WRAP TECHNOLOGIES, INC. 10-Q

Item 1. Legal Proceedings   Shareholder Derivative Litigation   On November 13, 2020 ,  Naresh Rammohan filed a shareholder derivative action in the United States District Court for the Central District of California against current and former Company officers Tom Smith, James Barnes, Mike Rothans, Marc Thomas, and David Norris, as well as current and former Company directors Messrs. Scot Cohen, Patrick Kinsella, Michael Parris, and Wayne Walker, alleging unjust enrichment, breach of fiduciary duty, waste of corporate assets, and contribution claims under the Securities Exchange Act of 1934 ,  docketed as Case No. 2:20-cv-10444-DMG-PVCx. On January 20, 2021 ,  Ray Westerman filed a second derivative action in the same court against the same parties, alleging breach of fiduciary duty and contribution claims under the Securities Exchange Act of 1934 ,  docketed as Case No. 2:21-cv-00550-DMG-PVCx. On January 22, 2021 ,  Jesse Lowe filed a third derivative action in the same court against the same parties, alleging breach of fiduciary duty and asserting various claims under the Securities Exchange Act of 1934 ,  docketed as Case No. 2:21-cv-00597-DMG-PVCx.  The Company is named as a nominal defendant in each of these actions.   On February 16, 2021 ,  the Honorable Dolly M. Gee issued an order consolidating the three derivative actions under the caption  In re Wrap Technologies, Inc. Shareholder Derivative Litigation , Case No. 2:20-10444-DMG-PVCx, (the “ Derivative Action ”) and stayed the Derivative Action at least until the resolution of the action captioned  In re Wrap Technologies, Inc. Securities Exchange Act Litigation , Case No. 2:20-cv-08760-DMG (the “ Securities Action ”).  On December 20, 2021, Judge Gee dismissed the Securities Action with prejudice.  On April 29, 2022 the above-mentioned parties jointly filed a stipulation of voluntary dismissal in order to dismiss the Derivative Action without prejudice to the plaintiffs, the Company, or Wrap shareholders (“ the Stipulation ”). The Stipulation is currently pending before Judge Gee.    Other Legal Proceeding Information   We may become subject to other legal proceedings, as well as demands and claims that arise in the normal course of our business, including claims of alleged infringement of third-party patents and other intellectual property rights, breach of contract, employment law violations, and other matters and matters involving requests for information from us or our customers under federal or state law. Such claims, even if not meritorious, could result in the expenditure of significant financial and management resources. We make a provision for a liability relating to legal matters when it is both probable that a liability has been incurred and the amount of the loss can be reasonably estimated. These provisions are reviewed and adjusted to include the impacts of negotiations, estimated settlements, legal rulings, advice of legal counsel, and other information and events pertaining to a particular matter. At March 31, 2022, we had no provision for liability under existing litigation.   An unfavorable outcome on any litigation matters could require payment of substantial damages, or, in connection with any intellectual property infringement claims, could require us to pay ongoing royalty payments or could prevent us from selling certain of our products. As a result, a settlement of, or an unfavorable outcome on, any of the matters referenced above or other litigation matters, or legal proceedings could have a material adverse effect on our business, operating results, financial condition and cash flows.     -24-   Table of Contents