stockholders'
	Shares		Amount		Capital		Deficit			Income		Equity
Balance at April 1, 2023		41,270,300	$	4	$	94,961	$	(71,404	)	$	-	$	23,561
Common shares issued upon exercise of stock options		-		-		-		-			-		-
Share-based compensation expense		-		-		1,221		-			-		1,221
Common shares issued upon vesting of restricted stock units		640,387		-		-		-			-		-
Net loss for the period		-		-		-		(5,007	)		-		(5,007	)
Balance at June 30, 2023		41,910,687	$	4	$	96,182	$	(76,411	)	$	-	$	19,775

Six Months Ended June 30, 2023

										Accumulated
					Additional					Other			Total
	Common Stock				Paid-In		Accumulated			Comprehensive			Stockholders'
	Shares		Amount		Capital		Deficit			Income			Equity
Balance at January 1, 2023		41,175,993	$	4	$	94,333	$	(67,376	)	$	94		$	27,055
Common shares issued upon exercise of stock options		250		-		-		-			-			-
Share-based compensation expense		-		-		1,849		-			-			1,849
Common shares issued upon vesting of restricted stock units		734,444		-		-		-			-			-
Settlement – US Treasury bills		-		-		-		-			(94	)		(94	)
Net loss for the period		-		-		-		(9,035	)		-			(9,035	)
Balance at June 30, 2023		41,910,687	$	4	$	96,182	$	(76,411	)	$	-		$	19,775

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Three Months Ended June 30, 2022

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

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

See accompanying notes to unaudited condensed consolidated interim financial statements.

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Wrap Technologies, Inc.

Condensed Consolidated Statements of Cash Flows

(in thousands)

(unaudited)

	Six Months Ended June 30,
	2023			2022
Cash Flows From Operating Activities:
Net loss	$	(9,035	)	$	(10,217	)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation and amortization		403			380
Share-based compensation		1,849			1,756
Warranty provision		(44	)		45
Non-cash lease expense		53			49
Provision for doubtful accounts		(4	)		8
Changes in assets and liabilities:
Accounts receivable		884			2,446
Inventories		(2,545	)		(467	)
Prepaid expense and other current assets		53			168
Accounts payable		508			(417	)
Operating lease liability		(52	)		(41	)
Customer deposits		3			(39	)
Accrued liabilities and other		7,149			106
Warranty settlement		(6	)		(63	)
Deferred revenue		8			79
Net cash used in operating activities		(776	)		(6,207	)

Cash Flows From Investing Activities:
Purchase of short-term investments		(2,645	)		(14,890	)
Proceeds from maturities of short-term investments		10,000			20,000
Capital expenditures for property and equipment		(66	)		(168	)
Investment in patents and trademarks		(176	)		(102	)
Purchase of intangible assets		(10	)		-
Investment in long-term deposits		-			(2	)
Proceeds from long-term deposits		31			-
Net cash provided by investing activities		7,134			4,838

Cash Flows From Financing Activities:
Proceeds from exercise of stock options		-			75
Net cash provided by financing activities		-			75

Net decrease in cash and cash equivalents		6,358			(1,294	)
Cash and cash equivalents, beginning of period		5,330			4,937
Cash and cash equivalents, end of period	$	11,688		$	3,643

Supplemental Disclosure of Non-Cash Investing and Financing Activities:
Change in unrealized gain on short-term investments	$	(94	)	$	(11	)
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, 2022, included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2022 (the “Annual Report”), as filed with the SEC on March 2, 2023. The accompanying condensed consolidated balance sheet at December 31, 2022, has been derived from the audited consolidated balance sheet at December 31, 2022, contained in the Annual Report. 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 4,117,586 and 6,458,823 shares of Common Stock were outstanding at June 30, 2023, and 2022, respectively. 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.

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Recent Issued Accounting Guidance

The Company has reviewed 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

Revenue consists of product revenue and other revenue. Product sales include BolaWrap products and accessories. Other revenue includes VR revenue, service, training and shipping revenue.

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 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 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. 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, 2023.

	Customer		Deferred
	Deposits		Revenue
Balance at January 1, 2023	$	-	$	333
Additions, net		3		124
Transfer to revenue		-		(117	)
Balance at June 30, 2023	$	3	$	340
Current portion	$	3	$	211
Long-term portion	$	-	$	129

At June 30, 2023, the Company’s deferred revenue of $340 consisted of $217 related to VR, $17 related to training and $106 related to BolaWrap extended warranties and services. At December 31, 2022, the Company’s deferred revenue of $333 consisted of $198 related to VR, $11 related to training and $124 related to BolaWrap extended warranties and services.

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. FINANCIAL INSTRUMENTS

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;

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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 and Certificate of Deposits are classified as Level 1 because they are valued using quoted market prices.

The following table shows the Company’s cash and cash equivalents, Money Market Funds and short-term investments by significant investment category as of June 30, 2023, and December 31, 2022.

	As of June 30, 2023
	Adjusted		Unrealized		Unrealized		Market
	Cost		Gains		Losses		Value
Level 1:
Money Market Funds	$	2,774	$	-	$	-	$	2,774
U.S. Treasury securities in short-term investments		-		-		-		-
Certificate of Deposits		6,500		-		-		6,500
Total Financial Assets	$	9,274	$	-	$	-	$	9,274

As of December 31, 2022

Adjusted

Unrealized

Market

Cost

Gains

Losses

Value

Level 1:

Money Market Funds

3,004

SEC Form 10-Q filed by Wrap Technologies Inc.