WRAP TECHNOLOGIES, INC.
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2017
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)
|
4620
Arville Street, Ste E
Las
Vegas, Nevada 89103
(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:
None
Securities
registered pursuant to Section 12(g) of the Act:
Common
Stock, par value $.0001
(Title
of class)
Indicate
by check mark if the registrant is a well-known seasoned issuer, as
defined in Rule 405 of the Securities Act. Yes [ ] No
[X]
Indicate
by check mark if the registrant is not required to file reports
pursuant to Section 13 or Section 15(d) of the Exchange Act. Yes [
] No [X]
Indicate
by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities
Exchange Act of 1934 during the preceding 12 months (or for such
shorter period that the registrant was required to file such
reports), and (2) has been subject to such filing requirements for
the past 90 days. Yes [X] No [ ]
Indicate
by check mark whether the registrant has submitted electronically
and posted on its corporate Web site, if any, every Interactive
Data File required to be submitted and posted 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 and post such
files).
[ X
] Yes [ ] No
Indicate
by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be
contained, to the best of registrant’s knowledge, in
definitive proxy or information statements incorporated by
reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ ]
Indicate by check mark whether registrant is a large accelerated
filer, an accelerated filer, a non-accelerated filer, smaller
reporting company, or an emerging growth company. See the
definitions of “accelerated filer,” “large
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 [ ]
(Do not
check if a smaller reporting company)
|
Smaller reporting company
[X]
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 [X]
The
aggregate market value of the issuer’s Common Stock held by
non-affiliates of the registrant on June 30, 2017 (the last
business day of the registrant’s most recently completed
second fiscal quarter) was approximately $-0- as there was no
public market at June 30, 2017.
Indicate the number of shares outstanding of each of the
registrant’s classes of common stock, as of the latest
practicable
date:
22,803,533 shares of common stock, par value $0.0001 per share, as
of March 1, 2018.
TABLE
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F-1
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P
A
RT I
FORWARD-LOOKING STATEMENTS
IN
ADDITION TO HISTORICAL INFORMATION, THIS ANNUAL REPORT CONTAINS
FORWARD-LOOKING STATEMENTS WITHIN THE MEANING OF THE PRIVATE
SECURITIES LITIGATION REFORM ACT OF 1995 AND THE COMPANY DESIRES TO
TAKE ADVANTAGE OF THE “SAFE HARBOR” PROVISIONS THEREOF.
THEREFORE, THE COMPANY IS INCLUDING THIS STATEMENT FOR THE EXPRESS
PURPOSE OF AVAILING ITSELF OF THE PROTECTIONS OF SUCH SAFE HARBOR
WITH RESPECT TO ALL OF SUCH FORWARD-LOOKING STATEMENTS. THE
FORWARD-LOOKING STATEMENTS IN THIS REPORT REFLECT THE
COMPANY’S CURRENT VIEWS WITH RESPECT TO FUTURE EVENTS AND
FINANCIAL PERFORMANCE. THESE FORWARD-LOOKING STATEMENTS ARE SUBJECT
TO CERTAIN RISKS AND UNCERTAINTIES, INCLUDING THOSE DISCUSSED
HEREIN, THAT COULD CAUSE ACTUAL RESULTS TO DIFFER MATERIALLY FROM
HISTORICAL RESULTS OR THOSE ANTICIPATED. IN THIS REPORT, THE WORDS
“ANTICIPATES,” “BELIEVES,”
“EXPECTS,” “INTENDS,” “FUTURE”
AND SIMILAR EXPRESSIONS IDENTIFY FORWARD-LOOKING STATEMENTS.
READERS ARE CAUTIONED TO CONSIDER THE SPECIFIC RISK FACTORS
DESCRIBED BELOW AND NOT TO PLACE UNDUE RELIANCE ON THE
FORWARD-LOOKING STATEMENTS CONTAINED HEREIN, WHICH SPEAK ONLY AS OF
THE DATE HEREOF. THE COMPANY UNDERTAKES NO OBLIGATION TO PUBLICLY
REVISE THESE FORWARD-LOOKING STATEMENTS TO REFLECT EVENTS OR
CIRCUMSTANCES THAT MAY ARISE AFTER THE DATE HEREOF.
TRADEMARKS, TRADE NAMES AND SERVICE MARKS
BolaWrap and our other common law trademarks, service marks or
trade names appearing in this annual report are the property of
Wrap Technologies, Inc. Other trademarks, service marks or trade
names appearing in this annual report are the property of their
owners. We do not intend our use or display of other
companies’ trade names or trademarks to imply a relationship
with, or endorsement or sponsorship of us by, any other companies.
We have omitted the
®
and ™ designations, as
applicable, for the trademarks used in this annual
report.
Overview
We are a security technology company focused on delivering
innovative solutions to customers, primarily law enforcement and
security personnel. We began demonstrations of our first product,
the BolaWrap 100, in November 2017. In early 2018 we are focusing
on continued product testing and evaluations by prospective
customers and implementing product changes resulting from early
feedback. We expect to commence product sales in mid
2018.
Our BolaWrap 100 product is a hand-held remote restraint device
that discharges an eight-foot bola style Kevlar tether to entangle
an individual at a range of 10-25 feet. Inspired by law enforcement
professionals, the small but powerful BolaWrap 100 assists law
enforcement to safely and effectively control encounters.
Currently, law enforcement agencies authorize a continuum of force
options:
●
verbal commands;
●
physical control – soft techniques of grabs and holds
progressing to hard techniques such as punches and
kicks;
●
less-lethal weapons - batons, pepper spray,
impact munitions and conducted electrical weapons (“
CEWs”
);
and
●
lethal force – deadly weapons such as firearms.
BolaWrap 100 offers law enforcement a new tool to remotely and
temporarily control an individual or impede flight by targeting and
wrapping an individual’s legs.
The small, light but rugged BolaWrap 100 is designed for weak hand
operation to provide remote restraint while other use of force
continuum options remain open. The design offers wide latitude of
accuracy to engage and restrain targeted legs of a subject. Quick
eject and rapid reload of bola cartridges allows one device to be
reused in a single encounter or in multiple
encounters.
There are limited effective options for remote engagement, so when
verbal commands go unheeded law enforcement is faced with either
hands on engagement or other potentially injurious less lethal or
lethal force. We believe our new tool is essential to meet modern
policing requirements with individuals frequently not responding to
verbal commands and to assuage public demands for less lethal
policing. We believe our device minimizes the need to employ other
uses of force including combat and less-lethal weapons. Many
less-lethal weapons rely on “pain compliance” often
escalating encounters with potential for injury.
Primary use cases fall into the two broad categories routinely
encountered by law enforcement and security personnel:
●
remotely retain and limit the mobility of an individual attempting
to evade arrest or questioning, individuals increasingly ignore law
enforcement verbal commands; and
●
assist in subduing individuals actively resisting arrest by
limiting mobility, possibly making other engagement options less
risky to officers and less injurious to individuals.
Our commercialization efforts for the BolaWrap 100 is targeting the
approximately 18,000 United States law enforcement agencies with
approximately 765,000 full time officers, as well as the United
States Border Patrol with 21,000 border patrol agents. We also
intend to target law enforcement agencies and security personnel
worldwide. We have not generated any revenues to date, have no
customers and only recently commenced demonstrating product to
prospective customers. We may be required to make new modifications
or improvements to the product as a result of demonstrations and
ongoing product testing. See “
Risk
Factors
” included in this
annual report for additional information regarding risks and
uncertainties associated with our business.
History
We were organized as Wrap Technologies, LLC, a Delaware limited
liability company on March 2, 2016 by our founders Elwood G.
Norris, Scot Cohen and James A. Barnes. We are headquartered in Las
Vegas, Nevada. Our formation followed several months of research
into ensnarement techniques by our Chief Technology Officer and
primary inventor, Mr. Norris. Mr. Norris has been granted over 80
U.S. patents, and with Mr. Barnes, founded LRAD Corporation
(Nasdaq:LRAD), a company engaged in directed sound technologies
including non-lethal acoustic hailing and warning devices sold
worldwide for law enforcement, military, government and security
markets.
On March 31, 2017 Wrap Technologies, LLC
(“
Wrap
LLC
”) merged with and
into a wholly-owned subsidiary MegaWest Energy Montana Corp.
(“
MegaWest
”). Wrap LLC ceased separate existence with
MegaWest continuing as the surviving entity after changing its name
to Wrap Technologies, Inc. On March 22, 2017 Wrap LLC acquired
privately held MegaWest from Petro River Oil Corp.
(“
Petro River
”) a related party by virtue of Scot Cohen,
an owner/manager also being an owner and the Executive Chairman of
Petro River. MegaWest had no assets or liabilities at the date of
acquisition and was not an operating business.
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 common stock, par value $0.0001 per
share (“
Common
Stock
”), at a public
offering price of $1.50 per share. Three officers of the Company
purchased 40,000 shares of Common Stock during the offering for
$60,000.
Plan of Operation
Our plan of operation for 2018 includes growing research,
production, marketing, sales, distribution and service functions.
We expect to focus significant efforts on product demonstrations
and coordinating product testing by various agencies.
Our research and development activities in 2018 will focus on
responding and adapting to requirements identified through product
demonstrations and testing by agencies and on cost reduction
activities. Our research plans also include focusing on developing
accessories and creating new models of our restraining device and
developing other security related products.
We have no plans for material acquisition of plant or
equipment.
Industry Background
The market for use of force related products and devices includes
law enforcement agencies, correctional facilities, military
agencies, private security guard companies and retail consumers. We
believe law enforcement officials are the opinion leaders regarding
market acceptance of new security products. We therefore intend to
focus on the law enforcement agency segment of the market for the
BolaWrap 100.
According to the Department of Justice (“Police Use of
Nonfatal Force, 2002-2011”, Special Report NCJ 249216,
Published November 2015 by the U.S. Department of Justice Office of
Justice Programs, Bureau of Justice Statistics), from 2002 to 2011
an annual average of 44 million U.S. residents age 16 or older -
about 19% of all persons of this age - had at least one
face-to-face contact with a police officer. About 1.6% or 715,500
involved threats of or use of force. And about 1.3 million were
handcuffed during their encounter with police. Nearly all local
police departments and all federal law enforcement agencies have a
use-of-force policy that dictates the level of force its officers
can use to respond to various situations. In January 2017, a
collaborative effort among 11 significant law enforcement
leadership and labor organizations in the United States resulted in
the publication of a National Consensus Policy on Use of Force
(collaborative publication of 11 contributing law enforcement
agencies organized by the International Association of Chiefs of
Police and published in January 2017). This policy states, among
other information:
●
officers shall use only the force that is objectively reasonable to
effectively bring an incident under control, while protecting the
safety of the officer and others;
●
officers shall use force only when no reasonably effective
alternative appears to exist and shall use only the level of force
which a reasonably prudent officer would use under the same or
similar circumstances;
●
an officer shall use de-escalation techniques and other
alternatives to higher levels of force consistent with his or her
training whenever possible and appropriate before resorting to
force and to reduce the need for force; and
●
when de-escalation techniques are not effective or appropriate, an
officer may consider the use of less lethal force to control a
non-compliant or actively resistant individual. An officer is
authorized to use agency-approved, less lethal force techniques and
issued equipment:
o
to protect the officer or others from immediate physical
harm;
o
to restrain or subdue an individual who is actively resisting or
evading arrest; or
o
to bring an unlawful situation safely and effectively under
control.
A police officer is trained to use only the minimum force necessary
to overcome the threat of injury or violence posed by a suspect.
For example, under most policies, an officer may not use lethal
force unless a subject poses a threat of significant bodily injury
or fatality to the officer or other persons.
Studies have concluded that most police officers never deploy
lethal force in the course of their careers. While the vast
majority of law enforcement officers around the world are armed
with firearms, only a small percentage will actually ever use them.
Officers, however, use less lethal force on a regular basis.
Traditional tactics such as using a control hold, baton, club, or
combat to control a suspect may result not only in a risk of injury
to the suspect, but also a risk that the officer will be injured.
Other force options including chemical spray, impact munitions and
CEWs not only risk injury but are often controversial. Each weapon
available to law enforcement has distinct advantages and
disadvantages, and we believe law enforcement agencies require
different tools for different situations.
We believe a new remote restraining device is necessary to meet
modern policing requirements with individuals frequently not
responding to verbal commands and public demands for less lethal
policing. A tool to restrain at a distance may offer reduced
frequency of deployment of other control techniques including CEWs.
We believe that the following characteristics for our new
restraining product are the most important to law enforcement and
security agencies:
●
effectiveness: remote restraint of individuals while keeping all
other use of force options available;
●
range: variable distance over which the device is
effective;
●
safety: minimal risk of injury or death;
●
ease of use: simple operation and low maintenance;
●
dependability: reliability in many environments, product
durability;
●
accountability: tracking to reduce misuse of the weapon;
and
●
cost: low cost per use and possible reduction of insurance and
litigation expense.
The BolaWrap
100
Solution
The BolaWrap 100 is designed to perform well in terms of all of the
above characteristics. We believe the BolaWrap 100 is a unique new
device to restrain subjects safely and without eliminating any
other use of force options necessary for the protection of law
enforcement and the public. While no use of force technique or
device is 100% effective, in our opinion, unique performance could
make the BolaWrap 100 a tool of choice in a range of encounters for
law enforcement agencies and other security services.
Effectiveness
Without an effective remote restraint device to assist controlling
an encounter, law enforcement often defaults to less-lethal weapons
that rely upon a pain response or electrical induced incapacitation
for effect. These methods along with lethal force may be necessary
for the most dangerous and aggressive suspects. However, there are
many encounters where remote restraint may be an option in lieu of
or before physical contact with an individual to reduce possibility
for flight or the possibility for injury to the individual and the
officer. In volunteer testing, the BolaWrap 100 has shown to be
effective in restraining individuals hindering the flight ability
and crippling the ability to fight allowing effective further
officer action.
Range
Batons and chemical sprays can only be used from close distances,
usually less than five feet. Rubber bullets, beanbag rounds, and
similar less-lethal impact weapons must be used at distances
greater than 30 feet to minimize suspects’ injuries. Combat,
come along and wrist locks require intimate contact with suspects.
The BolaWrap 100 is designed to engage a suspect at 10 to 25 feet
operable by the weak hand allowing other force options to remain
available. The design of the device makes it ineffective and it is
not recommended for use at close distances, less than ten
feet.
Safety
The BolaWrap 100 is not intended as a weapon. It does not rely on
pain or electrical induced incapacitation for effectiveness. The
wrapping effect is intended to impede flight while not inducing
uncontrolled falls or injury. There is no issue of recovery time as
the case with CEW, impact munitions or chemical
devices.
Ease of Use
The BolaWrap 100 is small, light and rugged. It is designed to be
operated as a weak hand device. It is simple to use, activate and
deploy. It can be reloaded and deployed again as quickly as a spent
cartridge can be removed and a replacement cartridge inserted,
typically in less than five seconds. Further, the weapon requires
no maintenance, there are no electronic components. The BolaWrap
100 also does not leave contaminating residues, unlike chemical
sprays that may contaminate buildings, vehicles or other closed
facilities or officer uniforms.
Dependability
The BolaWrap 100 as a mechanical device operates effectively under
a variety of unfavorable conditions, such as wind and rain, and is
rugged and durable.
Accountability
The BolaWrap 100 is designed for professional use and not consumer
use. Each device and each cartridge is identified with a serial
number for recordkeeping purposes.
Cost
The single use, but recyclable, bola cartridge is priced at a per
cartridge price to allow use in both training and active
deployment. While we do not believe there is a directly competitive
remote restraint device, our cartridge prices are competitive with
CEWs, impact munitions and most other specialized less-lethal
weapons, with the exception of the least expensive chemical sprays.
However, the indirect costs of decontaminating buildings, vehicles,
and uniforms resulting from the use of chemical sprays can place
these sprays at an overall cost disadvantage per use.
In addition, litigation and insurance costs for law enforcement
agencies can be significant. Reducing the frequency of need for
other use of force tools and the number of injuries and fatalities
caused by law enforcement officers may reduce the number of suits
filed against agencies for excessive use of force, wrongful death
and injury.
We believe the addition of a new remote restraint device may have
the benefit of increasing goodwill between law enforcement agencies
and their communities. Community relations considerations can be
particularly important at a time when almost any interaction with
police can be recorded and scrutinized by the media and the
public.
Product
Our BolaWrap 100 product is a hand-held remote restraint device
that discharges an eight-foot bola style Kevlar® tether to
entangle an individual at a range of 10-25 feet. BolaWrap 100
offers law enforcement a new tool to remotely engage and
temporarily control individuals.
The small, light but rugged BolaWrap 100 is designed to provide
remote restraint while other use of force continuum options remain
open. The design offers wide latitude of accuracy to engage and
restrain targeted legs of a subject. Quick eject and rapid reload
of bola cartridges allows one device to be reused in a single
encounter or in multiple encounters.
The bola cartridge contains two sockets that discharge two small
pellets at a thirty to forty degree angle. The pellets are linked
by the eight-foot Kevlar tether such that the tether first engages
an individual’s legs then the force of the pellets causes the
tether to wrap. Small barbs on each pellet engage clothing to
retard the unwinding of the bola tether wrap. The bola cartridge
contains a 9 mm fractional charge blank cartridge (as used in prop
guns) to discharge the tether.
The durable body of the BolaWrap 100 contains a receptacle for the
bola cartridge along with the activation, deployment and safety
mechanisms. Bola cartridges are quickly ejected allowing rapid
reloading, activation and deployment.
We demonstrated our first prototype device in December 2016 and
developed pre-manufacturing demonstration prototypes in April 2017.
We assembled first production units in November 2017 and commenced
demonstrations and trial deployments with a small number of law
enforcement agencies.
We do not expect law
enforcement field deployments and associated revenues until
prospective customers test and evaluate our product and until any
required modifications or improvements are incorporated into the
product.
See
“
Risk
Factors
” included in this
annual report for additional information regarding risks and
uncertainties associated with our business.
Markets
Law Enforcement and Corrections
Federal, state and local law enforcement agencies in the United
States currently represent the primary target market for the
BolaWrap 100. According to United States Bureau of Justice
statistics (“Census of State and Local Law Enforcement
Agencies, 2008”, U.S. Department of Justice, Bureau of
Justice Statistics, published July 2011), there were nearly 18,000
of these agencies in the United States in 2008 that employed about
765,000 full-time, sworn law enforcement officers. In 2005, the
United States Bureau of Justice statistics (“Census of State
and Federal Correctional Facilities, 2005”, U.S. Department
of Justice, Bureau of Justice Statistics, published October 2008)
estimated that there were 295,000 correctional officers in over
1,800 federal and state correctional facilities in the United
States.
United States Border Patrol (USBP)
With over 21,000 agents (“Border Patrol Overview”, U.S.
Customs and Border Protection, January 27, 2015, Web. 25, September
2017,
https://www.cbp.gov/border-security/along-us-borders/overview),
this is one of the largest law enforcement agencies in the United
States with a large number of encounters with individuals requiring
soft engagement techniques. We believe the BolaWrap 100 can be an
effective tool to safely assist in detention of individuals subject
to the agency’s jurisdiction. The BolaWrap 100 offers an
additional tool for frontline agents to de-escalate encounters
while effecting agent responsibilities.
Private Security Firms and Guard Services
According to 2016 Bureau of Labor Statistics estimates
(“Occupational Employment Statistics”, United States
Department of Labor, March 31, 2017, Web. 25 September 2017), there
were approximately 1.1 million privately employed security guards
in the United States. They represent a broad range of individuals,
including investigation and security services, hospitals, schools,
local government, and others. We believe that some security
personnel armed with BolaWrap 100 could be effective to de-escalate
some encounters without eliminating other tools available today.
Providing guards with BolaWrap 100 may reduce the potential
liability of private security companies and personnel in such
encounters.
Although there are use cases in correctional facilities and by
certain military policing personnel, we are initially targeting
BolaWrap 100 for law enforcement and security personnel markets. We
do not currently plan a consumer version of the
device.
Selling and Marketing
Law enforcement agencies represent our primary target market. In
this market, we expect that the decision to purchase the BolaWrap
100 will normally be made by a group of people including the agency
head, his training staff, and use of force and weapons experts. The
decision sometimes involves political decision-makers such as city
council members. While we expect the decision-making process for a
remote restraint device will be less controversial than that for
less-lethal products such as CEWs, we still expect the process to
take as little as a few weeks or as long as a year or more
partially due to budgeting reasons.
While initial sales will be made by our executive and sales
employees, we may determine to utilize existing networks of
independent regional police equipment distributors compensated on a
commission and incentive basis.
Most law enforcement and corrections agencies will not purchase new
use of force devices until a training program is in place to
certify officers in their proper use. We are developing and intend
to offer training and class materials that certify law enforcement
trainers as instructors in the use and limitations of the BolaWrap
100.
In addition to our planned training, we plan to participate in a
variety of trade shows and conferences. We expect our marketing
efforts will also benefit from significant free media coverage.
Other marketing communications may include video e-mails, press
releases, and conventional print advertising in law enforcement
trade publications. We are designing a website to contain similar
marketing information and are developing social media outreach and
communications.
Our Strategy
Our goal is to realize the potential of a new remote restraint
device targeting law enforcement and security personnel. We aim to
produce a product line starting with the BolaWrap 100 to meet the
requirements of these customers. The key elements of our strategy
include:
●
produce a product line meeting customer requirements as a new tool
to aid in the retention of individuals to make encounters more
effective and less dangerous to law enforcement and the
public;
●
develop a robust production and supply system to support our
customers; and
●
develop relationships with customers requiring large numbers of
products mainly larger city police departments and larger
agencies.
We also plan to explore international markets and developing
products for use by security and related personnel.
Related Party License and Royalties
We are obligated to pay royalties pursuant to an exclusive Amended
and Restated Intellectual Property License Agreement, dated as of
September 30, 2016, with Syzygy Licensing, LLC
(“
Syzygy
”), a private technology invention,
consulting and licensing company owned and controlled by Elwood G.
Norris and James A. Barnes, both officers and shareholders of the
Company. Syzygy has no ongoing operations, and does not engage in
any manufacturing, production or other related
activities.
The agreement provides for the payment of royalties of 4% of
revenues from products employing the licensed device technology up
to the earlier to occur of (i) the payment by the Company of an
aggregate of $1.0 million in royalties, or (ii) September 30, 2026.
All development and patent costs have been paid by us and patent
applications and the technology related to the BolaWrap 100 have
been assigned to the Company, subject to the royalty
obligation.
Manufacturing and Suppliers
We completed the design and have commenced initial small volume
production of the BolaWrap 100 and related cartridges. We source
components from a variety of suppliers with final assembly, testing
and shipping occurring in our facility in Las Vegas, Nevada. We
believe arranging and maintaining quality manufacturing capacity
will be essential to the performance of our products and the growth
of our business.
Warranties
We expect to warranty our products to be free from defects in
materials and workmanship for a period up to one year from the date
of purchase. The warranty will be generally a limited warranty, and
in some instances impose certain shipping costs on the customer. We
expect in most cases it will be more economical and effective to
replace the defective device rather than repair.
Competition
While we are targeting the BolaWrap 100 as a new solution for law
enforcement and not as a replacement for other tools currently in
use, we will still compete with other use of force products for
budgets. Law enforcement agencies may also determine that we are an
alternative to other solutions in spite of such
positioning.
Other use of force devices including CEWs sold by Axon Enterprises,
Inc. (formerly Taser International, Inc.), and pepper spray,
batons, impact weapons sold by companies such as Defense Technology
will compete with the BolaWrap 100 indirectly. Many law enforcement
and corrections personnel consider such less-lethal weapons to be
distinct tools, each best-suited to a particular set of
circumstances. Consistent with this tool kit approach, purchasing
any given tool does not preclude the purchase of one or several
more. In other cases, budgetary considerations and limited space on
officers’ belts dictate that only a limited number of devices
will be purchased and carried. We believe the BolaWrap 100’s
unique remote restraint use, effectiveness, and low possibility of
injury will enable it to compete effectively against other
alternatives.
Many of our present and potential future competitors have, or may
have, substantially greater resources to devote to compete in the
law enforcement market and to further technological and new product
developments. Also, these competitors or others may introduce
products with features and performance competitive to our
product.
Seasonality
We do not expect to experience any significant seasonality trends.
However, seasonality trends may occur in the future.
Government Regulation
The BolaWrap 100 is classified as a “firearm” by the
U.S. Bureau of Alcohol, Tobacco, Firearms and Explosives
(“
ATF
”), and is subject to federal
firearms-related regulations. We hold a Federal Firearms
Manufacturing License that expires in 2020. Many states also have
regulations restricting the sale and use of certain firearms and
may determine their own classification and restrictions
irrespective of ATF regulation. In most cases, the law enforcement
and corrections market is subject to different ATF and state
regulations or exemptions than the private citizen market, and we
do not expect additional state restrictions or approvals for sales
to law enforcement. Where different regulations exist, we expect
that the regulations affecting the private citizen market may also
apply to the private security markets, except as the applicable
regulations otherwise specifically provide.
BolaWrap 100 may also be considered a firearm or a crime control
product by the U.S. government. Accordingly, the export of our
devices will be regulated under export administration regulations.
As a result, we must obtain export licenses from the Department of
Commerce for all shipments to foreign countries other than Canada.
We do not expect the need to obtain these licenses will cause a
material delay in any future foreign shipments. Export regulations
also prohibit the further shipment of our products from foreign
markets in which we hold a valid export license to foreign markets
in which we do not hold an export license for our
products.
Foreign regulations, which may affect our device, and sale thereof,
are numerous and often unclear. We expect to work with a
distributor or advisor who is familiar with the applicable import
regulations in each of any future foreign markets.
Intellectual Property
We intend to protect our intellectual property assets including
pending patents, trademarks and trade craft and trade secrets such
as know-how. In addition, we use confidentiality agreements with
employees and some suppliers to ensure the safety of our trade
secrets. We have five U.S. patents pending and have filed one
application to extend protection in certain other foreign
jurisdictions. We have filed for trade name protection for
“BolaWrap” and expect to employ a combination of
registered and common law trade names, trademarks and service marks
in our business. We expect to rely on a variety of intellectual
property protections for our products and technologies, including
contractual obligations, and we intend to pursue a policy of
vigorously enforcing such rights.
We have an ongoing policy of filing patent applications to seek
protection for novel features of our products and technologies.
Prior to the filing and granting of patents, our policy is to
disclose key features to patent counsel and maintain these features
as trade secrets prior to product introduction. Patent applications
may not result in issued patents covering all important claims and
could be denied in their entirety.
The use of force product industry is characterized by frequent
litigation regarding patent and other intellectual property rights.
Others, including academic institutions and competitors, hold
numerous patents in less-lethal and related technologies. Although
we are not aware of any existing patents that would materially
inhibit our ability to commercialize our technology, others may
assert claims in the future. Such claims, with or without merit,
may have a material adverse effect on our financial condition,
results of operations or cash flows.
The failure to obtain patent protection or the loss of patent
protection on our existing and future technologies or the
circumvention of our patents by competitors could have a material
adverse effect on our ability to compete successfully.
Our policy is to enter into nondisclosure agreements with each
employee and consultant or third party to whom any of our
proprietary information is disclosed. These agreements prohibit the
disclosure of confidential information to others, both during and
subsequent to employment or the duration of the working
relationship. These agreements may not prevent disclosure of
confidential information or provide adequate remedies for any
breach.
Research and Development
Our research and development initiatives are led by our internal
personnel and make use of specialized consultants when necessary.
These initiatives include basic research, mechanical engineering
design and testing. Future development projects will focus on new
versions of the BolaWrap technology and new security technologies.
Total research and development expenditures were $311,335 and
$217,244 in 2017 and 2016, respectively.
Employees and Executive Officers
We have four executive officers. We have five other employees with
three engaged in sales and marketing, one in production and one in
research and development. We employ consultants from time to time
to provide additional sales and marketing services.
We believe we offer competitive compensation and other benefits and
that our employee relations are good.
An investment in our company involves a high degree of risk. In
addition to the other information included in this report, you
should carefully consider the following risk factors in evaluating
an investment in our company. You should consider these matters in
conjunction with the other information included or incorporated by
reference in this report.
If any of the
following risks actually occurs, our business, reputation,
financial condition, results of operations, revenue, and future
prospects could be negatively impacted. In that event, the market
price of our common stock could decline, and you could lose part or
all of your investment.
Risk Factors Relating to Our Business
We have a history of operating losses, expect additional losses and
may not achieve or sustain profitability.
We have a history of operating losses and expect additional losses
as we introduce
BolaWrap 100 to the
law enforcement market
and
until we achieve revenues and resulting margins to offset our
operating costs. Our net loss for the period from inception
(March 2, 2016) to December 31, 2016 was $234,356 and for the year
ended December 31, 2017 was $833,545. Our ability to achieve future
profitability is dependent on a variety of factors, many outside
our control. Failure to achieve profitability or sustain
profitability, if achieved, may require us to continue to raise
additional financing which could have a material negative impact on
the market value of our common stock.
We may need additional capital to execute our business plan, and
raising additional capital, if possible, by issuing additional
equity securities may cause dilution to existing shareholders. In
addition, raising additional capital by issuing additional debt
financing may restrict our operations.
We may need additional capital to pay operating costs and support
planned growth. While we may be able to generate some funds from
product sales, existing working capital may not be sufficient.
Principal factors affecting the availability of internally
generated funds include:
●
failure of product sales to meet planned projections;
●
working capital requirements to support business
growth;
●
our ability to control spending; and
●
acceptance of our product in planned markets.
In the event we are required to raise additional capital through
the issuance of equity or convertible debt securities, the
percentage ownership of our shareholders could be diluted
significantly, and these newly issued securities may have rights,
preferences or privileges senior to those of our existing
shareholders. In addition, the issuance of any equity
securities could be at a discount to the market price.
If we incur debt financing, the payment of principal and interest
on such indebtedness may limit funds available for our business
activities, and we could be subject to covenants that restrict our
ability to operate our business and make distributions to our
shareholders. These restrictive covenants may include
limitations on additional borrowing and specific restrictions on
the use of our assets, as well as prohibitions on our ability to
create liens, pay dividends, redeem stock or make
investments. There is no assurance that any equity or debt
financing transaction will be available on acceptable terms, or at
all.
We are a development stage technology
company with no current revenues and limited experience developing
security technology for law enforcement or other security
personnel, as well as other areas required for the successful
development and commercialization of
BolaWrap
100, our first product, which makes it
difficult to assess our future viability.
We are a development stage technology company. We currently have no
revenues, and we have not yet fully demonstrated an ability to
overcome many of the fundamental risks and uncertainties frequently
encountered by development stage companies in new and rapidly
evolving fields of technology. To execute our business plan
successfully, we will need to accomplish the following fundamental
objectives, either on our own or with strategic
collaborators:
●
successfully commercialize
BolaWrap
100, and develop future products
for commercialization;
●
develop, obtain and maintain required regulatory approvals for
commercialization of products we produce;
●
establish an intellectual property portfolio
for
BolaWrap
100 and other future
products;
●
establish and maintain sales, distribution and marketing
capabilities, and/or enter into strategic partnering arrangements
to access such capabilities;
●
gain market acceptance for
BolaWrap
100 and/or other future
products; and
●
obtain adequate capital resources and manage
our spending as costs and expenses increase due to research,
production, development, regulatory approval and commercialization
of
BolaWrap
100 and/or other future
products.
Our principal product has not yet been produced in commercial
quantities. We may incur significant and unpredictable warranty
costs as our products are introduced and produced.
Our principal product,
BolaWrap 100,
is just being introduced for testing
into the marketplace. No assurance can be provided that we can
successfully produce commercial quantities of our principal product
or that additional development will be required for a commercially
viable product. We generally expect to warrant our products to be
free from defects in materials and workmanship for a period of up
to one year from the date of purchase. We may incur substantial and
unpredictable warranty costs from post-production product or
component failures. Future warranty costs could further adversely
affect our financial position, results of operations and business
prospects.
We are materially dependent on the acceptance of our product by the
law enforcement market. If law enforcement agencies do not purchase
our product, our revenues will be adversely affected and we may not
be able to expand into other markets, or otherwise continue as a
going concern.
A substantial number of law enforcement agencies may not purchase
our remote restraint product. In addition, if our product is not
widely accepted by the law enforcement market, we may not be able
to expand sales of our product into other markets. Law enforcement
agencies may be influenced by claims or perceptions that our
product is not effective or may be used in an abusive manner. Sales
of our product to these agencies may be delayed or limited by such
claims or perceptions.
We will be dependent on sales of
the
BolaWrap
100 product, and if this product is
not widely accepted, our growth prospects will be
diminished.
We expect to depend on sales of the
BolaWrap
100 and related cartridges for the
foreseeable future. A lack of demand for this product, or its
failure to achieve broad market acceptance, would significantly
harm our growth prospects, operating results and financial
condition.
If we are unable to manage our projected growth, our growth
prospects may be limited and our future profitability may be
adversely affected.
We intend to expand our sales and marketing programs and our
manufacturing capability. Rapid expansion may strain our
managerial, financial and other resources. If we are unable to
manage our growth, our business, operating results and financial
condition could be adversely affected. Our systems, procedures,
controls and management resources also may not be adequate to
support our future operations. We will need to continually improve
our operational, financial and other internal systems to manage our
growth effectively, and any failure to do so may lead to
inefficiencies and redundancies, and result in reduced growth
prospects and profitability.
We may face personal injury and other liability claims that harm
our reputation and adversely affect our sales and financial
condition.
Our product is intended to be used in confrontations that could
result in injury to those involved, whether or not involving our
product. Our product may cause or be associated with such injuries.
A person injured in a confrontation or otherwise in connection with
the use of our product may bring legal action against us to recover
damages on the basis of theories including personal injury,
wrongful death, negligent design, dangerous product or inadequate
warning. We may also be subject to lawsuits involving allegations
of misuse of our product. If successful, personal injury, misuse
and other claims could have a material adverse effect on our
operating results and financial condition. Although we carry
product liability insurance, significant litigation could also
result in a diversion of management’s attention and
resources, negative publicity and an award of monetary damages in
excess of our insurance coverage.
Our future success is dependent on our ability to expand sales
through direct sales or distributors, and our inability to grow our
sales force or recruit new distributors would negatively affect our
sales.
Our distribution strategy is to pursue sales through multiple
channels with an emphasis on direct sales and, in the future,
independent distributors. Our inability to recruit and retain sales
personnel and police equipment distributors who can successfully
sell our products could adversely affect our sales. If we do not
competitively price our products, meet the requirements of any
future distributors or end-users, provide adequate marketing
support, or comply with the terms of any distribution arrangements,
such distributors may fail to aggressively market our product or
may terminate their relationships with us. These developments would
likely have a material adverse effect on our sales. Should we
employ distributors our reliance on the sales of our products by
others also makes it more difficult to predict our revenues, cash
flow and operating results.
We expect to expend significant resources to generate sales due to
our lengthy sales cycle, and such efforts may not result in sales
or revenue.
Generally, law enforcement agencies consider a wide range of issues
before committing to purchase a product, including product
benefits, training costs, the cost to use our product in addition
to, or in place of other use of force products, product reliability
and budget constraints. The length of our sales cycle may range
from 30 days to a year or more. We may incur substantial
selling costs and expend significant effort in connection with the
evaluation of our product by potential customers before they place
an order. If these potential customers do not purchase our product,
we will have expended significant resources without corresponding
revenue.
Most of our intended end-users are subject to budgetary and
political constraints that may delay or prevent sales.
Most of our intended end-user customers are government agencies.
These agencies often do not set their own budgets and therefore
have little control over the amount of money they can spend. In
addition, these agencies experience political pressure that may
dictate the manner in which they spend money. As a result, even if
an agency wants to acquire our product, it may be unable to
purchase due to budgetary or political constraints. Some government
agency orders may also be canceled or substantially delayed due to
budgetary, political or other scheduling delays which frequently
occur in connection with the acquisition of products by such
agencies.
Government regulation of our products may adversely affect
sales.
Our device is classified as a firearm regulated by the Bureau of
Alcohol, Tobacco and Firearms involving substantial regulatory
compliance. Our device may also face state restrictions especially
regarding sales to security agencies. Our product sales may be
significantly affected by federal, state and local regulation.
Failure to comply with regulations could also result in the
imposition of fines, penalties and other actions that could
adversely impact our financial position, cash flows and operating
results.
Our product is also be controlled by the United States Department
of Commerce (“
DOC
”) for exports directly from the United
States. Consequently, we need to maintain our export license from
the DOC for the export of our product from the United States other
than to Canada. Compliance with or changes in U.S. export
regulations could significantly and adversely affect any future
international sales.
Certain foreign jurisdictions may restrict the sale of our device
limiting our international sales opportunities.
Our products, including
BolaWrap
100, have no issued patents or other
intellectual property protection. If we are unable to protect our
intellectual property, we may lose a competitive advantage or incur
substantial litigation costs to protect our
rights.
Our future success depends in part upon our proprietary technology.
None of our products, including
BolaWrap
100, have any issued patented or other
intellectual property protection. Our protective measures taken
thus far, including pending patents, trademarks and trade secret
laws, may prove inadequate to protect our proprietary rights. There
can be no assurance we will be granted any patent rights from
pending patents. The scope of any possible patent rights may not
prevent others from developing and selling competing products. The
validity and breadth of claims covered in any possible patents
involve complex legal and factual questions, and the resolution of
such claims may be highly uncertain, lengthy, and expensive. In
addition, any patents, if granted, may be held invalid upon
challenge, or others may claim rights in or ownership of our
patents.
Our competitive position will be seriously damaged if our products
are found to infringe on the intellectual property rights of
others.
Other companies and our competitors may currently own or obtain
patents or other proprietary rights that might prevent, limit or
interfere with our ability to make, use or sell our products. Any
intellectual property infringement claims against us, with or
without merit, could be costly and time-consuming to defend and
divert our management’s attention from our business. In the
event of a successful claim of infringement against us and our
failure or inability to license the infringed technology, our
business and operating results could be adversely affected. Any
litigation or claims, whether or not valid, could result in
substantial costs and diversion of our resources. An adverse result
from intellectual property litigation could force us to do one or
more of the following:
●
cease selling, incorporating or using products or services that
incorporate the challenged intellectual property;
●
obtain a license from the holder of the infringed intellectual
property right, which license may not be available on reasonable
terms, if at all; and
●
redesign products or services that incorporate the disputed
technology.
If we are forced to take any of the foregoing actions, we could
face substantial costs and shipment delays and our business could
be seriously harmed. Although we carry general liability insurance,
our insurance may not cover potential claims of this type or be
adequate to indemnify us for all liability that may be
imposed.
In addition, it is possible that our customers may seek indemnity
from us in the event that our products are found or alleged to
infringe the intellectual property rights of others. Any such claim
for indemnity could result in substantial expenses to us that could
harm our operating results.
We have no experience developing law enforcement products. Our lack
of experience and competition in the law enforcement market could
reduce our sales and prevent us from achieving
profitability.
The law enforcement market is highly competitive and our management
team has no experience developing law enforcement products. We face
competition from numerous larger, better capitalized, more
experienced and more widely known companies that make restraint
devices, less-lethal weapons and other law enforcement products.
Increased competition could result in greater pricing pressure,
lower gross margins and reduced sales, and prevent us from
achieving profitability.
We cannot predict our future operating results. Our quarterly and
annual results will likely be subject to fluctuations caused by
many factors, any of which could result in our failure to achieve
our expectations.
We currently expect our
BolaWrap
100 product will be the source of all
of any future revenues. Revenues, if any, are expected to vary
significantly due to a number of factors. Many of these factors are
beyond our control. Any one or more of these factors, including
those listed below, could cause us to fail to achieve our revenue
expectations. These factors include:
●
our ability to develop and supply product to
customers;
●
market acceptance of, and changes in demand for, our
products;
●
gains or losses of significant customers, distributors or strategic
relationships;
●
unpredictable volume and timing of customer orders;
●
the availability, pricing and timeliness of delivery of components
for our products;
●
fluctuations in the availability of manufacturing capacity or
manufacturing yields and related manufacturing costs;
●
timing of new technological advances, product announcements or
introductions by us and by our competitors;
●
unpredictable warranty costs associated with our
product;
●
budgetary cycles and order delays by customers or production delays
by us or our suppliers;
●
regulatory changes affecting the marketability of our
products;
●
general economic conditions that could affect the timing of
customer orders and capital spending and result in order
cancellations or rescheduling; and
●
general political conditions in this country and in various other
parts of the world that could affect spending for the products that
we intend to offer.
Some or all of these factors could adversely affect demand for our
products and, therefore, adversely affect our future operating
results. As a result of these and other factors, we believe that
period-to-period comparisons of our operating results may not be
meaningful in the near term and accordingly you should not rely
upon our performance in a particular period as indicative of our
performance in any future period.
Our expenses may vary from period to period, which could affect
quarterly results and our stock price.
If we incur additional expenses in a quarter in which we do not
experience increased revenue, our results of operations will be
adversely affected and we may incur larger losses than anticipated
for that quarter. Factors that could cause our expenses to
fluctuate from period to period include:
●
the timing and extent of our research and development
efforts;
●
investments and costs of maintaining or protecting our intellectual
property;
●
the extent of marketing and sales efforts to promote our products
and technologies; and
●
the timing of personnel and consultant hiring.
Our dependence on third-party suppliers for key components of our
product could delay shipment of our products and reduce our
sales.
We depend on certain domestic and foreign suppliers for the
delivery of components used in the assembly of our product. Our
reliance on third-party suppliers creates risks related to our
potential inability to obtain an adequate supply of components or
subassemblies and reduced control over pricing and timing of
delivery of components and subassemblies. Specifically, we will
depend on suppliers of sub-assemblies, machined parts, injection
molded plastic parts, and other miscellaneous custom parts for our
product. We do not have any long-term supply agreements with any
planned suppliers. Any interruption of supply for any material
components of our products could significantly delay the shipment
of our products and have a material adverse effect on our revenues,
profitability and financial condition.
Foreign currency fluctuations may reduce our competitiveness and
sales in foreign markets.
The relative change in currency values creates fluctuations in
product pricing for future potential international customers. These
changes in foreign end-user costs may result in lost orders and
reduce the competitiveness of our products in certain foreign
markets. These changes may also negatively affect the financial
condition of some foreign customers and reduce or eliminate their
future orders of our products.
Loss of key management and other personnel could impact our
business.
Our business is substantially dependent on our officers and other
key personnel. The loss of an officer or any key personnel could
materially adversely affect our business, financial condition,
results of operations and cash flows. In addition, competition for
skilled and non-skilled employees among companies like ours is
intense, and the future loss of skilled or non-skilled employees or
an inability to attract, retain and motivate additional skilled and
non-skilled employees required for the operation and expansion of
our business could hinder our ability to conduct research
activities successfully, develop new products, attract customers
and meet customer shipments.
Inadequate internal controls and accounting practices could lead to
errors, which could negatively impact our business, financial
condition, results of operations and cash flows.
Our small size and limited personnel make maintaining internal
controls and management oversight systems more challenging than for
more established and larger entities.
We
have identified a material weakness in our accounting and financial
functions due to a lack of segregation of duties primarily
resulting from our limited staffing.
We
will need to establish and improve internal controls and management
oversight systems. We may not be able to prevent or detect
misstatements in our reported financial statements due to system
errors, the potential for human error, unauthorized actions of
employees or contractors, inadequacy of controls, temporary lapses
in controls due to shortfalls in transition planning and oversight
resource contracts and other factors. In addition, due to their
inherent limitations, such controls may not prevent or detect
misstatements in our reported financial results as required under
SEC rules, which could increase our operating costs or impair our
ability to operate our business. Controls may also become
inadequate due to changes in circumstances. It will be necessary to
replace, upgrade or modify our internal information systems from
time to time. If we are unable to implement these changes in a
timely and cost-effective manner, our ability to capture and
process financial transactions and support our customers as
required may be materially adversely impacted, which could harm our
business, financial condition, results of operations and cash
flows.
Risk Factors Relating to Our Common Stock
Currently, there is no established public market for our common
stock, and there can be no assurances that any established public
market will ever develop or that our common stock will be quoted
for trading, and even if quoted, it is likely to be subject to
significant price fluctuations.
There has not yet been any established trading market for our
common stock, and there is currently no established public market
for our securities. A market maker has filed an application with
FINRA on our behalf so as to be able to quote the price of our
common stock on the OTC Markets commencing upon the effectiveness
of certain requirements. There can be no assurance that the market
maker’s application will be accepted by FINRA nor can we
estimate as to the time period that the application will require.
We were not permitted to file such application on our own behalf.
If the application is accepted, there can be no assurances as
to whether:
●
the prices at which our common stock will trade; or
●
the extent to which investor interest in us will lead to the
development of an active, liquid trading market. Active trading
markets generally result in lower price volatility and more
efficient execution of buy and sell orders for
investors.
In addition, our common stock is unlikely to be followed by any
market analysts, and there may be few institutions acting as market
makers for our common stock. Either of these factors could
adversely affect the liquidity and trading price of our common
stock. Until an orderly market develops in our common stock, if
ever, the price at which it trades is likely to fluctuate
significantly. Prices for our common stock will be determined in
the marketplace and may be influenced by many factors, including
the depth and liquidity of the market for shares of our common
stock, developments affecting our business, including the impact of
the factors referred to elsewhere in these Risk Factors, investor
perception of
BolaWrap
100
and general economic and market conditions. No assurances can
be given that an orderly or liquid market will ever develop for the
shares of our common stock.
Our common stock
will be subject to “penny stock”
rules
.
We expect that our common stock will be defined as a “penny
stock” under Rule 3a51-1 promulgated under the Exchange Act.
“Penny stocks” are subject to Rules 15g-2 through 15g-7
and Rule 15g-9, which impose additional sales practice requirements
on broker-dealers that sell penny stocks to persons other than
established customers and institutional accredited investors. Among
other things, for transactions covered by these rules, a
broker-dealer must make a special suitability determination for the
purchaser and have received the purchaser’s written consent
to the transaction prior to sale. Consequently, these rules may
affect the ability of broker-dealers to sell our common stock and
affect the ability of holders to sell their shares of our common
stock in the secondary market. To the extent our common stock is
subject to the penny stock regulations, the market liquidity for
our shares will be adversely affected.
We cannot predict the price range or volatility of our common
stock, and sales of a substantial number of shares of our common
stock may adversely affect the market price of our common
stock.
From time to time, the market price and volume of shares traded of
companies in the industry in which we operate experience periods of
significant volatility. Company-specific issues and developments
generally affecting our industries or the economy may cause this
volatility. The market price of our common stock may fluctuate in
response to a number of events and factors, including:
●
general economic, market and political conditions;
●
quarterly variations in results of operations or results of
operations that are below public market analyst and investor
expectations;
●
changes in financial estimates and recommendations by securities
analysts;
●
operating and market price performance of other companies that
investors may deem comparable;
●
press releases or publicity relating to us or our competitors or
relating to trends in our markets; and
●
sales of common stock or other securities by insiders.
In addition, broad market and industry fluctuations, investor
perception and the depth and liquidity of the market for our common
stock may adversely affect the trading price of our common stock,
regardless of actual operating performance.
Sales or distributions of a substantial number of shares of our
common stock in the public market, or the perception that such
sales could occur, could adversely affect the market price of our
common stock. Many of the shares of our common stock, other than
the shares held by executive officers and directors, will be
eligible for immediate resale in the public market. Substantial
selling of our common stock could adversely affect the market price
of our common stock.
We cannot assure you as to the price at which our common stock will
trade following initial quotation, if any. Until our common stock
is fully distributed and an orderly market develops in our common
stock, the price at which our common stock trades may fluctuate
significantly and may be lower or higher than the price that would
be expected for a fully distributed issue.
Our directors and executive officers are among our largest
shareholders, and may have certain personal interests that may
affect the Company.
Our directors and executive officers owned 70.6% of our common
stock at March 1, 2018. As a result, they, acting individually or
as a group, have the potential ability to exert influence on the
outcome of issues requiring approval by the Company’s
shareholders. This concentration of ownership may have effects such
as delaying or preventing a change in control of the Company that
may be favored by other shareholders or preventing transactions in
which shareholders might otherwise recover a premium for their
shares over current market prices.
We may issue additional common stock in the future. The issuance of
additional common stock may reduce the value of your common
stock.
We may issue additional shares of common stock without further
action by our shareholders. Moreover, the economic and voting
interests of each stockholder will be diluted as a result of such
issuances. Although the number of shares of common stock that
shareholders presently own will not decrease, such shares will
represent a smaller percentage of the total shares that will be
outstanding after the issuance of additional shares. The
issuance of additional shares of common stock may cause the market
price of our common stock to decline.
Sales of common stock issuable on the exercise of any future
options or warrants may lower the price of our common
stock.
We adopted a stock option plan on March 31, 2017, which will
authorize the grant of options or restricted stock awards to
purchase up to 2.0 million shares of our common stock to our
employees, directors and consultants. The issuance of shares of
common stock issuable upon the exercise or conversion of options
could cause substantial dilution to existing holders of common
stock, and the sale of those shares in the market could cause the
market price of our common stock to decline. The potential dilution
from the issuance of these shares could negatively affect the terms
on which we are able to obtain equity financing.
We may issue preferred stock in the future, and the terms of the
preferred stock may reduce the value of your common
stock.
We are authorized to issue up to 5,000,000 shares of preferred
stock in one or more series. Our Board of Directors may determine
the terms of future preferred stock offerings without further
action by our shareholders. If we issue preferred stock, it could
affect your rights or reduce the value of your common stock. In
particular, specific rights granted to future holders of preferred
stock could be used to restrict our ability to merge with or sell
our assets to a third party. Preferred stock terms may include
voting rights, preferences as to dividends and liquidation,
conversion and redemption rights and sinking fund
provisions.
The payment of dividends will be at the discretion of our Board of
Directors.
The declaration and amount of future dividends, if any, will be
determined by our Board of Directors and will depend on our
financial condition, earnings, capital requirements, financial
covenants, regulatory constraints, industry practice and other
factors our Board deems relevant.
None.
We lease approximately 1,890 square feet of office, assembly and
warehousing space at 4620 Arville Street, Suite E, Las Vegas,
Nevada 89103, pursuant to a three-year lease expiring December 2019
at a monthly rate of $1,512. We expect that this property will be
sufficient to meet our needs for at least the next 12
months.
Begining in October 2017 we commenced reimbursing officer Mr.
Elwood Norris $1,500 per month on a month to month basis for
laboratory facility costs.
We may,at times, be involved in litigation in the ordinary course
of business. We will also, from time to time, when appropriate in
management’s estimation, record adequate reserves in our
financial statements for pending litigation.
Not applicable.
P
A
RT II
Market Information
Prior to the date of this annual report, there has not been any
established trading market for our Common Stock, and there is
currently no established public market for our securities. A market
maker has filed a Rule 211 application with FINRA so that our
Common Stock may be quoted on an interdealer quotation system
such as the OTC Markets. We have made application to and
currently intend to have our shares quoted on the OTCQB operated by
the OTC Markets, although we may not be successful and our shares
may never be quoted and owners of our Common Stock may not have a
market in which to sell the shares. Also, no estimate may be given
as to the time that this application process will
require
.
Holders
At March 1, 2018 there were 22,803,533 shares of common stock
outstanding and approximately 48 stockholders of
record.
Dividends
We have never paid any dividends to our common stockholders. Future
cash dividends or special payments of cash, stock or other
distributions, if any, will be dependent upon our earnings,
financial condition and other relevant factors. The Board of
Directors does not intend to pay or declare any dividends on our
common stock in the foreseeable future, but instead intends to have
the Company retain all earnings, if any, for use in the
business.
Equity Compensation Plan Information
The following table sets forth information as of December 31, 2017,
with respect to compensation plans (including individual
compensation arrangements) under which our equity securities are
authorized for issuance, aggregated as follows:
|
Plan Category
|
|
Number of securities to be
issued upon exercise of
outstanding options,
warrants and rights
(a)
|
|
|
Weighted-average exercise
price of outstanding
options, warrants and
rights
(b)
|
|
Number of securities
remaining available for
future issuance under
equity compensation plans
(excluding securities
reflected in column (a))
(c)
|
|
Equity compensation plans approved by security holders
|
|
-0-
|
|
|
$-0-
|
|
2,000,000
|
|
Equity compensation plans not approved by security
holders
|
|
-0-
|
|
|
$-0-
|
|
-0-
|
|
Total
|
|
-0-
|
|
|
$-0-
|
|
2,000,000
|
Recent Sales of Unregistered Securities
No unregistered securities were issued during the fiscal year that
were not previously reported in a Quarterly Report
on
Form
10-Q or Current Report on Form 8-K.
Use of Proceeds for Initial Public Offering
On August 10, 2017, our Registration Statement on Form S-1
(File No. 333-217340) was declared effective by the SEC for
our initial self-underwritten public offering of up to 2,666,666
shares of common stock, par value $0.0001, at a public offering
price of $1.50 per share (the “
Offering
”). In December 2017 we completed the sale
of 2,328,533 shares pursuant to the Offering, resulting in gross
proceeds of $3,492,800 including $60,000 subscribed by existing
stockholders (including two officers/directors), and we incurred
approximately $70,000 in expenses in connection with the Offering.
We have used proceeds from the Offering for research and
development costs associated with production of BolaWrap100
components, sales and marketing expense, and general corporate
expense. The Offering terminated on December 18,
2017.
We paid no commissions in connection with the Offering, and no
Offering expenses were paid directly or indirectly to any of our
directors or officers (or their associates) or persons owning ten
percent or more of any class of our equity securities or to any
other affiliates. There has been no material change in the planned
use of proceeds from those disclosed in the final prospectus for
the Offering dated as of August 15, 2017 and filed with the SEC
pursuant to Rule 424(b)(5).
Issuer Purchases of Equity Securities
Not applicable.
Information requested by this Item is not included as we are
electing scaled disclosure requirements available to Smaller
Reporting Companies.
The discussion and analysis set forth below should be read in
conjunction with the information presented in other sections of
this Annual Report on Form 10-K, including “Item 1.
Business,” “Item 1A. Risk Factors,” and
“Item 8. Financial Statements and Supplementary Data.”
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.
Overview
We are a security technology company organized in March 2016
focused on delivering solutions to customers, primarily law
enforcement and security personnel. We began demonstrations of our
first product, the BolaWrap 100, in November 2017. We do not expect
to report revenues until prospective customers test and evaluate
our product. There can be no assurance regarding the timing or
amount of future revenues from this product, if any.
Organization and Reverse Capitalization
Our Company resulted from the March 31, 2017 merger of Wrap
Technologies, LLC (“
Wrap LLC
”) with and into our wholly-owned subsidiary
MegaWest Energy Montana Corp. (“
MegaWest
”). Wrap LLC ceased separate existence with
MegaWest continuing as the surviving entity. MegaWest changed its
name to Wrap Technologies, Inc. and amended and restated new
articles of incorporation authorizing 150,000,000 shares of Common
Stock, par value $0.0001, and 5,000,000 shares of preferred stock,
par value $0.0001. All issued and outstanding 835.75 membership
units of Wrap LLC were exchanged for 20.0 million shares of our
Common Stock.
Wrap LLC acquired privately held MegaWest from Petro River Oil
Corp. (“
Petro River
”) on March 22, 2017 through the issuance of
16.75 membership units, representing a 2% membership interest in
Wrap LLC. Petro River was owned 11% by Scot Cohen, its Executive
Chairman, who also was a Manager and the owner of a 26% membership
interest in Wrap LLC, and is currently the Executive Chairman of
our Company. MegaWest had no assets or liabilities at the date of
acquisition nor at December 31, 2016, and is not considered an
operating business.
Wrap LLC’s acquisition of MegaWest and its subsequent merger
with and into MegaWest as a wholly-owned subsidiary of the Company,
and exchange of membership interests for common stock was accounted
for as a reverse recapitalization of Wrap LLC (the
“
Recapitalization
”).
Wrap LLC, now the Company as a result of the Recapitalization, is
deemed the accounting acquirer with MegaWest the accounting
acquiree. Our financial statements are in substance those of Wrap
LLC and are deemed to be a continuation of its business from its
inception date of March 2, 2016. The Company’s balance sheet
continues at historical cost as the accounting acquiree had no
assets or liabilities and no goodwill or intangible assets were
recorded as part of the Recapitalization.
To reflect the Recapitalization, historical shares of common stock
and additional paid-in capital have been retroactively adjusted
using the exchange ratio of approximately 23,930.60 shares of
Common Stock for each membership unit of Wrap LLC.
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 Common Stock at the public offering price of
$1.50 per share. Three officers of the Company purchased 40,000
shares of the offering for $60,000.
We are establishing and growing business functions including
production, marketing, sales, distribution, service and
administration. Until we generate revenues and margins or obtain
additional financing, we 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,
there is risk and uncertainty whether we can timely accomplish
required functional activities and achieve important milestones,
including introducing new products and obtaining orders from
customers.
We are unable to predict the market acceptance of our new product
or the level of future sales, if any. We have no orders or
customers for our products.
We may need additional capital for operations and to finish
development and marketing of our new product line. Obtaining any
required additional financing in the future could be a significant
management challenge and failure to secure necessary financing
would have a material adverse affect on our
operations.
Given our limited personnel and financial resources we face
significant challenges in establishing, operating and growing our
new business. We expect 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,
which we refer to as U.S. GAAP, requires us to make estimates and
judgments that affect the reported amounts of assets, liabilities,
revenue and expenses, and related disclosure of contingent assets
and liabilities. On an on-going basis, we evaluate our estimates,
including those 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.
Until consummation of the Recapitalization on March 31, 2017, we
were treated as a partnership for federal and state income tax
purposes and did not incur income taxes. Instead, our losses were
included in the income tax returns of the member partners.
Following the Recapitalization, we are responsible for federal,
state and foreign taxes for jurisdictions in which we conduct
business. 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.
Operating Expense
Our operating expenses have 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 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 the use of outside resources, public
company and regulatory costs, and other factors, some outside our
control
.
We expect our operating costs will increase
rapidly in 2018 as we introduce our product and expand our research
and development, production, distribution, service and
administrative functions. 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
Year Ended December 31, 2017 Compared to the Period from Inception
(March 2, 2016) to December 31, 2016
We had no revenues or product costs for the year ended December 31,
2017 nor for the prior period from inception (March 2, 2016) to
December 31, 2016 (“
prior short
period
”).
Selling, General and Administrative Expense.
Selling, general and administrative expenses for
the year ended December 31, 2017 were $522,210 compared to $17,112
for short period ended December 31, 2016. The most recent year
included legal, merger and audit costs of $84,391, compensation and
benefits of $158,100, marketing and sales consulting costs of
$104,946, occupancy, insurance and office costs of $37,706, travel
and entertainment costs of $55,356 and trade show and marketing
costs of $58,533. In the prior period, our activities were just
beginning with the focus being on research and
development.
Research and Development Expense.
Research and development expenses for the year
ended December 31, 2017 were $311,335. The most recent year
included $65,185 of compensation costs, consulting and contract
research costs of $150,880, prototype and supply costs of $29,998,
and patent costs of $46,580. This compared to $217,244 for the
prior short period ended December 31, 2016 including $70,000 of
deferred related party research costs, consulting and contract
research costs of $95,525, patent costs of $33,141, and prototype
and supply costs of $15,313.
Net Loss.
Our net loss for the
year ended December 31, 2017 was $833,545 compared to a net loss of
$234,356 for the short prior period ended December 31, 2016 when
development activities were beginning.
Liquidity and Capital Resources
Overview.
Our sole source of
liquidity has been funding from our shareholders. We expect our
primary source of future liquidity will be from the sale of future
product, if any, and if required from future equity or debt
financings.
Capital Requirements.
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 Common Stock at the public offering price of
$1.50 per share. Other than $3,083,976 cash on hand at December 31,
2017, we have no additional sources of liquidity.
We cannot currently estimate our future liquidity requirements or
future capital needs which will depend on capital required to
introduce our new product and the staffing and support required
along with the timing and amount of future revenues and product
costs. We anticipate that demands for operating and working capital
could grow rapidly based on decisions regarding staffing,
development, production, marketing and other functions and based on
factors outside our control. We believe we have sufficient capital
for the next twelve months. No assurances can be provided that any
future debt or equity capital will be available to us. Failure to
quickly produce and sell our new product and timely obtain any
required additional capital in the future will have a material
adverse affect on the Company.
Our future capital requirements, cash flows and results of
operations could be affected by and will depend on many factors
that are currently unknown to us, including:
●
the timing of
the availability of our new product line for sale to
customers;
●
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;
●
t
he
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.
Cash Flow
Operating Activities.
During
the year ended December 31, 2017, net cash used in operating
activities was $833,709.
The net loss of $833,545 was reduced by a $16,853
decrease in prepaid expense, $26,000 of deferred and accrued
officer compensation and a $81,514 increase of accounts payable and
accruals. A total of $131,192 was invested in inventories for
production.
During the short period ended December 31, 2016, net cash used in
operating activities was $177,890. The net loss of
$234,356 was reduced by $70,000 of deferred officer compensation
and $14,965 of accounts payable. A total of $29,811 was expended on
prepaid expenses.
Investing Activities.
We used
$35,103 and $9,538 of cash for the purchase of property and
equipment during the year ended December 31, 2017 and the short
period ended December 31, 2016, respectively.
Financing Activities.
We
obtained $3,697,716 of cash from our shareholders, net of offering
costs associated with our self-underwritten public offering, during
the year ended December 31, 2017. During the short period ended
December 31, 2016 we obtained $442,500 of cash from our
shareholders.
Contractual Obligations
We are obligated to pay to Syzygy Licensing, LLC
(“
Syzygy
”) a 4% royalty on future product sales up
to an aggregate of $1.0 million in royalties.
Other than our facility lease of approximately
$18,100 per year, we have no other ontractual
obligations.
Effects of Inflation
We do not believe that inflation has had a material impact on our
business, revenues or operating results during the period
presented.
Recent Accounting Pronouncements
See “Financial Statements at page F-9 - “Note 1 -
Organization and Summary of Significant Accounting Policies -
Recent Accounting Pronouncements” for recent accounting
pronouncements that may affect our financial
reporting.
Not applicable.
The Financial Statements of the Company required to be included in
this Item 8 are set forth in a separate section of this report
following Item 15 and the Signature Page commencing on Page
F-1.
There have been no disagreements or any reportable events requiring
disclosure under Item 304(b) of Regulation S-K.
We are required to maintain disclosure controls and procedures
designed to ensure that material information related to us, is
recorded, processed, summarized and reported within the time
periods specified in the SEC rules and forms.
Evaluation of Disclosure Controls and Procedures
We maintain disclosure controls and procedures (as defined in Rules
13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934,
as amended (the “
Exchange
Act
”)) that are designed
to ensure that information required to be disclosed in our Exchange
Act Reports is recorded, processed, summarized and reported within
the time periods specified in the SEC’s rules and forms. Our
disclosure controls and procedures are also designed to ensure that
information required to be disclosed in our Exchange Act Reports is
accumulated and communicated to management, including our Principal
Executive Officer and Chief Financial Officer, to allow timely
decisions regarding required disclosures. In designing and
evaluating the disclosure controls and procedures, management
recognizes that any controls and procedures, no matter how well
designed and operated, can provide only reasonable assurance of
achieving the desired control objectives, and management is
required to apply its judgment in evaluating the cost-benefit
relationship of possible controls and
procedures.
Our management, with the participation of our Principal Executive
Officer and Chief Financial Officer, evaluated the effectiveness of
our disclosure controls and procedures as of December 31, 2017 and,
based on this evaluation, our Principal Executive Officer and Chief
Financial Officer concluded that, as of the end of the period
covered by this report, our disclosure controls and
procedures
were not effective
at the reasonable assurance level due to the existence of a known
material weakness in our internal control over financial reporting
as summarized in the following paragraph.
As of December 31, 2017 we had limited employees and our Chief
Financial Officer was responsible for initiating transactions, had
custody of assets, recorded and reconciled transactions and
prepared our year end financial reports without the sufficient
segregation of conflicting duties normally required for effective
internal control. We believe the lack of segregation of duties is a
material weakness in our internal controls at December 31, 2017
affecting management’s ability to conclude that our
disclosure controls and procedures were effective at the reasonable
assurance level.
Management’s Report on Internal Control Over Financial
Reporting
This annual report does not include a report of management's
assessment regarding internal control over financial reporting or
an attestation report of the company's registered public accounting
firm due to a transition period established by rules of the
Securities and Exchange Commission for newly public companies. An
attestation report of the Company’s independent registered
public accounting firm regarding internal control over financial
reporting is also not required for smaller reporting
companies.
Changes in Internal Controls
Other than identifying the segregation of duties material weakness
described above, there have been no changes in our internal control
over financial reporting during the period ended December 31, 2017
in connection with the evaluation required by paragraph (d) of
Exchange Act Rules 13a-15 or 15d-15, that have materially affected,
or are reasonably likely to materially affect, our internal control
over financial reporting.
None.
PA
R
T III
Directors and Executive Officers
Set forth below is information concerning our executive officers
and directors as of March 1, 2018:
|
Name
|
Age
|
Positions
|
Director Since
|
|
Scot Cohen
|
48
|
Executive Chairman
|
2017
|
|
David Norris
|
52
|
Director and President
|
2018
|
|
James A. Barnes
|
63
|
Director, Chief Financial Officer, Secretary
and Treasurer
|
2017
|
|
Elwood G. Norris
|
78
|
Director and Chief Technology Officer
|
2017
|
|
Michael Parris
|
58
|
Director
|
2017
|
There are no arrangements or understandings between our Company and
any other person pursuant to which he was or is to be selected as a
director, executive officer or nominee. David Norris is the son of
Elwood G. Norris, the Company’s Chief Technology Officer and
a former Director.
Scot Cohen
cofounded the
Company with Mr. Barnes and Mr. Elwood Norris in March 2016 and
currently serves as its Executive Chairman and Secretary. He served
as a Manager until the Company’s incorporation in March 2017
when he was appointed to serve as the Company’s Secretary. In
July 2017, Mr. Cohen was appointed to serve as the Company’s
Executive Chairman and in January 2018 resigned as Secretary. Mr.
Cohen has over 20 year’s experience in institutional asset
management, wealth management, and capital markets. He
currently serves as Executive Chairman of the Board of Petro River
Oil Corp. (OTC Pink: PTRC) since 2012. Scot is the founder and
serves as a principal of the Iroquois Capital Opportunity Fund, a
closed end private equity fund focused on investments in North
American oil and gas assets. He is also the co-founder
of Iroquois Capital, a New York based hedge fund. In addition,
he manages several operating and non-operating partnerships, which
actively invest in the energy sector.
Prior to founding Iroquois Capital, Scot founded a merchant bank
based out of New York, which was one of the most active
participants in structured investments in public companies in the
United States over the four-year period he was actively managing
the business. Scot began his career at Oppenheimer and
Company in a sales capacity and transitioned from there to a
boutique investment-banking firm where he spent two years. Scot
currently sits on the board of directors of True Drinks Holding,
Inc. (OTC Pink:TRUU), as well as several private companies, and is
involved a number of charitable ventures. Scot earned a
Bachelor of Science degree from Ohio University in
1991.
The Board of Directors believes Mr. Cohen’s success with
multiple private investment firms, his extensive contacts within
the investment community and financial expertise will assist the
Company’s efforts to raise capital to fund the continued
implementation of the Company’s business plan.
David Norris
– was
appointed Director and President in January 2018. Prior to joining
the Company, he served in senior executive roles at privately held
loanDepot, Inc. from April 2014 to December 2017, during which time
it rapidly expanded into the fifth largest mortgage lender in the
United States. Most recently, he served as Chief Revenue Officer of
loanDepot, with prior executive positions including President and
Chief Operating Officer. In October 2012, Mr. Norris was appointed
as Chief Executive Officer of Greenlight Financial Services, which
was sold to Nationstar Mortgage in May 2013, whereupon he served as
President of Direct Lending and Chief Marketing Officer until
February 2014. Mr. Norris also previously served as President at
LendingTree, Inc. and Discover Home Loans. In addition, Mr.
Norris’ career includes executive and management roles at
Toshiba America Information Systems, Qualcomm Personal Electronics
and American Technology Corporation. His early career was as a
probation officer in San Diego for five years. Mr. Norris earned
his Bachelor of Science degree in business administration from
University of Phoenix in 1993.
Mr. David Norris brings to the Company and the Board of Directors
significant executive experience in rapidly growing businesses and
a background in developing, launching and manufacturing new
products.
James A. Barnes
cofounded the
Company with Mr. Elwood Norris and Mr. Cohen in March 2016 and
currently serves as a director, President and Chief Financial
Officer. He served as Manager until the Company’s
incorporation in March 2017. He has been President of Sunrise
Capital, Inc., a private venture capital and financial and
regulatory consulting firm since 1984. He was Chief Financial
Officer of Parametric Sound Corporation (now Turtle Beach
Corporation) (Nasdaq GM: HEAR) from 2010 to February 2015, and from
February 2015 to February 2017 served as Vice President
Administration at Turtle Beach Corporation. Since 1999, he has been
Manager of Syzygy Licensing LLC (“
Syzygy
”), a private technology invention and
licensing company he owns with Mr. Elwood Norris. He previously
practiced as a certified public accountant and management
consultant with Ernst & Ernst (1976-1977), Touche Ross &
Co. (1977-1980), and as a principal in J. McDonald & Co. Ltd.,
Phoenix, Arizona (1980-1984). He graduated from the University of
Nebraska with a B.A. Degree in Business Administration in 1976 and
is a certified public accountant (inactive).
Mr. Barnes possesses substantial financial, regulatory and
management experience, and such experience is extremely valuable to
the Board of Directors and the Company as it executes its business
plan.
Elwood G. Norris
cofounded the
Company with Mr. Barnes and Mr. Cohen in March 2016 and currently
serves as Chief Technology Officer. He was a director from March
2017 to January 2018. He was previously a director and President of
Parametric Sound Corporation (now Turtle Beach Corporation) (Nasdaq
GM: HEAR) from 2010 to February 2015 and from February 2015 to
September 2016 served as Chief Scientist, a non-executive position,
at Turtle Beach. He was a director of LRAD Corporation (Nasdaq
CM: LRAD) from August 1980 to June 2010. He served as Chairman of
LRAD Corporation’s Board of Directors, an executive position,
in which he served in a technical advisory role and acted as a
product spokesman from September 2000 to April 2009. He is an
inventor, and has authored more than 80 U.S. patents, primarily in
the fields of electrical and acoustical engineering, and has been a
frequent speaker on innovation to corporations and government
organizations. He is the inventor of our BolaWrap technology. Mr.
Elwood Norris is a majority owner of Syzygy, but has no employment
or management relationship with Syzygy.
Mr. Elwood Norris brings to the Company and the Board of Directors
demonstrated product innovation ability and years of public company
executive experience. As a result, the Board of Directors values
the input provided by Mr. Elwood Norris, and believe his
contributions to the deliberations of the Board and management are
very valuable.
Michael Parris
– was appointed a Director in November
2017.
Mr. Parris has been a
partner at Perry Rogers Partners Inc., a sports management firm,
since 1996, where he primarily oversees the SHAQ Brand and other
strategic alliances. His role at Perry Rogers Partners encompasses
business development, worldwide brand management, marketing and
public relations. Prior to joining Perry Rogers Partners, Mr.
Parris had a successful career in law enforcement with the Newark
Police Department in Newark, New Jersey rising to the rank of
Lieutenant. During his career in law enforcement, he worked and
commanded several specialized units, including Homicide, Robbery,
and Internal Affairs. Mr. Parris holds a Bachelor of Science degree
in Business Management from the University of
Phoenix.
Mr. Parris’ background in law enforcement and worldwide
marketing and brand experience are valuable attributes for the
board of directors.
Code of Ethics
We have adopted a Code of Ethics applicable to all our employees,
including our principal executive officer, principal financial
officer and principal accounting officer. We will provide any
person, without charge, a copy of our Code of Conduct Policy upon
written request to Investor Relations, Wrap Technologies, Inc.,
4620 Arville Street, Ste E. Las Vegas, Nevada 89103. We also post
on our website a copy of or Code of Ethics at
www.wraptechnologies.com.
Section 16(a) Beneficial Ownership Reporting
Compliance
Based solely on a review of copies of such reports furnished to our
Company and representation that no other reports were required
during the fiscal year ended December 31, 2017, we believe that all
persons subject to the reporting requirements pursuant to Section
16(a) filed the required reports on a timely basis with the
Securities and Exchange Commission.
Stockholder Recommendations for Director Nominations
We have no nominating committee of the Board of Directors and no
formal procedure for director nominations. Accordingly, there has
been no change in the procedures by which security holders may
recommend nominees to our board of directors since our corporate
formation in March 2017.
Audit Committee and Audit Committee Financial Expert
We have no formal audit committee.
Compensation of our Named Executive Officers; Summary Compensation
Table
James A. Barnes was our only named executive officer for the year
ended December 31, 2016. Scot Cohen was appointed to serve as our
Executive Chairman and our principal executive officer in July
2017.
The following table sets forth compensation accrued for named
executive officers during the years ended December 31, 2016 and
2017.
|
Name and Principal Position
|
Year
|
Salary
|
Bonus
|
Stock Awards
|
Option Awards
|
All Other
Compensation
|
Total
|
|
|
|
|
|
|
|
|
|
|
James
A. Barnes
|
2017
|
$
64,000
|
$
-0-
|
$
-0-
|
$
-0-
|
$
-0-
|
$
64,000
|
|
President,
Chief Financial Officer and Director
|
2016
|
$
20,000
|
$
-0-
|
$
-0-
|
$
-0-
|
$
-0-
|
$
20,000
|
|
|
|
|
|
|
|
|
|
|
Scot
Cohen
|
2017
|
$
-0-
|
$
50,000
|
$
-0-
|
$
-0-
|
$
-0-
|
$
50,000
|
|
Executive Chairman, Secretary and Director
|
|
|
|
|
|
|
|
Effective March 2016 through February 2017, the Company accrued
monthly deferred compensation for the services of officers Messrs.
Elwood Norris and Barnes in the aggregate amount of $7,000 per
month payable to Syzygy with Mr. Barnes’ proportionate share
being $2,000 per month. The balance as of December 31, 2016 was
$70,000 ($20,000 allocable to Mr. Barnes), and at February 28, 2017
was $84,000 ($24,000 allocable to Mr. Barnes), which amount accrues
without interest. There is currently no established repayment
schedule or timing for payment. Commencing March 1, 2017, Messrs.
Elwood Norris and Barnes were each being paid compensation of
$6,000 per month for their services as employees and officers of
the Company with March 2017 amounts deferred with no established
repayment schedule or timing for payment.
As noted above, Mr. Cohen was appointed to serve as the
Company’s Executive Chairman in July 2017, in addition to his
role as the Company’s Secretary. During 2017 there was no
compensation arrangement between Mr. Cohen and the Company for his
services as the Company’s Executive Chairman or Secretary. In
February 2018 the Board of Directors granted and the Company paid a
$50,000 bonus to Mr. Cohen for 2017 services.
Mr. David Norris was appointed our President in January 2018 and
became our principal executive officer.
Syzygy, an entity controlled by Messrs. Elwood Norris and Barnes,
will receive a royalty as described above in
“
Business—Related Party
License and Royalties
” in
consideration for the license of certain technology necessary for
the development of BolaWrap 100. We expect that Messrs. Elwood
Norris and Barnes will continue to be compensated in their roles as
officers as determined by our Board of
Directors.
Description of the 2017 Equity Compensation Plan
The 2017 Equity Compensation Plan (the “
2017
Plan
”) was adopted by
the Company’s Board of Directors on March 31, 2017, and
approved by a majority of the Company’s shareholders on March
31, 2017. The 2017 Plan reserves for issuance 2.0 million shares of
the Company’s Common Stock for issuance as one of four types
of equity incentive awards: (i) stock options, (ii) restricted
stock, and (iii) stock units. The 2017 Plan permits the
qualification of awards under the plan as “performance-based
compensation” within the meaning of
Section 162(m) of the Internal Revenue
Code.
There were no options granted to named executive officers nor any
outstanding equity awards at December 31, 2017 or
2016.
Potential Payments Upon Termination, Death, Disability, or
Retirement
We have no executive employee contracts at this time. Every officer
and employee is an at will employee. The royalties payable to
Syzygy, controlled by Messrs. Elwood Norris and Barnes, are
unrelated to employment or their roles as officers, and will
continue upon any termination, death, disability or
retirement.
Director Compensation
There was no director compensation paid or incurred during the year
ended December 31, 2017. There were no awards of stock to any
director during the year ended December 31, 2017
The following table sets forth information concerning shares of our
Common Stock beneficially owned as of March 1, 2018,
by:
●
each person or
entity known by us to be the beneficial owner of 5% or more of the
outstanding shares of Common Stock;
●
each person
currently serving as director; and
●
each of our
named executive officers.
The share amounts in the table below are based on 22,803,533 shares
of Common Stock issued and outstanding as of March 1, 2018. To our
knowledge, except as otherwise indicated in the footnotes below,
each person or entity has sole voting and investment power with
respect to the shares of Common Stock set forth opposite such
person’s or entity’s name. Beneficial ownership is
determined in accordance with the rules of the SEC and generally
includes voting or investment power with respect to the
securities.
|
Title of Class
|
|
Name and Address of Beneficial Owner
|
Amount and Nature of Beneficial Ownership
|
|
Percent of Class
|
|
|
|
|
|
|
|
|
|
|
Common Stock
|
|
Elwood G. Norris
|
6,221,956
|
(1)
|
|
30.4%
|
|
|
|
4620 Arville Street, Suite E
|
|
|
|
|
|
|
|
Las Vegas, Nevada 89103
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common Stock
|
|
Scot Cohen
|
5,605,744
|
(2)
|
|
27.4%
|
|
|
|
4620 Arville Street, Suite E
|
|
|
|
|
|
|
|
Las Vegas, Nevada 89103
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common Stock
|
|
James A. Barnes
|
2,632,366
|
(3)
|
|
12.9%
|
|
|
|
4620 Arville Street, Suite E
|
|
|
|
|
|
|
|
Las Vegas, Nevada 89103
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common Stock
|
|
David Norris
|
1,794,795
|
(4)
|
|
8.8%
|
|
|
|
4620 Arville Street, Suite E
|
|
|
|
|
|
|
|
Las Vegas, Nevada 89103
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common Stock
|
|
Michael Parris
|
598,265
|
(5)
|
|
2.6%
|
|
|
|
4620 Arville Street, Suite E
|
|
|
|
|
|
|
|
Las Vegas, Nevada 89103
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common Stock
|
|
Fortis Business Holdings LLC
|
1,351,251
|
(6)
|
|
5.9%
|
|
|
|
45 Main St., Suite 800
|
|
|
|
|
|
|
|
Brooklyn, NY 11201
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common Stock
|
|
Iroquois Capital Investment Group LLC
|
1,791,558
|
(7)
|
|
7.9%
|
|
|
|
205 E 42
nd
Street, Flr
20
|
|
|
|
|
|
|
|
New York, NY 10017
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
All directors and executive
|
|
|
|
|
|
|
|
officers as a group (5 persons)
|
14,460,066
|
|
|
70.6%
|
______________________
|
(1)
|
Consists of shares of Common Stock beneficially owned by Mr. Elwood
Norris and his family trust.
|
|
(2)
|
Includes 5,204,906 shares beneficially owned by Mr. Cohen and
400,838 shares beneficially owned by Petro River Oil Corp.
(“
Petro River
”). Mr. Cohen is Executive Chairman of Petro
River and the beneficial owner of 11% of the issued and outstanding
common stock of Petro River. Mr. Cohen disclaims beneficial
ownership of the Shares owned by Petro River.
|
|
|
|
|
(3)
|
Includes 2,286,741 shares held by a family trust and 358,959 shares
held by Sunrise Capital, Inc. Mr. Barnes is President of Sunrise
Capital, Inc.
|
|
|
|
|
(4)
|
Consists of shares of Common Stock held in family
trust.
|
|
(5)
|
Represents Mr. Parris’ fifty percent interest in the shares
held by Twenty-Two Franklin Street Group, LLC.
|
|
(6)
|
Louis Kestenbaum is the managing member and principal owner with
voting and investment power.
|
|
(7)
|
Consist of 1,224,891 shares held by Iroquois Capital Investment
Group LLC (“ICIG”) and 566,667 shares held by Iroquois
Master Fund Ltd. (“IMF”). Iroquois Capital Management
L.L.C. (“Iroquois Capital”) is the investment manager
of Iroquois Master Fund, Ltd (“IMF”). Consequently,
Iroquois Capital has voting control and investment discretion over
securities held by IMF. As President and Managing Member of
Iroquois Capital, Mr. Richard Abbe and Mrs. Kimberly Page make
voting and investment decisions on behalf of Iroquois Capital in
its capacity as investment manager to IMF. As a result of the
foregoing, Mr. Abbe and Mrs. Page may be deemed to have beneficial
ownership (as determined under Section 13(d) of the Securities
Exchange Act of 1934, as amended) of the securities held by IMF. As
Managing Member of ICIG, Mr. Abbe makes voting and investment
decisions on behalf of ICIG. As a result of the foregoing, Mr. Abbe
may be deemed to have beneficial ownership (as determined under
Section 13(d) of the Securities Exchange Act of 1934, as amended)
of the securities held by ICIG.
|
Effective March 2016, we began accruing monthly compensation for
the services of Messrs. Elwood Norris and Barnes in the aggregate
amount of $7,000 per month payable to Syzygy. The balance as of
December 31, 2016 was $70,000 and accrues without interest. This
arrangement ended in February 2017 with a balance of $84,000
accrued.
We are obligated to pay royalties 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
Messrs. Elwood Norris and Barnes, both officers and shareholders of
the Company. The agreement provides for the payment of royalties of
4% of revenues from products employing the licensed device
technology up to the earlier to occur of (i) the payment by the
Company of an aggregate of $1.0 million in royalties, or (ii)
September 30, 2026. All patent applications and the technology
related to the BolaWrap 100 have been assigned to the Company,
subject to the royalty obligation. During the period ended
December 31, 2016 we paid $25,409 of patent legal costs incurred by
Syzygy for the device technology pursuant to the license
agreement.
For a director to be considered “independent,” the
Board must affirmatively determine that the director has no
material relationship with the Company (directly or as a partner,
stockholder or officer of an organization that has a relationship
with the Company). In each case, the Board considers all relevant
facts and circumstances. Our Board has affirmatively determined
that Mr. Parris is an independent director.
The following table presents fees billed by Rosenberg Rich Baker
Berman, P.A. for professional services rendered for the fiscal
years ended December 31, 2017 and 2016:
|
|
2017
|
2016
|
|
Audit
fees (1)
|
$
25,500
|
$
-
|
|
Audit
related fees (2)
|
4,075
|
-
|
|
Tax
fees (3)
|
-
|
-
|
|
All
other fees (4)
|
-
|
-
|
|
Total
|
$
29,575
|
$
-
|
(1)
Audit
Fees include fees and expenses for professional services rendered
in connection with the audit of our financial statements for those
years, reviews of the interim financial statements that are
normally provided by the independent registered public accounting
firm in connection with statutory and regulatory filings or
engagements.
(2)
Audit
Related Fees consist of fees billed for assurance related services
that are reasonably related to the performance of the audit or
review of our financial statements and are not reported under
“Audit Fees.” Included in Audit Related Fees are fees
and expenses related to reviews of registration statements and SEC
filings other than Forms 10-K and 10-Q.
(3)
Tax
Fees include the aggregate fees billed during the fiscal year
indicated for professional services for tax compliance, tax advice
and tax planning. No such fees were billed by Rosenberg Rich Baker
Berman, P.A. for 2017 or 2016.
(4)
All
Other Fees consist of fees for products and services other than the
services reported above. No such fees were billed by Rosenberg Rich
Baker Berman, P.A. for 2017 or 2016.
Audit Committee Pre-Approval Policies and Procedures
All audit and non-audit services are pre-approved by the Board of
Directors, which considers, among other things, the possible effect
of the performance of such services on the registered public
accounting firm’s independence. The Board of Directors
pre-approves the annual engagement of the principal independent
registered public accounting firm, including the performance of the
annual audit and quarterly reviews for the subsequent fiscal year,
and pre-approves specific engagements for tax services performed by
such firm. The Board of Directors has also established pre-approval
policies and procedures for certain enumerated audit and audit
related services performed pursuant to the annual engagement
agreement, including such firm’s attendance at and
participation at Board meetings; services of such firm associated
with SEC registration statements, periodic reports and other
documents filed with the SEC or other documents issued in
connection with securities offerings, such as comfort letters and
consents; such firm’s assistance in responding to any SEC
comment letters; and consultations with such firm as to the
accounting or disclosure treatment of transactions or events and/or
the actual or potential impact of final or proposed rules,
standards or interpretations by the SEC, Public Company Accounting
Oversight Board (PCAOB), Financial Accounting Standards Board
(FASB), or other regulatory or standard-setting bodies. The Board
of Directors is informed of each service performed pursuant to its
pre-approval policies and procedures.
The Board of Directors has considered the role of Rosenberg Rich
Baker Berman, P.A. in providing services to us for the year ended
December 31, 2017 and has concluded that such services are
compatible with such firm’s independence.
PAR
T
IV
|
(a)
List of documents filed as a part of
this report:
|
|
|
|
(1)
Index to Financial
Statements
|
|
|
|
Report
of Independent Registered Public Accounting Firm
|
|
F-2
|
|
Balance
Sheets as of December 31, 2017 and 2016
|
|
F-3
|
|
Statements
of Operations for the Year Ended December 31, 2017 and for the
Period from Inception
(March
2, 2016) to December 31, 2016
|
|
F-4
|
|
Statements
of Stockholders’ Equity for the Period from Inception (March
2, 2016) to
December
31, 2017
|
|
F-5
|
|
Statements
of Cash Flows for the Year Ended December 31, 2017 and for the
Period from Inception
(March
2, 2016) to December 31, 2016
|
|
F-6
|
|
Notes
to Financial Statements
|
|
F-7
|
|
|
|
|
|
(2)
Financial Statement
Schedules
|
|
|
|
All
schedules have been omitted because the information is not
applicable, is not material or because the information required is
included in the financial statements or the notes
thereto.
|
||
|
(3)
Index to Exhibits
|
|
|
|
The
exhibits listed on the accompanying index to exhibits immediately
following the financial statements are filed as part of, or hereby
incorporated by reference into, this Form 10-K.
|
||
|
Exhibit
Number
|
Description
|
|
|
Stock Purchase
Agreement, dated March 22, 2017, by and between Wrap Technologies,
LLC, Petro River Oil Corp., and Megawest Energy Montana Corp.
Incorporated by reference to Exhibit 2.1 to the Registration
Statement on Form S-1, filed on April 17, 2017.
|
|
|
Merger Agreement
between Wrap Technologies, LLC and Megawest Energy Montana Corp.,
dated March 30, 2017. Incorporated by reference to Exhibit 2.2 to
the Registration Statement on Form S-1, filed on April 17,
2017.
|
|
Amended and
Restated Certificate of Incorporation of the Registrant.
Incorporated by reference to Exhibit 3.1 to the Registration
Statement on Form S-1, filed on April 17, 2017.
|
|
|
Bylaws of the
Registrant. Incorporated by reference to Exhibit 3.2 to the
Registration Statement on Form S-1, filed on April 17,
2017.
|
|
|
Form
of Common Stock Certificate. Incorporated by reference to Exhibit
4.1 to Amendment No. 1 to the Registration Statement on Form S-1,
filed on May 30, 2017.
|
|
|
Form
of Lock-Up Agreement, dated November 20, 2017. Incorporated by
reference to Exhibit 99.1 to Form 8-K filed on November 22,
2017.
|
|
|
Amended and
Restated Intellectual Property License Agreement, dated September
30, 2016, by and between Wrap Technologies, LLC and Syzygy
Licensing LLC. Incorporated by reference to Exhibit 10.1 to the
Registration Statement on Form S-1, filed on April 17,
2017.
|
|
|
2017
Equity Compensation Plan. Incorporated by reference to Exhibit 10.2
to the Registration Statement on Form S-1, filed on April 17,
2017.
|
|
|
Code
of Ethics of the Registrant Applicable to Directors, Officers And
Employees. Incorporated by reference to Exhibit 14.1 to the
Registration Statement on Form S-1, filed on April 17,
2017.
|
|
|
Certification of
David Norris pursuant to Rule 13a-14(a) under the Securities
Exchange Act of 1934 *
|
|
|
Certification of
James A. Barnes pursuant to Rule 13a-14(a) under the Securities
Exchange Act of 1934 *
|
|
|
|
Certifications
pursuant to 18 U.S.C. Section 1350. This certification is being
furnished solely to accompany this Annual Report on Form 10-K and
is not being filed for purposes of Section 18 of the Securities
Exchange Act of 1934, as amended, and is not to be incorporated by
reference into any filing of the Company.*
|
|
|
Extensible Business Reporting Language (XBRL)
Exhibits*
|
|
101.INS
|
XBRL Instance Document.
|
|
101.SCH
|
XBRL Taxonomy Extension Schema.
|
|
101.CAL
|
XBRL Taxonomy Extension Calculation Linkbase.
|
|
101.DEF
|
XBRL Taxonomy Extension Definition Linkbase.
|
|
101.LAB
|
XBRL Taxonomy Extension Labels Linkbase.
|
|
101.PRE
|
XBRL Taxonomy Extension Presentation Linkbase.
|
*
Filed herewith.
+
Management contract or compensatory plan or
arrangement.
SIGNA
T
URES
Pursuant to the requirements of Section 13 or 15(d) of the
Securities Exchange Act of 1934, the Registrant has duly caused
this report to be signed on its behalf by the undersigned,
thereunto duly authorized, in the City of Las Vegas, State of
Nevada, on the 6th day of March, 2018.
|
|
Wrap
Technologies, Inc.
|
|
|
|
|
|
|
|
|
|
By:
|
/s/
DAVID NORRIS
|
|
|
|
|
President
|
|
|
|
|
|
|
Date:
March 6, 2018
I
n
accordance with the Exchange Act, this report has been signed below
by the following persons on behalf of the registrant and in the
capacities and on the dates indicated.
|
Name
|
|
Position
|
|
Date
|
|
|
|
|
|
|
|
/s/
DAVID NORRIS
|
|
President and Director
|
|
March 6, 2018
|
|
David Norris
|
|
(Principal Executive Officer)
|
|
|
|
|
|
|
|
|
|
/s/
JAMES A. BARNES
|
|
Chief Financial Officer, Secretary,
|
|
March 6, 2018
|
|
James A. Barnes
|
|
Treasurer and Director
|
|
|
|
|
|
(Principal Accounting Officer)
|
|
|
|
|
|
|
|
|
|
/s/
SCOT COHEN
|
|
Executive Chairman of Board
|
|
March 6, 2018
|
|
Scot Cohen
|
|
|
|
|
|
|
|
|
|
|
|
/s/MICHAEL
PARRIS
|
|
Director
|
|
March 6, 2018
|
|
Michael Parris
|
|
|
|
|
WRAP TECH
N
OLOGIES,
INC.
INDEX TO FINANCIAL STATEMENTS
|
(a)
List of documents filed as a part of
this report:
|
|
|
|
(1)
Index to Financial
Statements
|
|
|
|
Report
of Independent Registered Public Accounting Firm
|
|
F-2
|
|
Balance
Sheets as of December 31, 2017 and 2016
|
|
F-3
|
|
Statements
of Operations for the Year Ended December 31, 2017 and for the
Period from Inception
(March
2, 2016) to December 31, 2016
|
|
F-4
|
|
Statements
of Stockholders’ Equity for the Period from Inception (March
2, 2016) to
December
31, 2017
|
|
F-5
|
|
Statements
of Cash Flows for the Year Ended December 31, 2017 and for the
Period from Inception
(March
2, 2016) to December 31, 2016
|
|
F-6
|
|
Notes
to Financial Statements
|
|
F-7
|
|
|
|
|
|
(2)
Financial Statement
Schedules
|
|
|
|
All
schedules have been omitted because the information is not
applicable, is not material or because the information required is
included in the financial statements or the notes
thereto.
|
||
|
(3)
Index to Exhibits
|
|
|
|
The
exhibits listed on the accompanying index to exhibits immediately
following the financial statements are filed as part of, or hereby
incorporated by reference into, this Form 10-K.
|
||
REPORT
OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM.
To the
Board of Directors and
Stockholders
of Wrap Technologies, Inc.
Opinion on the Financial Statements
We have
audited the accompanying balance sheets of Wrap Technologies, Inc.
(the Company) as of December 31, 2017 and 2016, and the related
statements of operations, stockholders’ equity, and cash
flows for the year ended December 31, 2017 and the period from
March 2, 2016 (inception) through December 31, 2016, and the
related notes (collectively referred to as the financial
statements). In our opinion, the financial statements present
fairly, in all material respects, the financial position of the
Company as of December 31, 2017 and 2016, and the results of its
operations and its cash flows for the year ended December 31, 2017
and the period from March 2, 2016 (inception) through December 31,
2016, in conformity with accounting principles generally accepted
in the United States of America.
Basis for Opinion
These
financial statements are the responsibility of the Company’s
management. Our responsibility is to express an opinion on the
Company’s financial statements based on our audits. We are a
public accounting firm registered with the Public Company
Accounting Oversight Board (United States) (PCAOB) and are required
to be independent with respect to the Company in accordance with
the U.S. federal securities laws and the applicable rules and
regulations of the Securities and Exchange Commission and the
PCAOB.
We
conducted our audits in accordance with the standards of the PCAOB.
Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements
are free of material misstatement, whether due to error or fraud.
The Company is not required to have, nor were we engaged to
perform, an audit of its internal control over financial reporting.
As part of our audits, we are required to obtain an understanding
of internal control over financial reporting, but not for the
purpose of expressing an opinion on the effectiveness of the
Company’s internal control over financial reporting.
Accordingly, we express no such opinion.
Our
audits included performing procedures to assess the risks of
material misstatement of the financial statements, whether due to
error or fraud, and performing procedures that respond to those
risks. Such procedures included examining, on a test basis,
evidence regarding the amounts and disclosures in the financial
statements. Our audits also included evaluating the accounting
principles used and significant estimates made by management, as
well as evaluating the overall presentation of the financial
statements. We believe that our audits provide a reasonable basis
for our opinion.
|
/s/
Rosenberg Rich Baker Berman, P.A.
|
|
|
|
|
|
We have
served as the Company’s auditor since 2016.
|
|
|
|
|
|
Somerset,
NJ
|
|
|
|
|
|
March
6, 2018
|
|
|
|
|
Wrap Technologies, Inc.
|
|
December 31,
|
|
|
|
2017
|
2016
|
|
ASSETS
|
|
|
|
Current assets:
|
|
|
|
Cash
|
$
3,083,976
|
$
255,072
|
|
Inventories,
net
|
131,192
|
-
|
|
Prepaid
expenses and other current assets
|
11,446
|
28,299
|
|
Total current assets
|
3,226,614
|
283,371
|
|
Property and equipment, net
|
36,668
|
8,226
|
|
Other assets, net
|
1,512
|
1,512
|
|
Total assets
|
$
3,264,794
|
$
293,109
|
|
|
|
|
|
LIABILITIES AND STOCKHOLDERS' EQUITY
|
|
|
|
Current liabilities:
|
|
|
|
Accounts
payable
|
$
36,165
|
$
12,065
|
|
Deferred
and accrued officer compensation
|
96,000
|
70,000
|
|
Accrued
liabilities
|
60,314
|
2,900
|
|
Total current liabilities
|
192,479
|
84,965
|
|
|
|
|
|
Commitments and contingencies (Note 6)
|
|
|
|
|
|
|
|
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;
22,803,533 and 17,445,408 shares issued and outstanding,
respectively
|
2,280
|
1,745
|
|
Additional
paid-in capital
|
4,137,936
|
440,755
|
|
Accumulated
deficit
|
(1,067,901
)
|
(234,356
)
|
|
Total stockholders' equity
|
3,072,315
|
208,144
|
|
Total liabilities and stockholders' equity
|
$
3,264,794
|
$
293,109
|
See accompanying notes to financial statements.
|
Wrap Technologies, Inc.
|
||
|
|
||
|
|
||
|
|
|
Period From
|
|
|
|
Inception
|
|
|
Year Ended
|
March 2, 2016 to
|
|
|
December 31,
|
December 31,
|
|
|
2017
|
2016
|
|
|
|
|
|
Operating expenses:
|
|
|
|
Selling,
general and administrative
|
$
522,210
|
$
17,112
|
|
Research
and development
|
311,335
|
217,244
|
|
Total
operating expenses
|
833,545
|
234,356
|
|
Loss
from operations
|
(833,545
)
|
(234,356
)
|
|
|
|
|
|
Net loss
|
$
(833,545
)
|
$
(234,356
)
|
|
|
|
|
|
Net
loss per basic common share
|
$
(0.04
)
|
$
(0.03
)
|
|
Weighted
average common shares used to compute net loss per basic common
share
|
20,194,560
|
7,467,608
|
See accompanying notes to financial statements.
Wrap Technologies, Inc.
Statements of Stockholders' Equity
|
|
|
|
Additional
|
|
Total
|
|
|
Common Stock
|
Paid-In
|
Accumulated
|
Stockholders'
|
|
|
|
Shares
|
Amount
|
Capital
|
Deficit
|
Equity
|
|
Balance at Inception (March 2, 2016)
|
-
|
$
-
|
$
-
|
$
-
|
$
-
|
|
Sale
of common stock in March 2016 at $0.00836 per share
|
4,786,121
|
479
|
39,521
|
-
|
40,000
|
|
Sale
of common stock in September 2016 at $0.00836 per
share
|
4,786,120
|
479
|
39,521
|
-
|
40,000
|
|
Sale
of common stock in October 2016 at $0.00836 per share
|
4,786,120
|
479
|
39,521
|
-
|
40,000
|
|
Sale
of common stock in December 2016 at $0.10447 per share
|
3,087,047
|
308
|
322,192
|
-
|
322,500
|
|
Net
loss for the period
|
-
|
-
|
-
|
(234,356
)
|
(234,356
)
|
|
Balance at December 31, 2016
|
17,445,408
|
$
1,745
|
$
440,755
|
$
(234,356
)
|
$
208,144
|
|
Sale
of common stock in January 2017 at $0.10447 per share
|
2,153,754
|
215
|
224,785
|
-
|
225,000
|
|
Shares
issued to acquire merger subsidiary to effect reverse
recapitalization
|
400,838
|
40
|
(40
)
|
-
|
-
|
|
Sale
of common stock in July 2017 at $0.10447 per share
|
475,000
|
47
|
49,953
|
-
|
50,000
|
|
Sale
of common stock in public offering at $1.50 per share in fourth
quarter of 2017, net of issuance costs of $70,084
|
2,328,533
|
233
|
3,422,483
|
-
|
3,422,716
|
|
Net
loss for the period
|
-
|
-
|
-
|
(833,545
)
|
(833,545
)
|
|
Balance at December 31, 2017
|
22,803,533
|
$
2,280
|
$
4,137,936
|
$
(1,067,901
)
|
$
3,072,315
|
See accompanying notes to financial statements.
Wrap Technologies, Inc.
Statements of Cash Flows
|
|
|
Period From
|
|
|
|
Inception
|
|
|
|
March 2,
|
|
|
Year Ended
|
2016 to
|
|
|
December 31,
|
December 31,
|
|
|
2017
|
2016
|
|
|
|
|
|
Cash Flows From Operating Activities:
|
|
|
|
Net
loss
|
$
(833,545
)
|
$
(234,356
)
|
|
Adjustments to reconcile net loss to net cash
|
|
|
|
used
in operating activities:
|
|
|
|
Depreciation
|
6,661
|
1,312
|
|
Changes
in assets and liabilities:
|
|
|
|
Inventories
|
(131,192
)
|
-
|
|
Prepaid
expenses and other current assets
|
16,853
|
(29,811
)
|
|
Accounts
payable
|
24,100
|
12,065
|
|
Deferred
and accrued officer compensation
|
26,000
|
70,000
|
|
Accrued
liabilities
|
57,414
|
2,900
|
|
Net
cash used in operating activities
|
(833,709
)
|
(177,890
)
|
|
|
|
|
|
Cash Flows From Investing Activities:
|
|
|
|
Capital
expenditures for property and equipment
|
(35,103
)
|
(9,538
)
|
|
Net
cash used in investing activities
|
(35,103
)
|
(9,538
)
|
|
|
|
|
|
Cash Flows From Financing Activities:
|
|
|
|
Proceeds
from sale of common stock
|
3,767,800
|
442,500
|
|
Offering
costs paid in connection with sale of common stock
|
(70,084
)
|
-
|
|
Net
cash provided by financing activities
|
3,697,716
|
442,500
|
|
|
|
|
|
Net increase in cash and cash equivalents
|
2,828,904
|
255,072
|
|
Cash, beginning of period
|
255,072
|
-
|
|
Cash, end of period
|
$
3,083,976
|
$
255,072
|
See accompanying notes to financial statements.
|
1.
|
ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING
POLICIES
|
Organization and Business Description
Wrap Technologies, Inc. (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.
The Company resulted from the March 31, 2017 merger of Wrap
Technologies, LLC (“
Wrap LLC
”) with and into its wholly-owned subsidiary
MegaWest Energy Montana Corp. (“
MegaWest
”). Wrap LLC ceased separate existence with
MegaWest continuing as the surviving entity. MegaWest changed its
name to Wrap Technologies, Inc. and amended and restated new
articles of incorporation authorizing 150,000,000 shares of common
stock, par value $0.0001, and 5,000,000 shares of preferred stock,
par value $0.0001. All outstanding 835.75 membership units of Wrap
LLC were exchanged for 20,000,000 shares of common stock of the
Company.
Wrap LLC acquired privately held MegaWest from Petro River Oil
Corp. (“
Petro River
”) on March 22, 2017 through the issuance of
16.75 membership units representing a 2% ownership interest in Wrap
LLC. Petro River is owned 11% by Scot Cohen its Executive Chairman
who also was a Manager and 26% owner of Wrap LLC and a director and
officer of the Company. MegaWest had no assets or liabilities at
the date of acquisition nor at December 31, 2016 and is not
considered an operating business.
Wrap LLC’s acquisition of MegaWest and its subsequent merger
with and into the MegaWest wholly-owned subsidiary and exchange of
member units for common stock has been accounted for as a reverse
recapitalization of Wrap LLC. Wrap LLC, now the Company, is deemed
the accounting acquirer with MegaWest the accounting acquiree. The
Company’s financial statements are in substance those of Wrap
LLC and deemed to be a continuation of its business from its
inception date of March 2, 2016. The balance sheet of the Company
continues at historical cost as the accounting acquiree had no
assets or liabilities and no goodwill or intangible assets was
recorded as part of the recapitalization of the
Company.
To reflect the recapitalization historical common shares and
additional paid-in capital have been retroactively adjusted using
the exchange ratio of approximately 23,930.60 shares for each
membership unit of Wrap LLC.
Basis of Presentation and Use of Estimates
The accompanying financial statements have been prepared in
conformity with accounting principles generally accepted in the
United States of America (“
U.S. GAAP
”). 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 revenues and expenses during the reporting period.
Actual results could materially differ from those
estimates.
Public Offering
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 Common Stock at $1.50 per share.
Three officers of the Company purchased 40,000 shares of the
offering for $60,000.
Going Concern
Since inception in March 2016, the Company has generated
significant losses from operations and anticipates that it will
continue to generate significant losses from operations for the
foreseeable future.
While management believes it has adequate financial resources for
the next year, management cannot assure that if any future
financing is required that it will be available on favorable terms
or at all. Additionally, if additional capital is raised through
the sale of equity or convertible debt securities, the issuance of
such securities would result in dilution to the Company’s
existing stockholders. Furthermore, despite management’s
optimism regarding the Company’s technology and products,
there is no guarantee that any products will perform as hoped or
that such products can be successfully commercialized.
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 loss per common share is
computed by dividing net loss by the weighted-average number of
shares of common stock outstanding during the period increased to
include the number of additional shares of common stock that would
have been outstanding if the potentially dilutive securities had
been issued. There were no common Stock equivalents outstanding
during the periods presented; accordingly, the Company’s
basic and diluted net loss per share are the same.
Fair Value of Financial Instruments
The carrying amounts of cash, accounts payable and accrued
liabilities approximate fair values due to the short nature of
these instruments.
Concentrations of Credit Risk
Financial instruments, which potentially subject the Company to
concentrations of credit risk, consist primarily of cash. Due to
the relative short nature of such instrument, the carrying amount
approximates fair value. The Company places its cash in a demand
deposit account at one bank and such balances may at times be in
excess of amounts insured by federal agencies, which is $250,000 as
of December 31, 2017. The Company does not believe that it is
subject to any unusual financial risk beyond the normal risk
associated with commercial banking relationships. The Company
performs periodic evaluations of the relative credit standing of
these financial institutions. The Company has not experienced any
significant losses on its cash equivalents.
Property, Equipment and Depreciation
Property and equipment is stated at cost. Depreciation on property
and equipment is computed over the estimated useful lives of three
years using the straight-line method. The Company intends, on any
retirement or disposition of property and equipment, that the
related cost and accumulated depreciation or amortization will be
removed and a gain or loss recorded.
Impairment of Long-Lived Assets
Long-lived assets and identifiable intangibles held for use are
reviewed for impairment whenever events or changes in circumstances
indicate that the carrying amount may not be recoverable. If the
sum of undiscounted expected future cash flows is less than the
carrying amount of the asset or if changes in facts and
circumstances indicate, an impairment loss is recognized and
measured using the asset’s fair value. The Company did not
recognize any impairment loss during the periods ended December 31,
2016 and 2017.
Startup Costs
The Company expensed startup costs related to the development of
its business including approximately $24,600 incurred prior to
legal formation. Patent legal costs incurred are expensed as
research and development costs until evidence of patentability is
confirmed.
Advertising Costs
The Company expenses advertising costs in the period in which they
are incurred. The Company incurred advertising costs of $11,812 and
$417 for the periods ended December 31, 2017 and 2016,
respectively. Advertising costs are included in selling, general
and administrative expenses in the accompanying statements of
operations.
Research and Development Costs
Research and development costs consist primarily of contract
development costs and experimental work materials and certain
startup patent costs. Research and development costs with no
alternative use are expensed as incurred.
|
|
|
Income Taxes
Until its reverse recapitalization 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.
Accordingly, no provision or liability for federal or state income
taxes has been included in these financial statements for the
period prior to March 31, 2017 and no income tax expense was
recorded for the period ended December 31, 2017 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
deferred tax assets and liabilities are classified according to the
financial statement classification of the assets and liabilities
generating the differences.
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 Accounting Pronouncements
In May 2014, the Financial Accounting Standards Board
(“FASB”) issued Accounting Standards Update
(“ASU”) 2014-09,
Revenue from Contracts with
Customers
(Topic 606). 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.
Subsequently, the FASB issued the following accounting standard
updates related to Topic 606, Revenue from Contracts with
Customers:
●
ASU 2016-08,
Revenue from Contracts with
Customers
(Topic 606):
Principal versus
Agent Considerations (Reporting Revenue Gross versus Net)
in March 2016. ASU 2016-08 does not
change the core principle of revenue recognition in Topic 606 but
clarifies the implementation guidance on principal versus agent
considerations.
●
ASU 2016-10,
Revenue from Contracts with
Customers
(Topic 606):
Identifying
Performance Obligations and Licensing
in April 2016. ASU 2016-10 does not change the
core principle of revenue recognition in Topic 606 but clarifies
the implementation guidance on identifying performance obligations
and its licensing.
●
ASUs 2016-12 and 2016-20,
Revenue from Contracts with
Customers
(Topic 606):
Narrow-Scope
Improvements and Practical Expedients, and Technical Corrections
and Improvements to Topic 606, Revenue from Contracts with
Customers
, respectively, issued
in May and December 2016, respectively. These ASUs do not change
the core principle of revenue recognition in Topic 606 but clarify
the implementation guidance on a few narrow areas and add some
practical expedients to the guidance.
Topic 606 is effective for the Company as of January 1,
2018, and permits the use of either a retrospective or a modified
retrospective method. The Company currently anticipates using the
modified retrospective method and has no previously reported
revenues.
In January 2016, the FASB issued ASU 2016-01,
Recognition and Measurement of
Financial Assets and Financial Liabilities
, which provides targeted improvements to the
recognition, measurement, presentation and disclosure of financial
assets and financial liabilities. Specific accounting areas
addressed include equity investments and financial liabilities
reported under the fair value option and valuation allowance
assessment resulting from unrealized losses on available-for-sale
securities. This ASU also changes certain presentation and
disclosure requirements for financial instruments. This ASU is to
be applied by means of a cumulative effect adjustment to the
balance sheet as of the beginning of the fiscal year of adoption.
This ASU is effective for the Company as of January 1, 2018.
Early adoption, with certain exceptions, is not permitted. The
Company does not expect adoption of this ASU to have any impact on
its financial statements.
In February 2016, the FASB issued ASU 2016-02,
Leases (Topic
842)
, which requires lessees to
recognize right-of-use assets and corresponding liabilities for all
leases with an initial term in excess of 12 months. This ASU is to
be adopted using a modified retrospective approach, including a
number of practical expedients, that requires leases to be measured
and recognized under the new guidance at the beginning of the
earliest period presented. This ASU is effective for the Company as
of January 1, 2019. Early adoption is permitted. The Company
is currently evaluating the effect this ASU will have on its
financial statements and related disclosures.
In August 2016, the FASB issued ASU 2016-15,
Statement of Cash Flows (Topic
230)
:
Classification of Certain Cash
Receipts and Cash Payments
,
addressing eight specific cash flow issues in an effort to reduce
diversity in practice. This ASU is effective for the Company as of
January 1, 2018. The Company does not expect adoption to have
a material impact on its statements of cash
flows.
In November 2016, the FASB issued ASU 2016-18,
Restricted
Cash
, which requires that a
statement of cash flows explain the change during the period in the
total of cash, cash equivalents and amounts generally described as
restricted cash or restricted cash equivalents. Therefore, amounts
generally described as restricted cash and restricted cash
equivalents should be included with cash and cash equivalents when
reconciling the beginning-of-period and end-of-period total amounts
shown on the statement of cash flows. This ASU is effective for the
Company as of January 1, 2018. The Company does not expect
adoption of this ASU to have any impact on its financial
statements.
In May 2017, the FASB issued ASU 2017-09,
Scope of Modification
Accounting
, which amends the
scope of modification accounting for share-based payment
arrangements, provides guidance on the types of changes to the
terms or conditions of share-based payment awards to which an
entity would be required to apply modification accounting under ASC
718,
Compensation – Stock
Compensation
. This ASU is
effective for the Company as of January 1, 2018. The
Company does not expect adoption of
this ASU to have any impact on its financial
statements.
In July 2017, the FASB issued ASU 2017-11
, Earnings Per Share (Topic
260), Distinguishing Liabilities from Equity (Topic 480),
Derivatives and Hedging (Topic 815).
The amendments in Part I of this ASU change the
classification analysis of certain equity-linked financial
instruments (or embedded features) with down round features. When
determining whether certain financial instruments should be
classified as liabilities or equity instruments should be
classified as liabilities or equity instruments, a down round
feature no longer precludes equity classification when assessing
whether the instrument is indexed to an entity’s own stock.
The amendments also clarify existing disclosure requirements for
equity-classified instruments. The amendments in Part I of this ASU
are effective for the Company as of January 1, 2019. The
amendments in Part II of this ASU replace the indefinite deferral
of certain guidance in Topic 480 with a scope exception. The
amendments in Part II of this ASU do not require any transition
guidance. The
Company does not
expect adoption of this ASU to have any impact on its financial
statements.
In March 2016, the FASB issued ASU 2016 – 09
“
Improvements to Employee
Share-Based Payment Accounting
”, which simplifies the accounting for
share-based payment transactions including their income tax
consequences, classification as either equity or liability awards,
classification on the statement of cash flows, and other areas. The
method of adoption varies with the different aspects of the Update.
The Update is effective for the Company in the first quarter of
fiscal year 2018. The Company does not expect this ASU to have
a material impact on its financial
statements.
The Company has reviewed other recently issued, but not yet
effective, accounting pronouncements and does not believe the
future adoptions of any such pronouncements will be expected to
cause a material impact on its financial condition or the results
of operations.
|
2.
|
INVENTORIES,
NET
|
Inventory
is recorded at the lower of cost or net realizable value. The cost
of substantially all the Company’s inventory is determined by
the weighted average cost method. Inventories consisted of the
following at December 31, 2017:
|
Finished
goods
|
$
5,308
|
|
Work
in process
|
5,484
|
|
Raw
materials
|
120,400
|
|
|
$
131,192
|
|
3.
|
PROPERTY
AND EQUIPMENT, NET
|
Property and equipment consisted of the following:
|
|
December 31,
|
|
|
|
2017
|
2016
|
|
Laboratory
equipment
|
$
12,730
|
$
7,342
|
|
Tooling
|
18,165
|
-
|
|
Computer
equipment
|
4,151
|
-
|
|
Furniture
and fixtures
|
9,595
|
2,196
|
|
|
44,641
|
9,538
|
|
Accumulated
depreciation
|
(7,973
)
|
(1,312
)
|
|
|
$
36,668
|
$
8,226
|
Depreciation expense was $6,661 and $1,312 for the year ended
December 31, 2017 and the period from March 2, 2016 to December 31,
2016, respectively.
|
4.
|
DEFERRED COMPENSATION
|
Effective March 2016 the Company began accruing monthly
compensation for the services of two officers in the aggregate
amount of $7,000 per month payable to Syzygy Licensing, LLC
(“
Syzygy
”). In March 2017 the Company accrued and
deferred $6,000 compensation to each of the two officers. The
balance payable to Syzygy as of December 31, 2017 was $84,000 and
the accrued deferred compensation aggregated $12,000. These
balances accrue without interest. No payment terms or schedule has
been established.
|
5.
|
STOCKHOLDERS’
EQUITY AND SHARE-BASED COMPENSATION
|
The Company’s authorized capital consists of 150,000,000
shares of common stock, par value $0.0001, and 5,000,000 shares of
preferred stock, par value $0.0001. To reflect the recapitalization
(see Note 1) historical shares of common stock and additional
paid-in capital have been retroactively adjusted using the exchange
ratio of approximately 23,930.60 shares of common stock for each
member unit of Wrap LLC.
Effective with the merger, the Company adopted and the shareholders
approved on March 31, 2017 the 2017 Stock Incentive Plan
authorizing 2,000,000 shares of common stock for issuance as stock
options and restricted stock units to employees, directors or
consultants. At December 31, 2017, there has been no option grants
or restricted stock awards made and none were
outstanding.
|
6.
|
COMMITMENTS AND CONTINGENCIES
|
Facility Lease
Commencing December 1, 2016 the Company leased 1,890 square feet of
improved office, assembly and warehouse space in Las Vegas, Nevada
for a period of 37 months terminating December 31, 2019. The gross
monthly base rent is $1,550 increasing approximately 3.5% per year,
subject to certain future adjustments. The Company may receive an
aggregate of three months of base rent concessions over the term of
the lease subject to timely rent payments.
Rent expense for the period ended December 31, 2017 and 2016 was
$18,120 and $1,510, respectively. The remaining future annual
minimum lease obligations under the foregoing facility lease are
$17,123 and $19,051 for the balance of 2018 and 2019,
respectively.
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
stockholder/officers Mr. Elwood Norris and Mr. James Barnes. The
agreement provides for royalties of 4% of revenues from products
employing the licensed ensnarement device technology up to an
aggregate of $1,000,000 of royalties or until September 30, 2026,
whichever is earlier.
Indemnifications and Guarantees
Our officers and directors are indemnified as to personal liability
as provided by the Delaware law and the Company’s articles
and bylaws. The Company may also undertake indemnification
obligations in the ordinary course of business related to its
operations. The Company is unable to estimate with any reasonable
accuracy the liability that may be incurred pursuant to any such
indemnification obligations now or in the future. Because of the
uncertainty surrounding these circumstances, the Company’s
current or future indemnification obligations could range from
immaterial to having a material adverse impact on its financial
position and its ability to continue in the ordinary course of
business. The Company has no liabilities recorded for such
indemnities.
Regulatory Agencies
The Company may be subject to oversight from regulatory agencies
regarding firearms that arise in the ordinary course of its
business.
|
7.
|
INCOME TAXES
|
Until its reverse recapitalization on March 31, 2017, the Company
was treated as a partnership for federal and state income tax
purposes and did not incur income taxes. The Company accounts for
income taxes under ASC 740. Deferred income tax assets and
liabilities are determined based upon differences between the
financial reporting and tax bases of assets and liabilities and are
measured using the enacted tax rates and laws that will be in
effect when the differences are expected to reverse. Accounting
standards require the consideration of a valuation allowance for
deferred tax assets if it is "more likely than not" that some
component or all of the benefits of deferred tax assets will not be
realized.
The Company did not provide any current or deferred U.S. federal
income tax provision or benefit for the periods presented because
of operating losses since inception. As of December 31, 2017, the
Company has net operating loss carryforwards of approximately
$630,000 to reduce future taxable income through 2037. Certain
changes in stock ownership can result in a limitation on the amount
of net operating loss and tax credit carryovers that can be
utilized each year. As of December 31, 2017, management has not
determined the extent of any such limitations, if any.
The Company provided a full valuation allowance on the net deferred
tax asset, consisting of net operating loss carry forwards, because
management has determined that it is more likely than not that we
will not earn income sufficient to realize the deferred tax assets
during the carry forward period. As a result of the change in
future Federal statutory tax rates due to the passing of the Tax
Cuts and Jobs Act of 2017, management has determined that the
deferred tax assets and liabilities should not be valued at a
federal statutory rate of 34% but rather at the rate in which the
benefit of the deferred tax asset or liability will be realized by
the Company. As such, the Federal statutory rate used to
value the Company's deferred tax assets and liabilities is
21%.
The Company has not taken a tax position that, if challenged, would
have a material effect on the financial statements for the period
ended December 31, 2017 applicable under FASB ASC 740. The Company
did not recognize any adjustment to the liability for uncertain tax
position and therefore did not record any adjustment to the
beginning balance of accumulated deficit on the balance sheet. All
tax returns for the Company remain open.
The provision for (benefit from) income taxes consists of the
following:
|
Period Ended December 31, 2017
|
|
|
Current
tax benefit
|
$
-
|
|
Deferred
tax benefit
|
136,000
|
|
Change
in valuation allowance
|
(136,000
)
|
|
Income
tax benefit (provision)
|
$
-
|
A reconciliation of the provision for income taxes at the federal
statutory rate of 35% to the Company’s provision for income
tax is as follows:
|
Period Ended December 31, 2017
|
|
|
Income
taxes benefit computed at federal statutory rate
|
$
133,000
|
|
Research
tax credits
|
6,000
|
|
Permanent
differences and other
|
(3,000
)
|
|
Change
in valuation allowance
|
(136,000
)
|
|
Income
tax benefit (provision)
|
$
-
|
Deferred income taxes reflect the net tax effects of temporary
differences between the carrying amounts of assets and liabilities
for financial reporting purposes and the amounts used for income
tax purposes. The following table presents the significant
components of the Company’s deferred tax assets and
liabilities for the periods presented:
|
At December 31, 2017
|
|
|
Deferred
tax assets:
|
|
|
Net
operating losses
|
$
132,000
|
|
Research
tax credits
|
6,000
|
|
Deferred
compensation
|
20,000
|
|
Accruals
and other
|
13,000
|
|
|
171,000
|
|
Deferred
tax liabilities:
|
|
|
Depreciation
and other
|
3,000
|
|
|
3,000
|
|
Net
deferred tax assets
|
168,000
|
|
Less
valuation allowance
|
(168,000
)
|
|
Net
deferred taxes after valuation allowance
|
$
-
|
|
8.
|
RELATED PARTY TRANSACTIONS
|
During the period ended December 31, 2016 the Company paid $25,409
of patent legal costs incurred by Syzygy for the ensnarement device
technology pursuant to the license agreement (see Note 6) with such
technology subsequently assigned to the Company.
Commencing in October 2017 the Company commenced reimbursing
officer Mr. Elwood Norris $1,500 per month on a month to month
basis for laboratory costs for an aggregate of $4,500 during the
year ended December 31, 2017.
See Notes 1, 4 and 6 for additional related party transactions and
information.
F-13
TABLE OF CONTENTS
Item 1. B U SinessItem 1A. Ris K FactorsItem 1B. U N Resolved Staff CommentsItem 2. Pro P ErtiesItem 3. Legal P R OceedingsItem 4. Mine Safety DisclosuresItem 5. Market For Common Equity and Related Stockholder Matters and Issuer Purchases Of Equity SecuritiesItem 6. Selected Fin A Ncial DataItem 7. Mana G Ement's Discussion and Analysis Of Financial Condition and Results Of OperationsItem 7A. Quantita T Ive and Qualitative Disclosures About Market RiskItem 8. Financial Statements and Supplementary DataItem 9. C H Anges in and Disagreements with Accountants on Accounting and Financial DisclosureItem 9A. Co N Trols and ProceduresItem 9B. Othe R InformationItem 10. Directors, Executive Officers and Corporate GovernanceItem 11. Exec U Tive CompensationItem 12. Security O Wnership Of Certain Beneficial Owners and Management and Related Stockholder MattersItem 13. Certain R Elationships and Related Transactions and Director IndependenceItem 14. Principal Ac C Ounting Fees and ServicesItem 15. Exhibits and Financial Statement Schedules