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, 2019
Commission File Number: 000-55838
Wrap
Technologies, Inc.
(Exact name of registrant as specified in its charter)
|
Delaware
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98-0551945
|
|
(State or other jurisdiction of incorporation or
organization)
|
(I.R.S. Employer Identification Number)
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1817 W
4
th
Street
Tempe,
Arizona 85281
(Address of principal executive offices) (Zip
Code)
(800) 583-2652
(Registrant’s Telephone Number, Including Area
Code)
Securities registered pursuant to Section 12(b) of the Act:
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 every Interactive Data File required to be submitted
pursuant to Rule 405 of Regulation S-T (§232.405 of this
chapter) during the preceding 12 months (or for such shorter period
that the registrant was required to submit such
files).
[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 the 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 [ ]
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Accelerated filer [ ]
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|
Non-accelerated filer [X]
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Smaller reporting company [X]
Emerging growth company [X]
|
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 registrant’s common stock
held by non-affiliates of the registrant on June 28, 2019 (the last
business day of the registrant’s most recently completed
second fiscal quarter) was $79,544,812
based on the closing
price as reported on
the
Nasdaq Capital Market
(“
Nasdaq
”)
.
Shares of the registrant’s common stock held by each officer
and director and each person known to the registrant to own 10% or
more of the outstanding voting power of the registrant have been
excluded in that such persons may be deemed to be affiliates. This
determination of affiliate status is not a determination for other
purposes.
Indicate the number of shares outstanding of each of the
registrant’s classes of common stock, as of the latest
practicable
date: 30,044,241
shares
of common stock, par value $0.0001 per share, as
of
March 9,
2020.
Documents Incorporated by
Reference
The registrant incorporates information required by Part III (Items
10, 11, 12, 13, and 14) of this report by reference to portions of
the registrant’s definitive proxy statement with respect to
its 2020 Annual Meeting of Shareholders to be filed with the
Securities and Exchange Commission within 120 days after the close
of the fiscal year ended December 31, 2019, pursuant to Regulation
14A.
TABLE
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F-1
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-i-
FORWARD-LOOKING STATEMENTS
IN ADDITION TO HISTORICAL INFORMATION, THIS ANNUAL REPORT ON FORM
10-K (THE “
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 Wrap are registered trademarks in the U.S. and certain
other jurisdictions. They, along with 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.
ITEM 1. BUSINESS
Overview
We are a security technology company organized in March 2016,
focused on delivering modern policing solutions to customers,
primarily consisting of law enforcement and security personnel. We
began demonstrations of our first product, the BolaWrap 100 remote
restraint device, in November 2017. The immediate addressable
domestic market consists of approximately 900,000 full-time sworn
law enforcement officers in the U.S. We have demonstrated the
product to over 490 law enforcement agencies across the country,
often with media in attendance, resulting in hundreds of media
reports including television and print that have driven over 1,900
inquiries from domestic and international law enforcement
personnel. Over 140 law enforcement agencies and 29 distributors
took delivery of the BolaWrap 100 devices during 2018 and 2019. In
addition to sales to domestic and international agencies and
distributors, we delivered through December 2019 over 550 test and
evaluation devices at no cost to strategic agencies for trial,
evaluation and feedback. Our product is gaining important
worldwide awareness and recognition through media exposure, trade
show participations, product demonstrations and word of mouth as a
result of positive responses to our product. We believe we are
establishing a global brand and the product foundation for business
growth. We believe we have strong market opportunities for our
restraint product offering within the law enforcement, military and
homeland security business sectors domestically and
internationally.
The BolaWrap 100 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.
-1-
The BolaWrap 100 offers law enforcement a new tool, low on the
continuum of force, to remotely and temporarily control an
individual or impede flight or movement by targeting and wrapping
an individual’s legs or arms.
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 or arms 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, especially in encounters with subjects experiencing a
mental health crisis. 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 three broad categories routinely
encountered by law enforcement and security personnel:
●
remotely restrain and limit the mobility of an individual that may
be experiencing a mental health crisis or narcotic induced
psychosis and incapable of responding to law enforcement’s
verbal commands but that presents a danger to law enforcement, the
public or themselves if not restrained;
●
remotely restrain and limit the mobility of an individual
attempting to evade arrest or questioning, as well as individuals
increasingly ignoring verbal commands from law enforcement. These
individuals are commonly referred to as passively resistant or
non-compliant; 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 strategy is to focus on the
immediate
addressable domestic market of approximately 900,000 full-time
sworn officers
in over 15,300 federal,
state and local
law enforcement agencies. The FBI’s
Criminal Justice Information Services Division reported over
800,000 state and local law enforcement officers in 2018 and the
Department of Justice in October 2019 reported that based on 2016
data that there were over 100,000 full-time federal officers
primarily providing police protection. We are
also exploring other markets, including military
and international markets. We have estimated an addressable
international market of over 12.1 million police officers in the
100 largest police forces gathered from individual country
statistics. According to
Stratistics MRC, we participate in
a segment of the non-lethal products market expected to grow to
$11.85 billion by 2023.
Law
enforcement encounters with the mentally ill or those suffering a
mental health crisis present a difficult challenge,
often generating public controversy and costly
consequences. According to the Treatment Advocacy Center: Office of
Research & Public Affairs in a 2015 report on The Role of
Mental Illness in Fatal Law Enforcement Encounters, one in ten
police encounters involve the mentally ill and a minimum of one in
four fatal police encounters involve the mentally
ill.
We are unable to predict the market acceptance of our new product
or the level of future sales. We believe the enhanced version of
our product with the green line laser accessory that we introduced
in late May 2019, meets customer requirements
. We believe we
can accelerate orders and shipments during 2020. However, there can
be no assurance of the timing or quantity of orders or sales in
future periods.
See the section
entitled “
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 (“
we
”, “
us
”, “
our
”, “
Wrap
” or the “
Company
”), on March 2, 2016 by our founders Elwood
G. Norris, Scot Cohen and James A. Barnes. 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
Genasys Inc. (Nasdaq: GNSS), formerly LRAD Corporation, 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.
-2-
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 an aggregate of
40,000 shares of Common Stock during the offering for an aggregate
of $60,000.
On
October 30, 2018, we obtained gross cash proceeds of $13.68 million
and net cash proceeds of approximately $12.14 million from the sale
of 4,561,074 units (“
Units
”) for $3.00 per Unit in a
private offering. Each Unit consisted of one share of common stock
and one detachable two-year warrant to purchase one share of common
stock at an exercise price of $5.00 per share. Members of our
management and our existing stockholders purchased over 25% of the
securities sold in the private placement, including $1.0 million
invested by our Chief Technology Officer, Elwood G.
Norris.
On June 18, 2019, we consummated an offering (the
“
June
2019 Follow-On Offering
”)
resulted in gross cash proceeds of $12.5 million, or net cash
proceeds of $11.35 million after deduction of commissions and
offering costs. We sold 1,923,076 Units at a public offering price
of $6.50 per Unit. Each Unit consisted of one share of Common Stock
and one detachable two-year warrant to purchase one share of Common
Stock at an exercise price of $6.50 per share.
We demonstrated our first prototype BolaWrap 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. In October 2018, we
demonstrated our new BolaWrap green line laser and in May 2019
began distributing production green line laser equipped BolaWrap
100 devices and associated cartridges. In September 2019, we
relocated our corporate headquarters to our new sales,
manufacturing, training and product development facility in Tempe,
Arizona.
Plan of Operation
Our plan of operation for 2020 includes growing research,
production, marketing, sales, training, distribution and service
functions. We expect to focus significant efforts on both domestic
and international sales, training and production.
Our research and development activities for 2020 will focus on
BolaWrap 100 cost reduction activities and developing new models of
our restraint device. Our development plans also include developing
internally or in partnership with others additional security
related products and technologies. We may also evaluate other
related products for acquisition or distribution.
We currently have no plans for material acquisition of plant or
equipment.
See the section entitled “
Risk
Factors
” included in this
Annual Report for additional information regarding risks and
uncertainties associated with our operations and
business.
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 focus on
the law enforcement agency segment of the market for the BolaWrap
100.
-3-
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,
approximately 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. Additionally, 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 may 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. Although 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. This is more apparent in police interactions with the
mentally ill. According to a report by The State of Mental Health
in America, 2018; Mental Health America an estimated 40 million
adults in the U.S. suffer from mental health issues. And, in a 2015
report on The Role of Mental Illness in Fatal Law Enforcement
Encounters, the Treatment Advocacy Center: Office of Research &
Public Affairs indicated that 7.9 million individuals have severe
mental illness that disorders their thinking.
Amounting to somewhat fewer than 4 in every 100
adults in America, individuals with severe mental illness generate
no less than 1 in 10 calls for police service and occupy at least 1
in 5 prison and jail beds in the U.S. An estimated 1 in 3
individuals transported to hospital emergency rooms in psychiatric
crisis are taken there by police.
A tool to restrain individuals at a distance may offer reduced
frequency of deployment of other control techniques, including
CEWs, especially in encounters with the mentally ill. 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.
-4-
The BolaWrap
100
Solution
The BolaWrap 100 is designed to perform well with respect to all of
the above characteristics. We believe the BolaWrap 100 is a unique
new device to remotely restrain subjects safely and without
eliminating any other use of force options necessary for the
protection of law enforcement and the public. Although 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.
Early reports from a very limited number of field deployments by
law enforcement agencies during 2019 have been encouraging and we
expect additional use data in 2020.
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 at close
distances, and it is not recommended for use at less than ten
feet.
Safety
The BolaWrap 100 is not intended to be a weapon. It does not rely
on pain to gain compliance 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 is the case with CEW, impact munitions or
chemical devices. We spend significant resources training law
enforcement on the safe and effective use of the BolaWrap 100.
However, like any use of force, injuries may result from the use of
BolaWrap or as a consequence of its use.
Ease of Use
The BolaWrap 100 is small, light and rugged. 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 bola
cartridge inserted, typically in less than five seconds. Further,
the weapon requires no maintenance, and there are no electronic
components in the base device. The BolaWrap 100 also does not leave
contaminating residues, unlike chemical sprays that may contaminate
buildings, vehicles or other closed facilities or officer uniforms.
The integrated green line laser aids in the proper aiming of the
device and the device vibrates when the safety is disengaged to
alert the user that it is in deployment mode.
Dependability
The BolaWrap 100 as a mechanical device is designed to operate
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 bola 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. Although we do not believe there is currently 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 involving use of force
for law enforcement agencies can be significant, with settlements
in the millions of dollars for many departments. 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 our 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.
-5-
Markets
We
participate in the global non-lethal market that, according to a
June 2017 report by Global Market Outlook, was estimated to be
$6.32 billion in 2016 and is expected to grow to $11.85 billion in
2023. The following segments are our target markets.
Domestic and International Law Enforcement
Federal, state and local law enforcement agencies in the United
States currently represent the primary target market for the
BolaWrap 100. According to the FBI’s Criminal Justice
Information Services Division in 2018 there were over 800,000 local
and state full-time law enforcement officers. The U.S.
Department of Justice in October 2019 reported that based on 2016
data that there were over 100,000 full-time federal officers
primarily providing police protection and that there in 2016 there
were over 15,300 general purpose law enforcement agencies in the
U.S.
Federal
officers include over 37,000 customs and border patrol officers.
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.
Additionally, we have estimated an addressable international market
of over 12.1 million police officers in the 100 largest police
forces gathered from individual country statistics. We delivered
our first foreign order in 2018 and in 2019 signed our first
international distributors and in 2019 delivered product to 22
countries.
Corrections
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.
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 those employed by investigation and security services,
hospitals, schools, local government, and others. We believe that
some security personnel armed with the BolaWrap 100 could be
effective to de-escalate some encounters without eliminating other
tools available today. Providing guards with the BolaWrap 100 may
reduce the potential liability of private security companies and
personnel in such encounters.
Although there are use cases in private security, correctional
facilities and by certain military policing personnel, we are
initially targeting the BolaWrap 100 for law enforcement. 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 and various committees. Although 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.
We employ demonstrations as a primary sales step with
demonstrations scheduled from the over 1,900 law enforcement leads
created by our marketing activities in 2018 and 2019.
Demonstrations are generally followed by delivery of product for
test and evaluation and training with selected agencies. Some of
these deliveries are paid sales and some are issued as an
incentive, with the goal of larger future sales of devices and
cartridges. In each of 2018 and 2019, we demonstrated at more than
60 agencies often with other local agencies in attendance. In 2018,
we delivered over 200 devices at no cost to selected law
enforcement agencies for evaluation and feedback as a result of
these initial inquiries and made model changes as a result. During
2019, we delivered over 300 devices at no cost. We consider
training as an integral element of our sales and marketing approach
and believe that departments that have trained instructors
knowledgeable about our product will be more likely to purchase
devices.
-6-
Initial sales in 2018 and early 2019 were made by our executive and
sales employees. In June 2019, we implemented a channel
distribution strategy in which we sell our products to existing
independent regional police equipment distributors who then sell to
local law enforcement agencies.
We are focusing our internal
sales, sales support and business development resources on building
relationships with large agencies and actively supporting
distributors.
In addition to full-time
internal sales, sales support and business development personnel
from time to time we utilize part-time consultants with law
enforcement or government agency expertise to support our sales and
marketing activities.
During 2019, we signed distribution agreements with 11 domestic
distributors representing 45 states. These nonexclusive and
cancelable agreements provide certain territorial rights to
distributors but allow us to sell direct to certain
agencies.
During 2019, we also elected to increase staffing to simultaneously
pursue the international market and signed distribution agreements
with 16 international distributors representing 26 countries. These
agreements are generally exclusive, require minimum performance and
allow us to sell direct to customers subject to certain
compensation. We focus significant sales and business development
efforts to support our international distributors.
We
actively promote our brands and believe BolaWrap is becoming
increasingly known world-wide as the pioneer and leader in remote
restraint.
We participate in a variety
of domestic and international trade shows and conferences, both
directly and with our distributors. We expect our marketing efforts
will also continue to 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. Our website contains marketing information and
we are engaged in social media outreach and
communications.
We
intend to increase the use of our trademarks throughout our product
distribution chain and believe growing brand awareness will assist
in expanding our business. We believe our reputation as a pioneer
in the new category of remote restraint, strong training support
and product support provide us competitive advantages.
Training
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. Generally, they also must
adapt any new tools to their use of force policies and clear use
with any relevant committees or review boards. We have developed
and offer robust training and class materials that certify law
enforcement officers and trainers as BolaWrap Instructors in the
use and limitations of the BolaWrap 100.
Recognizing the need to provide robust training and sales support
we launched the Wrap “Train the Trainer” program in
October 2018. The program is designed such that our Master BolaWrap
Instructors train local BolaWrap Instructors at local agencies who
then train line officers in accordance with an agency’s
policies.
BolaWrap Master Instructors are engaged by us as independent
contractors and are required to have previous law enforcement
training experience and be effective communicators. Some are still
active law enforcement. In order to be certified as a Master
Instructor, candidates must complete a two-day Master Instructor
school at our Tempe training facility, observe a Train the Trainer
course and then be observed teaching a Train the Trainer Course. We
currently have 54 Master Instructors, residing in 19 states that
have completed the two-day course and more than 40 have been
certified as Master Instructors allowing them to conduct Instructor
Certification Training. In addition to two Wrap executives, three
other Master Instructors have been designated Senior Master
Instructors qualified to teach and certify other Master
Instructors.
BolaWrap Instructors are sworn law enforcement officers, typically
department trainers, defensive tactic instructors or SWAT officers.
To be certified as a BolaWrap Instructor, individuals must attend a
five-hour BolaWrap Instructor certification course, pass a written
exam and show proficiency in deploying and using the BolaWrap. We
also assist Instructors on lessons learned and best practices for
teaching line officers in the use of BolaWrap. The nature and
extent of line officer training is at each agency’s
discretion. Instructor certification is effective for two years
after which it requires renewal.
We employ a cloud-based software system, the Wrap Learning
Management System, to schedule and organize training events,
registration and training records. This software also hosts
training resources and materials including a 30-minute BolaWrap
Familiarization Course that distributors, purchasers and other
interested parties are highly encouraged to utilize to educate
themselves on BolaWrap use.
-7-
We have assembled a team of five experienced and well-known
trainers
from different regions
across the U.S. that form the Wrap Training Academy Advisory Board.
The Wrap Training Academy Advisory Board provides guidance that
helped create and now helps maintain a high-quality training
program for Wrap products.
Since launching our ‘Train the Trainer’ program in
October 2018,
at least one individual at over 160
U.S. police departments have received
formal training and over
520
officers
are now certified BolaWrap 100 instructors qualified and certified
to train line officers. We encourage training prior to use of the
BolaWrap 100 by individual departments but the nature and extent of
training, if any, is up to the individual
agency.
We believe our professional training and sales support team and
systems provide both a competitive advantage and a barrier to new
competition. The nature of modern policing requires that equipment
and services be supported and that line officers have access to
training and procedures to properly perform their duties and
minimize the policing risks. We believe we have positioned our
training and support teams to respond to agencies of all
sizes.
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 to meet customer requirements as a new tool
to aid in the retention of individuals to make encounters more
effective and less dangerous to members of law enforcement and the
public;
●
develop a robust production and supply system to support our
customers;
●
rapidly expand our training to support proper use of the product;
and
●
develop relationships with customers requiring large numbers of
products, mainly larger city police departments, larger agencies
and international police forces.
We also plan to develop products for use by security and related
personnel and add other security products to our product portfolio.
During 2019, at the request of a customer, we designed a private
label 20”x30” rifle rated police shield and arranged
for contract production of Wrap Shields to our specifications. In
January 2020, our design was independently tested and passed and
exceeded the National Institute of Justice 0108.01 Type III (High
Powered Rifle) ballistic standard. We expect to deliver product to
this customer in the first quarter of 2020 but have not yet
developed further plans for this or similar shield
products.
During 2019, working with an independent technology company, we
configured a virtual reality system and developed training
scenarios employing the BolaWrap. We used the system and scenarios
during two large trade shows in October and November and in
December installed a system in our Tempe training facility being
used for demonstrations and training. During 2020, we intend to
develop additional scenarios and determine future plans for this
technology which we believe may have broader application beyond
BolaWrap demonstrations and training.
Manufacturing and Suppliers
Manufacturing
We
believe maintaining quality manufacturing capacity is essential to
the performance of our products and the growth of our business. Our
manufacturing and assembly involves unique processes and materials.
We contract with third-party suppliers to produce various parts,
components and subassemblies. We established initial startup
production in our Las Vegas facility in 2018. In October 2019, we
completed a move and started production at our new facility in
Tempe, Arizona. This facility, in addition to administrative,
sales, training and warehousing space, has sufficient engineering
and manufacturing capacity to support current and expected business
growth. In our Tempe facility, we complete the final assembly, test
and ship our products. We have refined our internal processes to
improve how we design, test, and qualify products. We continue to
implement rigorous manufacturing and quality processes to track
production and field issues. We implement design and component
changes periodically to reduce our product costs and improve
product reliability and manufacturability.
Suppliers
We
minimize inventories and maximize the efficiency of our supply
chain by having a number of components and sub-assemblies produced
by outside suppliers. We rely on one supplier for laser assembly
with some parts sole sourced from other suppliers. We are making
efforts to obtain alternative suppliers to reduce such reliance.
Our ability to manufacture our products could be adversely affected
if we were to lose this sole source supplier and were unable to
find an alternative supplier. We believe we have developed strong
relationships with a number of our key suppliers. If these
suppliers should experience quality problems or part shortages, our
production schedules could be significantly delayed or our costs
significantly increased.
-8-
Backlog
At
December 31, 2019, we had $344,000 of customer deposits on orders
and had backlog of approximately $1.725 million expected to be
delivered in 2020. The amount of backlog at any point in time is
dependent upon order timing, scheduled delivery dates to our
customers and product lead times. Distributor and customer orders
for future deliveries are generally subject to modification,
rescheduling or in some instances, cancellation in the normal
course of 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
Although 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 may 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.
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 three Federal Firearms
Manufacturing Licenses that expire in 2020 through 2022. ATF
regulations are enforced by surveillance and inspection. If ATF
finds a violation, it can institute a wide range of enforcement
actions, ranging from public warnings to more severe sanctions such
as fines, penalties, suspension or withdrawal of regulatory
approvals, product recalls, seizure of products, operating
restrictions or total shutdown of production, and criminal
prosecution.
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.
The BolaWrap 100 is also considered a crime control product by the
U.S. government. Accordingly, the export of our devices is
regulated under export administration regulations. As a result, we
must obtain export licenses from the Department of Commerce for all
shipments to foreign countries. 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 an agent,
distributor or advisor who is familiar with the applicable import
regulations in each of any targeted foreign markets.
-9-
Intellectual Property
We intend to protect our intellectual property assets including
issued patents, pending patents, trademarks, 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 currently have seven issued U.S. patents
related to the BolaWrap 100, and have six additional U.S. patents
pending. In September 2018, we commenced filing our first foreign
patent applications targeting the European Union (38 countries) and
17 other countries, all of which are currently pending but two of
which have been allowed and expected to issue in 2002. We have
reserved rights to file additional foreign patents. We have also
been granted trade name protection for “BolaWrap”, and
“Wrap” 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.
For the
fiscal years ended December 31, 2019 and 2018, we spent
approximately $2.2 million and $0.7 million, respectively, on
company-sponsored research and development. Future levels of
research and development expenditures will vary depending on the
timing of further new product development and the availability of
funds to carry on additional research and development on currently
owned technologies or in other areas.
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 stockholders 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
revenue 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.
Seasonality
We do not expect to experience any significant seasonality trends.
However, seasonality trends may occur in the future.
-10-
Executive Officers and Employees
We currently have five executive officers. We have 19 other
employees, with 10 engaged in sales, marketing, sales support and
training, four in production, three in research and development and
two in administration. We employ consultants from time to time to
provide additional sales, marketing, training and research and
development services.
We believe we offer competitive compensation and other benefits and
that our employee relations are good.
Available Information
As a public company, we are required to file our annual reports on
Form 10-K, quarterly reports on Form 10-Q, current reports on Form
8-K, proxy statements on Schedule 14A and other information
(including any amendments) with the Securities and Exchange
Commission (the “
SEC
”). The SEC maintains an Internet site that
contains reports, proxy and information statements, and other
information regarding issuers that file electronically with the
SEC. You can find our SEC filings at the SEC’s website
at
www.sec.gov
.
Our Internet address is
www.wraptechnologies.com
.
Information contained on our website is not part of this Annual
Report. Our SEC filings (including any amendments) will be made
available free of charge on
www.wraptechnologies.com
,
as soon as reasonably practicable after we electronically file such
material with, or furnish it to, the SEC.
An investment in our Company involves a high degree of risk. In
addition to the other information included in this Annual 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 Annual 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 to incur
additional losses until we achieve sufficient revenue and resulting
margins to offset our operating costs. Our net loss for the
years ended December 31, 2019 and 2018 was $8,325,488 and
$3,336,435, respectively. Our ability to achieve future
profitability is dependent on a variety of factors, many of which
are outside of our control. Failure to achieve profitability or
sustain profitability, if achieved, may require us 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 stockholders. In
addition, raising additional capital by issuing additional debt
instruments may restrict our operations.
Although we believe we have adequate financial resources to fund
our operating expense for at least the next twelve months, and that
we may be able to generate funds from product sales during that
time, existing working capital may not be sufficient to achieve
profitable operations due to product introduction costs, operating
losses and other factors. 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 stockholders could be diluted
significantly, and such newly issued securities may have rights,
preferences or privileges senior to those of our existing
stockholders. In addition, the issuance of any equity securities
could be at a discount to the market price.
-11-
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
stockholders. 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, if at all.
We only recently commenced revenue operations and have limited
experience serving law enforcement and commercializing products
like the BolaWrap 100, our first product, which makes it difficult
to assess our future viability.
Although we are commercializing our first product, the BolaWrap
100, we have generated minimal revenue to date, and we have not yet
demonstrated an ability to overcome many of the fundamental risks
and uncertainties frequently encountered by 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 the BolaWrap 100, and develop additional future
products for commercialization;
●
develop,
obtain and maintain required regulatory approvals for
commercialization of products we produce;
●
establish
an intellectual property portfolio for the 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 the 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 the BolaWrap 100
and/or other future products.
We may incur significant and unpredictable warranty costs as our
products are introduced and produced.
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 could incur charges for excess or obsolete inventory and incur
production costs for improvements or model changes.
While
we strive to effectively manage our inventory, rapidly changing
technology, and uneven customer demand may result in short product
cycles and the value of our inventory may be adversely affected by
changes in technology that affect our ability to sell the products
in our inventory. If we do not effectively forecast and manage our
inventory, we may need to write off inventory as excess or
obsolete, which in turn can adversely affect cost of sales and
gross profit.
We have
experienced, and may in the future experience, improvement and
model changes and unusual production costs associated with
implementing production for our products. We currently have no
reserve for slow moving or obsolete inventory but may incur future
charges for obsolete or excess inventory.
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 revenue 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.
-12-
We will be dependent on sales of the BolaWrap 100 for the
foreseeable future, 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.
Our international operations could be harmed by factors including
political instability, natural disasters, fluctuations in currency
exchange rates, and changes in regulations that govern
international transactions.
We expect to sell our products worldwide and have commenced export
activities for multiple countries. We expect exports to become a
significant part of our future business. The risks inherent in
international trade may reduce our international sales and harm our
business and the businesses of our customers and our suppliers.
These risks include, among other things:
●
changes
in tariff regulations;
●
political
instability, war, terrorism and other political risks;
●
foreign
currency exchange rate fluctuations;
●
establishing
and maintaining relationships with local distributors, agents and
dealers;
●
lengthy
shipping times and accounts receivable payment cycles;
●
import
and export control and licensing requirements;
●
compliance
with a variety of U.S. laws, including the Foreign Corrupt
Practices Act, by us or key subcontractors;
●
compliance
with a variety of foreign laws and regulations, including
unexpected changes in taxation and regulatory
requirements;
●
greater
difficulty in safeguarding intellectual property abroad than in the
U.S.; and
●
difficulty
in staffing and managing geographically diverse
operations.
These and other risks may preclude or curtail international sales
or increase the relative price of our products compared to those
manufactured in other countries, reducing the demand for our
products. Failure to comply with U.S. and foreign governmental laws
and regulations applicable to international business, such as the
Foreign Corrupt Practices Act or U.S. export control regulations,
could have an adverse impact on our business with the U.S. and
foreign governments.
Business interruptions, including any interruptions resulting from
COVID-19, could significantly disrupt our operations and could have
a material adverse impact on us.
All of our employees are located in the U.S. In addition to our
employees, we rely on (i) distributors, agents and third-party
logistics providers in connection with product sales and
distribution and (ii) raw material and component suppliers in the
U.S., Canada, Europe and China. If we, or any of these third party
partners encounter any disruptions to our or their respective
operations or facilities, or if we or any of these third party
partners were to shut down for any reason, including by fire,
natural disaster, such as a hurricane, tornado or severe storm,
power outage, systems failure, labor dispute, pandemic or other
unforeseen disruption, then we or they may be prevented or delayed
from effectively operating our or their business,
respectively.
The coronavirus (COVID-19) that was reported to have surfaced in
Wuhan, China in December 2019 and that has now spread to other
countries could adversely impact our operations or those of our
third-party partners. Additionally, the continued spread of the
virus could negatively impact the manufacture, supply, distribution
and sale of our products and our financial results. The extent to
which the coronavirus impacts our operations or those of our
third-party partners will depend on future developments, which are
highly uncertain and cannot be predicted with confidence, including
the duration of the outbreak, new information that may emerge
concerning the severity of the coronavirus and the actions to
contain the coronavirus or treat its impact, among others. Any
losses or damages we incur could have a material adverse effect on
our financial results and our ability to conduct business as
expected
.
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 continue to expand our sales, marketing and training
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.
-13-
Our future success is dependent on our ability to expand sales
through distributors, and our inability to grow our sales force or
maintain and add distributors would negatively affect our
sales.
Our distribution strategy is to pursue sales through multiple
channels with an emphasis on independent distributors, domestically
and internationally. Our inability to recruit and retain sales
personnel and maintain and add 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. Our reliance on the sales of
our products by distributors also makes it more difficult to
predict our revenue, 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 they place an order at all. 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 and our distributors 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 our product 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. ATF regulations are enforced by surveillance and
inspection. If ATF finds a violation, it can institute a wide range
of enforcement actions, ranging from public warnings to more severe
sanctions such as fines, penalties, suspension or withdrawal of
regulatory approvals, product recalls, seizure of products,
operating restrictions or total shutdown of production, and
criminal prosecution. Any such actions could have a material
adverse impact on our operations.
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 controlled by the United States Department of
Commerce (“
DOC
”) for exports directly from the United
States. Consequently, we need to obtain export licenses from the
DOC for the export of our products from the United States.
Compliance with or changes in U.S. export regulations could
significantly and adversely affect any future international
sales.
Certain foreign jurisdictions may restrict the importation or sale
of our products, limiting our international sales
opportunities.
Our products, including the BolaWrap 100, have limited 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. We
currently own seven issued U.S. patents related to the BolaWrap 100
and have seven U.S. patents pending. We have filed foreign patent
applications in the European Union (up to 38 countries) and 17
other countries, and reserved our rights to file additional foreign
patents. Our protective measures taken thus far, including our
issued patents, pending patents, issued and pending 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.
-14-
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 made 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 distributors and 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 expense to us
that could harm our operating results.
We have limited 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 limited 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 that the BolaWrap 100 will be the primary
source of our revenue in the foreseeable future. We expect our
revenue, if any, 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, among
others:
●
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 products;
●
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.
-15-
Our expense may vary from period to period, which could affect
quarterly results and our stock price.
If we incur additional expense 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 expense 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
sub-assemblies 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
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 revenue,
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.
We will need to improve internal controls and management oversight
systems. Our small size and limited personnel and consulting
resources make doing so more challenging than for more established
entities. We may not be able to prevent or detect misstatements in
our reported financial statements due to limited segregation of
duties, 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.
-16-
Risk Factors Relating to Our Common Stock
Our stock price may be volatile or may decline regardless of our
operating performance, resulting in substantial losses for
investors.
The market price of our Common Stock has fluctuated significant to
date and in the future may fluctuate significantly in response to
numerous factors, many of which are beyond our control, including
the factors listed below and other factors described in this
“
Risk Factors
”
section:
●
actual
or anticipated fluctuations in our operating
results;
●
failure
of securities analysts to initiate or maintain coverage of our
Company, changes in financial estimates by any securities analysts
who follow our Company, or our failure to meet these estimates or
the expectations of investors;
●
rating
changes by any securities analysts who follow our
Company;
●
changes
in the availability of federal funding to support local law
enforcement efforts, or local budgets;
●
announcements
by us of significant technical innovations, acquisitions, strategic
partnerships, joint ventures or capital commitments;
●
changes
in operating performance and stock market valuations of other
security product companies generally;
●
price
and volume fluctuations in the overall stock market, including as a
result of trends in the economy as a whole;
●
changes
in our board of directors or management;
●
sales
of large blocks of our Common Stock, including sales by our
executive officers, directors and significant
stockholders;
●
lawsuits
threatened or filed against us;
●
short
sales, hedging and other derivative transactions involving our
capital stock;
●
general
economic conditions in the United States and abroad;
and
●
other
events or factors, including those resulting from war, incidents of
terrorism or responses to these events.
In addition, stock markets have experienced extreme price and
volume fluctuations that have affected and continue to affect the
market prices of equity securities of many security and technology
companies. Stock prices of many security and technology companies
have fluctuated in a manner unrelated or disproportionate to the
operating performance of those companies. In the past, stockholders
have instituted securities action litigation against certain
companies following periods of market volatility. If we were to
become involved in securities litigation, it could subject us to
substantial costs, divert resources and the attention of management
from our business and adversely affect our business, operating
results, financial condition and cash flows.
Sales of a substantial number of shares of our Common Stock may
adversely affect the market price of our Common Stock.
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 outstanding shares of our Common Stock,
other than the shares held by executive officers and directors, are
eligible for immediate resale in the public market. Substantial
selling of our Common Stock could adversely affect the market price
of our Common Stock.
Our common stock could be delisted from the Nasdaq Stock
Market.
Nasdaq’s
continued listing standards for our common stock require, among
other things, that (i) we maintain a closing bid price for our
common stock of at least $1.00, and (ii) we maintain: (A)
stockholders’ equity of $2.5 million; (B) market value of
listed securities of $35 million; or (C) net income from continuing
operations of $500,000 in the most recently completed fiscal year
or in two of the last three most recently completed fiscal years.
Any failures to satisfy any continued listing requirements could
lead to the receipt of a deficiency notice from Nasdaq and
ultimately to a delisting from trading of our common stock. If our
common stock were delisted from Nasdaq, among other things, this
could result in a number of negative implications, including
reduced liquidity in our common stock as a result of the loss of
market efficiencies associated with Nasdaq and the loss of federal
preemption of state securities laws as well as the potential loss
of confidence by suppliers, customers and employees, institutional
investor interest, fewer business development opportunities,
greater difficulty in obtaining financing and possible breaches of
certain contractual obligations.
-17-
Our officers and directors are among our largest stockholders, and
may have certain personal interests that may affect the
Company.
Management owned approximately 53% of our Common Stock
at December 31, 2019. As a result, our management, acting
individually or as a group, has the potential ability to exert
influence on the outcome of issues requiring approval by our
stockholders. 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 stockholders or preventing transactions in
which stockholders might otherwise recover a premium for their
shares over current market prices.
We may issue additional shares of Common Stock in the future. The
issuance of additional shares of Common Stock may reduce the value
of your Common Stock.
We may
issue additional shares of Common Stock without further action by
our stockholders. Moreover, the economic and voting interests of
each stockholder will be diluted as a result of any such issuances.
Although the number of shares of Common Stock that stockholders
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 shares of Common Stock issuable upon the exercise of any
future options or warrants may lower the price of our Common
Stock.
At December 31, 2019, we had warrants, options and restricted stock
units outstanding on 9,857,457 shares of our Common Stock. The
issuance of shares of Common Stock issuable upon the exercise of
options or warrants or issuance from restricted stock units could
cause substantial dilution to existing holders of our 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
stockholders. 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.
We incur substantial costs as a result of being a public
company.
As a public company, we are incurring significant levels of legal,
accounting, insurance, exchange listing fees and other expenses
that we did not incur as a private company. We are subject to the
reporting requirements of the Securities Exchange Act of 1934, as
amended (the “
Exchange
Act
”), the Sarbanes-Oxley
Act of 2002 (the “
Sarbanes-Oxley
Act
”), the Dodd-Frank
Act, the listing requirements of the Nasdaq Capital Market and
other applicable securities rules and regulations. Compliance with
these rules and regulations increases our legal and financial
compliance costs, makes some activities more difficult,
time-consuming or costly and increases demand on our systems and
resources as compared to when we operated as a private company. The
Exchange Act requires, among other things, that we file annual,
quarterly and current reports with respect to our business and
operating results. The Sarbanes-Oxley Act requires, among other
things, that we maintain effective disclosure controls and
procedures and internal control over financial reporting. In order
to maintain and, if required, improve our disclosure controls and
procedures and internal control over financial reporting to meet
this standard, significant resources and management oversight may
be required. As a result, management’s attention may be
diverted from other business concerns, which could adversely affect
our business and operating results. We may need to hire more
corporate employees in the future or engage outside consultants to
comply with these requirements, which would increase our costs and
expenses.
-18-
In addition, changing laws, regulations and standards relating to
corporate governance and public disclosure are creating uncertainty
for public companies, increasing legal and financial compliance
costs and making some activities more time-consuming. These laws,
regulations and standards are subject to varying interpretations,
in many cases due to their lack of specificity, and, as a result,
their application in practice may evolve over time as new guidance
is provided by regulatory and governing bodies. This could result
in continuing uncertainty regarding compliance matters and higher
costs necessitated by ongoing revisions to disclosure and
governance practices. We intend to invest resources to comply with
evolving laws, regulations and standards, and this investment may
result in increased general and administrative expenses and a
diversion of management’s time and attention from
revenue-generating activities to compliance activities. If our
efforts to comply with new laws, regulations and standards differ
from the activities intended by regulatory or governing bodies due
to ambiguities related to their application and practice,
regulatory authorities may initiate legal proceedings against us
and our business may be adversely affected.
As a result of disclosure of information in this report and in the
filings that we are required to make as a public company, our
business, operating results and financial condition have become
more visible, which has resulted in, and may in the future result
in threatened or actual litigation, including by competitors and
other third parties. If any such claims are successful, our
business, operating results and financial condition could be
adversely affected, and even if the claims do not result in
litigation or are resolved in our favor, these claims, and the time
and resources necessary to resolve them, could divert the resources
of our management and adversely affect our business, operating
results and financial condition.
The payment of dividends will be at the discretion of our Board of
Directors.
We have
never declared dividends on our Common Stock, and currently do not
anticipate that we will do so in the foreseeable future. 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 of Directors deems relevant.
-19-
None.
ITEM 2. P
ROPERTIES
We lease approximately 1,987 square feet of office, assembly and
warehousing space located at 4620 Arville Street, Suite E, Las
Vegas, Nevada 89103, pursuant to a three-year lease expiring
December 2019 at a current monthly rate of $1,588. In January 2019,
we extended this lease for an additional twelve months commencing
January 2020 and ending December 2020 at a rate of $2,100 per month
for the extension period. In February 2019, we entered into a
two-year lease for 1906 square feet of office, assembly and
warehousing space located at
20331 Lake Forest Drive, Suite C-11, Lake Forest,
California 92630
at a monthly
rate of $2,723. In June 2019, we entered into a 38-month lease for
11,256 of office, training, assembly and warehouse space in Tempe,
Arizona at a monthly rate of $7,654. We expect that these
properties will be sufficient to meet our needs for at least the
next 12 months.
Beginning in October 2017, we commenced reimbursing officer Mr.
Elwood Norris $1,500 per month on a month to month basis for
laboratory facility costs. In November 2018, we commenced paying
$5,000 on a month to month basis for a 50% share of 1,000 square
feet at 55 Fifth Ave, Suite 1702, New York, NY 10003. We from time
to time we may rent executive space on a month to month basis for
remotely located employees.
ITEM 3. LEGAL PROC
EEDINGS
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.
ITEM 4. M
INE SAFETY
DISCLOSURES
Not applicable.
-20-
P
A
R
T
II
ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
AND ISSUER PURCHASES OF EQUITY SECURITIES
Our Common Stock is listed on the Nasdaq Capital Market under the
symbol “WRTC”.
Holders
At
March 9,
2020
there were 30,044,241
shares of Common Stock outstanding and approximately
41
stockholders
of
record.
Equity Compensation Plan Information
Our 2017 Stock Incentive Plan (the “
2017
Plan
”) was adopted by
our Board of Directors on March 31, 2017, and approved by a
majority of our stockholders on March 31, 2017. The 2017 Plan
reserves for issuance 2.0 million shares of our Common Stock for
issuance as one of four types of equity incentive awards: (i) stock
options, (ii) shares of Common Stock, (iii) restricted stock
awards, and (iv) restricted 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.
On
March 16, 2019, the Board of the Company approved and on May 23,
2019, the stockholders ratified, an increase in the Plan
authorizing an additional 2,100,000 shares of Common Stock for a
total of 4,100,000 shares.
The following table sets forth information as of December 31, 2019,
with respect to compensation plans (including individual
compensation arrangements) under which our equity securities are
authorized for issuance, aggregated as follows:
|
|
|
|
Number of securities
|
|
|
|
|
remaining
|
|
|
Number of securities to be
|
Weighted-average exercise
|
available for
future issuance under
|
|
|
issued upon exercise of
|
price of outstanding
|
equity compensation plans
|
|
|
outstanding
|
options,
|
(excluding securities
|
|
|
options,
warrants and rights
|
warrants and
rights
|
reflected in column (a))
|
|
Plan Category
|
(a)
|
(b)
|
(c)
|
|
|
|
|
|
|
Equity
compensation plans approved by security holders
|
3,136,837
|
$
3.34
|
924,413
|
|
Equity
compensation plans not approved by security holders
|
100,000
|
$
3.00
|
-
|
|
Total
|
3,236,837
|
$
3.33
|
924,413
|
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.
Transfer Agent
Our
Transfer Agent and Registrar for our Common Stock is Colonial Stock
Transfer, located at 66 Exchange Place, Suite 100, Salt Lake City,
Utah 84111.
Issuer Purchases of Equity Securities
Not applicable.
-21-
ITEM 6. SEL
E
CTED FINANCIAL
DATA
Information requested by this Item is not included, as we are
electing to take advantage of scaled disclosure requirements
available to Smaller Reporting Companies.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
The discussion and analysis set forth below should be read in
conjunction with the information presented in other sections of
this Annual Report, 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 modern policing solutions to customers, primarily
consisting of law enforcement and security personnel. We began
demonstrations of our first product, the BolaWrap 100 remote
restraint device, in November 2017. We made various improvements
throughout 2018 as a result of feedback from early users of our
devices.
In late May 2019, we began
shipping an updated version of our BolaWrap 100 remote restraint
device featuring a green line laser to strategic police departments
and international distributors.
The
immediate addressable domestic market consists of approximately
900,000 full-time sworn law enforcement officers
at over 15,300 federal, state and local
law
enforcement agencies.
We are also
exploring other domestic markets, including military and private
security. Our international focus is on countries with the largest
police forces. The 100 largest international police agencies are
estimated to have over 12.1 million law enforcement personnel.
According to
Statistics MRC, we participate in a segment of
the non-lethal products global market expected to grow to $11.85
billion by 2023.
-22-
Business Outlook and Challenges
Our
remote restraint solution continues to gain worldwide awareness and
recognition through media exposure, trade shows, product
demonstrations and word of mouth as a result of positive responses
from agencies and early adoption and deployment success. We believe
we have a recognized global brand, technology and an initial
product foundation with the BolaWrap 100 and that we are poised for
sales growth in 2020. We believe we have strong market
opportunities within the immediate addressable domestic market of
approximately 900,000 full-time sworn law enforcement officers
in over 15,300 federal, state and
local
law enforcement agencies. And we believe we are
establishing the foundation through strong distributor
relationships to pursue the international market. Our product
offering also has application and we intend to explore
other markets, including military and border
patrol.
We intend to expand our business in 2020 domestically and
internationally through both direct and distributor sales. We are
pursuing large business opportunities internationally and also
pursuing business with large domestic police agencies. It is
difficult to anticipate how long
it will take to close these
opportunities, or if they will ultimately come to
fruition.
Our
products and accessories have varying gross margins, and therefore
product sales mix materially affects gross profit. In addition, the
margins differ based on the channel of trade through which the
products are sold. Production volume levels significantly impact
overhead allocations. We implement product updates and changes,
including raw material and component changes that may impact
product costs. We do not believe that historical gross profit
margins should be relied upon as an indicator of future gross
profit margins.
We
currently have approximately 10 full-time sales, business
development, training and marketing personnel. In addition, we
utilize various part-time sales consultants with experience and
knowledge in various law enforcement areas to assist with specific
markets we are pursuing. We exhibit at domestic and international
trade shows and hold many demonstration and training events for
customers and distributors.
Since inception in March 2016, we have generated significant losses
from operations and anticipate that we will continue to generate
significant losses from operations for the foreseeable
future.
Although we believe that we have adequate financial
resources to sustain our operations for the next year, no
assurances can be given, and we
may
need additional capital for future operations and to market and
further develop our products and introduce new
products.
We face significant challenges in operating and growing our
business. We expect that we will need to continue to innovate new
applications for our security technology, develop new and improved
products and technologies to meet diverse customer requirements and
identify and develop new markets for our products.
Critical Accounting Policies and Estimates
The
preparation of financial statements in accordance with accounting
principles generally accepted in the United States
(“
U.S. GAAP
”)
requires us to make estimates and judgments that affect the
reported amounts of assets, liabilities, revenue and expense, and
related disclosure of contingent assets and liabilities. We
evaluate our estimates, on an on-going basis, including those
estimates related to recognition and measurement of contingencies
and accrued costs. We base our estimates on historical experience
and on various other assumptions we believe to be reasonable under
the circumstances. Actual results may differ from these estimates
under different assumptions or conditions.
As part
of the process of preparing our financial statements, we are
required to estimate our provision for income taxes. Significant
management judgment is required in determining our provision for
income taxes, deferred tax assets and liabilities, tax
contingencies, unrecognized tax benefits, and any required
valuation allowance, including taking into consideration the
probability of the tax contingencies being incurred. Management
assesses this probability based upon information provided by its
tax advisers, its legal advisers and similar tax cases. If at a
later time our assessment of the probability of these tax
contingencies changes, our accrual for such tax uncertainties may
increase or decrease. Our effective tax rate for annual and interim
reporting periods could be impacted if uncertain tax positions that
are not recognized are settled at an amount which differs from our
estimates.
Some of
our accounting policies require higher degrees of judgment than
others in their application. These include share-based compensation
and contingencies and areas such as revenue recognition, operating
lease liabilities, warranty liabilities, impairments and valuation
of intangible assets.
-23-
Revenue Recognition
. We sell our products to customers
including law enforcement agencies, domestic distributors and
international distributors and revenue from such transactions is
recognized in the periods that products are shipped (free on board
(“
FOB
”)
shipping point) or received by customers (FOB destination), when
the fee is fixed or determinable and when collection of resulting
receivables is reasonably assured. We identify customer performance
obligations, determine the transaction price, allocate the
transaction price to the performance obligations and recognize
revenue as we satisfy the performance obligations. Our primary
performance obligations are products/accessories and training. Our
customers do not have the right to return product unless the
product is found to be defective.
Stock Based Compensation.
We follow the fair value
recognition provisions issued by the Financial Accounting Standards
Board (“
FASB
”)
in Accounting Standards Codification (“
ASC
”) Topic 718, Stock
Compensation (“
ASC
718
”) and we adopted Accounting Standards Update
(“
ASU
”) 2018-07
for share-based transactions with non-employees. Share-based
compensation expense recognized during 2019 and 2018 includes stock
option and restricted stock unit compensation expense.
The grant date fair
value of stock options is determined using the Black-Scholes
option-pricing model.
The grant date is the date at which an
employer and employee or non-employee reach a mutual understanding
of the key terms and conditions of a share-based payment award.
The
Black-Scholes option-pricing model requires inputs including the
market price of the Company’s Common Stock on the date of
grant, the term that the stock options are expected to be
outstanding, the implied stock volatilities of several
publicly-traded peers over the expected term of stock options,
risk-free interest rate and expected dividend. Each of these inputs
is subjective and generally requires significant judgment to
determine.
The grant date fair
value of restricted stock units is based upon the market price of
the Company’s Common Stock on the date of the grant.
We determine
the amount
of share-based compensation expense based on awards that we
ultimately expect to vest and account for forfeitures as they
occur.
The
fair value of share-based compensation is amortized to compensation
expense over the vesting term.
Allowance for Doubtful Accounts.
Our products are sold to
customers in many different markets and geographic locations. We
estimate our bad debt reserve on a case-by-case basis due to a
limited number of customers mostly government agencies or
well-established distributors. We base these estimates on many
factors including customer credit worthiness, past transaction
history with the customer, current economic industry trends and
changes in customer payment terms. Our judgments and estimates
regarding collectability of accounts receivable have an impact on
our financial statements.
Valuation of Inventory
. Our inventory is comprised of raw
materials, assemblies and finished products. We must periodically
make judgments and estimates regarding the future utility and
carrying value of our inventory. The carrying value of our
inventory is periodically reviewed and impairments, if any, are
recognized when the expected future benefit from our inventory is
less than carrying value.
Valuation of Intangible Assets.
Intangible assets consist of
patents and trademarks that are amortized over their estimated
useful lives. We must make judgments and estimates regarding the
future utility and carrying value of intangible assets. The
carrying values of such assets are periodically reviewed and
impairments, if any, are recognized when the expected future
benefit to be derived from an individual intangible asset is less
than carrying value. This generally could occur when certain assets
are no longer consistent with our business strategy and whose
expected future value has decreased.
Accrued Expenses.
We establish a warranty reserve based on
anticipated warranty claims at the time product revenue is
recognized. This reserve requires us to make estimates regarding
the amount and costs of warranty repairs we expect to make over a
period of time. Factors affecting warranty reserve levels include
the number of units sold, anticipated cost of warranty repairs, and
anticipated rates of warranty claims. We have very limited history
to make such estimates and warranty estimates have an impact on our
financial statements. Warranty expense is recorded in cost of
revenues. We evaluate the adequacy of this reserve each reporting
period.
We use
the recognition criteria of ASC 450-20, “Loss
Contingencies” to estimate the amount of bonuses when it
becomes probable a bonus liability will be incurred and we
recognize expense ratably over the service period. We accrue bonus
expense each quarter based on estimated year-end results, and then
adjust the actual in the fourth quarter based on our final results
compared to targets.
Historically,
our assumptions, judgments and estimates relative to our critical
accounting policies have not differed materially from actual
results. There were no significant changes or modification of our
critical accounting policies and estimates involving management
valuation adjustments affecting our results for the year ended
December 31, 2019.
-24-
Recent Accounting Pronouncements
New
pronouncements issued for future implementation are discussed in
Note 1 to our financial statements.
Segment and Related Information
The
Company has one operating segment with one business activity,
providing restraint solutions. The Company’s
chief
operating decision maker is its Chief Executive Officer, who
manages operations for purposes of allocating resources. Refer to
Note 13, Major Customers and Related Information, in our financial
statements for further discussion.
Operating Expense
Our
operating expense includes (i) selling, general and administrative
expense, and (ii) research and development expense. Research and
development expense is comprised of the costs incurred in
performing research and development activities and developing
production on our behalf, including compensation and consulting,
design and prototype costs, contract services, patent costs and
other outside expenses. The scope and magnitude of our future
research and development expense is difficult to predict at this
time and will depend on elections made regarding research projects,
staffing levels and outside consulting and contract costs. However,
in the near term, we expect our research and development expense to
increase in absolute dollars as we increase new product development
activities.
The
actual level of future selling, general and administrative expense
will be dependent on staffing levels, elections regarding
expenditures on sales, marketing and customer training, the use of
outside resources, public company and regulatory costs, and other
factors, some of which are outside of our control. We expect our
operating costs will increase as we expand product distribution
activities and expand our research and development, production,
distribution, training, service and administrative functions in the
near term. We may also incur substantial noncash share-based
compensation costs depending on future option and restricted stock
unit 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, 2019 Compared to Year Ended December 31,
2018
The
following table sets forth for the periods indicated certain items
of our condensed statement of operations. The financial information
and the discussion below should be read in conjunction with the
condensed financial statements and notes contained in this
Report.
|
|
Year Ended December 31,
|
Change
|
||
|
|
2019
|
2018
|
$
|
%
|
|
Revenues:
|
|
|
|
|
|
Product
sales
|
$
656,071
|
$
18,830
|
$
637,241
|
|
|
Other
revenue
|
40,719
|
4,320
|
36,399
|
|
|
Total
revenues
|
696,790
|
23,150
|
673,640
|
|
|
Cost
of revenues
|
420,016
|
18,611
|
401,405
|
|
|
Gross profit
|
276,774
|
4,539
|
272,235
|
|
|
|
|
|
|
|
|
Operating expenses:
|
|
|
|
|
|
Selling,
general and administrative
|
6,653,465
|
2,607,397
|
4,046,068
|
155
%
|
|
Research
and development
|
2,236,985
|
734,776
|
1,502,209
|
204
%
|
|
Total
operating expenses
|
8,890,450
|
3,342,173
|
5,548,277
|
166
%
|
|
Loss
from operations
|
$
(8,613,676
)
|
$
(3,337,634
)
|
$
(5,276,042
)
|
158
%
|
|
|
|
|
|
|
Revenue
We
reported revenue of $696,790 for the year ended December 31, 2019.
We had minimal revenue of $23,150 for the year ended December 31,
2018 as we only commenced limited and selected agency product sales
in late 2018. Our recent marketing and selling efforts have focused
on creating demand for our improved generation BolaWrap 100 product
with our green line laser introduce. Initial deliveries of the
improved product began in late May 2019. We incurred product
promotional costs of $433,172 for the year ended December 31, 2019
related to the cost of demonstration products and accessories
delivered to law enforcement agencies that were expensed as
marketing costs. A total of $192,484 of such product marketing
costs was incurred during the year ended December 31,
2018.
-25-
We had
$2,684 of deferred revenue at December 31, 2019 related to products
sold for which the training revenue component had not been
completed.
We
believe we can accelerate sales in 2020 but
sales may be sporadic as we grow our distributor
and customer base
. The receipt of orders will often be
uneven due to the timing of customer’s approval or budget
cycles and delays for any required permits due to the regulated
nature of our products.
At
December 31, 2019 we had $344,000 of customer deposits on orders
and had backlog of approximately $1.725 million expected to be
delivered in 2020. Distributor and customer orders for future
deliveries are generally subject to modification, rescheduling or
in some instances, cancellation in the normal course of
business.
Gross Profit
Our
cost of revenue for the year ended December 31, 2019 was $420,016
resulting in a gross margin of 40%. Due to the minimal revenue and
the changes being made to our product as we establish volume
manufacturing such margin may not be indicative of future margins.
In addition, our margins vary based on
the sales channels through which our products are sold. We continue
to implement product updates and changes, including raw material
and component changes that may impact product costs. With such
product updates and changes we have limited warranty cost
experience and estimated future warranty costs can impact our gross
margins. We do not believe that historical gross profit margins
should be relied upon as an indicator of future gross profit
margins.
In September 2019, we relocated manufacturing operations and
production to our new facility in Tempe, Arizona. While this
significantly increases our capacity, we expect that larger
allocations of overhead and costs associated with start-up and
training may have a negative impact on product margins until and if
production volume increases in future quarters.
Selling, General and Administrative Expense
Selling,
general and administrative expense increased by $4,046,068 during
the year ended December 31, 2019, when compared to the year ended
December 31, 2018. During the year ended December 31, 2019, we
incurred a $992,944 increase in non-cash share-based compensation
expense allocated to selling, general and administrative expense
with $1,410,095 in the year ended December 31, 2019 compared to
$417,151 in the year ended December 31, 2018. Other increases in
the 2019 period included a $1,154,578 increase in cash compensation
costs from an increase in headcount since 2018 and a $408,802
increase in travel costs. Marketing and promotion costs increased
$645,639 in the 2019 period when compared to the 2018 period, due,
primarily to promotional products. Occupancy costs increased
$252,665 due to the addition of facilities in Lake Forest,
California and Tempe, Arizona, and public company costs increased
$300,512 due to Nasdaq fees, insurance and related increased public
costs incurred in 2019.
In
2020, we expect to expend additional resources on the marketing and
selling of our products, training distributors and customers and
administratively supporting our operations.
Research and Development Expense
Research
and development expense increased $1,502,209 during the year ended
December 31, 2019, when compared to the year ended December 31,
2018. We incurred a $30,164 period over period increase in non-cash
share-based compensation expense allocated to research and
development expense. Other increases in costs for the 2019 period,
when compared to the 2018 period included a $696,762 increase in
cash compensation costs from an increase in headcount primarily
associated with production development. Prototype related costs
increased $423,952 in the 2019 period, primarily related to
developing the updated version of the BolaWrap 100 product and
effect of model and component changes. Consulting costs during the
2019 period increased $231,826 related to developing systems for
monitoring research and production. Travel costs increased $91,970
due primarily to setting up the new manufacturing facilities. We
expect our research and development costs will increase in 2020 due
to increased research personnel added during 2019 and current
projects focused on improving our products, developing an improved
restraint product and developing additional security
products.
Net Loss
Loss
from operations during the year ended December 31, 2019 increased
by $5,276,042 when compared to the year ended December 31, 2018,
resulting, primarily from increased operating costs due to
increased personnel and marketing and selling and supporting
activities.
-26-
Liquidity and Capital Resources
Overview
We have experienced net losses and negative cash flows from
operations since our inception. As of December 31, 2019, we had
cash of $16,983,864 and positive working capital of $18,598,899,
and had sustained cumulative losses attributable to stockholders of
$12,729,824. We believe that our cash on hand will sustain our
operations for at least the next twelve months from the date of
this Report.
Our sources of liquidity to date has been primarily funding from
our stockholders and the sale and exercise of equity securities. We
expect our primary source of future liquidity will be from the sale
of products, exercise of stock options and warrants and if required
from future equity or debt financings.
Capital Requirements
In December 2017, we completed our self-underwritten IPO, raising
gross proceeds of approximately $3.49 million from the sale of
2,328,533 shares of Common Stock at the public offering price of
$1.50 per share.
In October 2018, we received approximately $12.14 million in net
cash proceeds from the private sale of equity securities to certain
accredited investors.
In June
2019, we obtained net cash proceeds of approximately $11.35 million
from the June 2019 Follow-On Offering. During the year ended
December 31, 2019 we also obtained $2.14 million of net proceeds
from the exercise of previously issued warrants and stock
options.
We cannot currently estimate our future liquidity requirements or
future capital needs, which will depend on, among other things,
capital required to introduce our products and the staffing and
support requirements, as well as the timing and amount of future
revenue and product costs. We anticipate that demands for operating
and working capital will grow as we are increasing staffing,
development, production, marketing, training and other functions
and based on other factors outside of our control. We believe we
have sufficient capital to sustain our operations for the next
twelve months, although no assurances can be given. Additionally,
no assurances can be provided that any future debt or equity
capital will be available to us under favorable terms, if at all.
Failure to quickly produce and sell products and timely obtain any
required additional capital in the future would result in a
material adverse effect on the Company.
Our future capital requirements, cash flows and results of
operations could be affected by, and will depend on, many factors,
some of which are currently unknown to us, including, among other
things:
●
decisions regarding
staffing, development, production, marketing and other
functions;
●
the
ability to meet sales projections and timing and extent of market
acceptance of our products;
●
the
costs, timing and outcome of planned production and required
customer and regulatory compliance of our products;
●
the
costs of preparing, filing and prosecuting our patent applications
and defending any future intellectual property-related
claims;
●
the
costs and timing of additional product development;
●
the
costs, timing and outcome of future warranty claims or litigation
against us associated with any of our products; and
●
the
timing and costs associated with any new financing.
Off-Balance Sheet Arrangements
We have no off-balance sheet arrangements.
-27-
Cash Flow
Operating Activities.
During the year ended
December 31
, 2019, net cash used in operating activities was
$8,485,637.
The net loss of $8,325,488 was
decreased by
non-cash expense of $1,779,205 consisting primarily of share-based
compensation expense of $1,536,096. Other major component changes
using operating cash included a $1,892,768 increase in inventories,
an increase of $190,951 in accounts receivable, a $136,084 increase
in prepaid expenses and other current assets and a $96,000
reduction in deferred compensation. An increase of $286,398 in
accounts payable and accrued liabilities and new customer deposits
of $343,724 reduced the cash used in operating
activities.
During the year ended
December 31
, 2018, net cash used in operating activities was
$2,692,136 consisting primarily of the net loss of $3,336,435
reduced by non-cash share-based compensation of
$512,988.
Investing Activities.
We used $256,742 and $14,225 of cash for the purchase of property
and equipment during the years ended
December 31
, 2019 and 2018, respectively. We began
capitalizing patent costs during mid-2018 and invested $114,274 and
$120,070 in patents during the years ended
December
31
, 2019 and 2018,
respectively.
Financing Activities.
We
received $11,351,214 of net proceeds from the June 2019 Follow-On
Offering, and, during the year ended December 31, 2019, obtained
$2,141,576 net proceeds from the exercise of previously issued
warrants and stock options. During the year ended
December 31
, 2018 we obtained $12,140,786 of net proceeds
from the private sale of equity securities.
Contractual Obligations and Commitments
We are obligated to pay to Syzygy Licensing, LLC
(“
Syzygy
”) a 4% royalty fee on future product sales
up to an aggregate amount of $1.0 million in royalties
or
until September 30, 2026, whichever occurs earlier
.
In January 2019, we extended our Las Vegas, Nevada corporate and
production facility lease through December 31, 2020. In February
2019, we entered into a two-year lease for an office and warehouse
space in Lake Forest, California. In June 2019, we entered into a
38-month lease for office, training, assembly and warehouse space
in Tempe, Arizona. We are committed to aggregate lease payments on
these leases of $143,574 in 2020, $101,406 in 2021 and $57,328 in
2022.
At
December 31, 2019, we were committed to approximately $82,000 of
purchase commitments for product components. These purchase
commitments are generally subject to modification as to timing,
quantities and scheduling and in certain instances may be
cancelable without penalty.
Effects of Inflation
We do
not believe that inflation has had a material impact on our
business, revenue or operating results during the periods
presented.
Recent Accounting Pronouncements
Other than our adoption of ASU 2016-02, Leases (Topic 842), there
have been no recent accounting pronouncements or changes in
accounting pronouncements during the year ended December 31, 2019,
or subsequently thereto, that we believe are of potential
significance to our financial statements.
Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure
There
have been no disagreements with our independent registered public
accounting firm in regards to accounting and financial
disclosure.
-28-
Not applicable.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
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.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING
AND FINANCIAL DISCLOSURE
There have been no disagreements or any reportable events requiring
disclosure under Item 304(b) of Regulation S-K.
ITEM 9A. CONTROLS AND PROCEDURES.
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 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 Chief
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 Chief Executive
Officer and Chief Financial Officer, evaluated the effectiveness of
our disclosure controls and procedures as of December 31, 2019 and,
based on this evaluation, our Chief 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 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 because the Company is an “emerging growth
company” under the JOBS Act. 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
There
have been no changes in our internal control over financial
reporting since September 30, 2019, 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. Our process for evaluating controls and procedures is
continuous and encompasses constant improvement of the design and
effectiveness of established controls and procedures and the
remediation of any deficiencies, which may be identified during
this process.
ITEM 9B. OT
HER INFORMATION
None.
-29-
P
A
R
T
III
Certain
information required by this Part III is omitted from this report
and is incorporated by reference to our Definitive Proxy Statement
to be filed with the SEC in connection with the Annual Meeting of
Stockholders to be held in 2020 (the “
Proxy Statement
”), which must be
filed no later than 120 days
after the
close of the fiscal year ended December 31, 2019, pursuant to
Regulation 14A
.
ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE
GOVERNANCE.
The information required by this item will be incorporated by
reference from the Company’s definitive proxy statement, to
be filed with the SEC on or before April 29, 2020.
ITEM 11. EXECUTIVE COMPENSATION.
The information required by this item will be incorporated by
reference from the Company’s definitive proxy statement, to
be filed with the SEC on or before April 29, 2020.
ITEM 12. SECURITY
OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT AND RELATED STOCKHOLDER MATTERS.
The information required by this item will be incorporated by
reference from the Company’s definitive proxy statement, to
be filed with the Securities and Exchange Commission on or before
April 29, 2020.
ITEM 13. CERTAIN
RELATIONSHIPS AND RELATED TRANSACTIONS AND
DIRECTOR INDEPENDENCE.
The information required by this item will be incorporated by
reference from the Company’s definitive proxy statement, to
be filed with the SEC on or before April 29, 2020.
ITEM 14. PRINCIPAL ACCOUNTING FEES AND SERVICES.
The information required by this item will be incorporated by
reference from the Company’s definitive proxy statement, to
be filed with the SEC on or before April 29, 2020.
-30-
PA
R
T
IV
ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
|
(a)
List of documents filed as a part of this
report:
|
|
|
|
(1)
Index to
Financial Statements
|
|
|
|
|
F-2
|
|
|
|
F-3
|
|
|
|
F-4
|
|
|
|
F-5
|
|
|
|
F-6
|
|
|
|
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
Investor Warrant, dated October 30, 2018. Incorporated by reference
to Exhibit 4.1 to the Current Report on Form 8-K, filed on November
5, 2018.
|
|
|
Form of
Placement Agent Warrant, dated October 30, 2018. Incorporated by
reference to Exhibit 4.2 to the Current Report on Form 8-K, filed
on November 5, 2018.
|
|
|
Form of Investor Warrant, dated June 18, 2019.
Incorporated by reference to Exhibit 4.1 to the
Current Report on Form 8-K, filed on June 18,
2019.
|
|
|
Form of
Offering Agent Warrant, dated June 18, 2019.
Incorporated by reference to Exhibit 4.2 to the
Current Report on Form 8-K, filed on June 18,
2019.
|
|
|
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.
|
|
|
Form of Placement Agent Agreement, dated October 30, 2018.
Incorporated by reference to Exhibit 10.1 to the Current Report on
Form 8-K, filed on November 5, 2018.
|
|
|
Form of Registration Rights Agreement, dated October 30, 2018.
Incorporated by reference to Exhibit 10.2 to the Current Report on
Form 8-K, filed on November 5, 2018.
|
|
|
Supplemental
Engagement Letter by and between Wrap Technologies, Inc. and
Katalyst Securities LLC, dated June 7, 2019.
Incorporated by reference to Exhibit 10.1 to the
Current Report on Form 8-K, filed on June 13,
2019.
|
|
|
Engagement Letter by and between Wrap Technologies, Inc., Dinosaur
Financial Group, LLC and Katalyst Securities LLC, dated June 12 ,
2019.
Incorporated by reference
to Exhibit 10.2 to the Current Report on Form 8-K, filed on June
18, 2019.
|
|
|
Amended 2017 Equity Compensation Plan.
Incorporated by
reference to Exhibit 10.1 to the Registration Statement on Form
S-8, filed on June 24, 2019.
|
|
|
Industrial Real Estate Lease, dated May 10, 2019, by and between
Wrap Technologies, Inc. and JM Sky Harbor Properties LLC.
Incorporated by reference from Exhibit 10.1 to the Current Report
on Form 8-K, filed on June 6, 2019.
|
|
|
Code of
Ethics of the Registrant Applicable to Directors, Officers and
Employees.*
|
|
|
Consent
of Independent Registered Public Accounting Firm -
Rosenberg Rich Baker Berman, P.A.
*
|
|
|
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.
-31-
SIG
N
ATURES
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 10th day of March, 2020.
|
|
Wrap Technologies, Inc.
|
|
|
|
|
|
|
|
|
|
By:
|
/s/
DAVID
NORRIS
|
|
|
|
|
Chief Executive Officer
|
|
|
|
|
|
|
Date: March 10, 2020
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
|
|
Chief Executive Officer and Director
|
|
March 10, 2020
|
|
David Norris
|
|
(Principal Executive Officer)
|
|
|
|
|
|
|
|
|
|
/s/ JAMES A. BARNES
|
|
Chief Financial Officer, Secretary and
|
|
March 10, 2020
|
|
James A. Barnes
|
|
Treasurer
|
|
|
|
|
|
(Principal Accounting Officer)
|
|
|
|
|
|
|
|
|
|
/s/ SCOT COHEN
|
|
Executive Chair of Board
|
|
March 10, 2020
|
|
Scot Cohen
|
|
|
|
|
|
|
|
|
|
|
|
/s/PATRICK KINSELLA
|
|
Director
|
|
March 10, 2020
|
|
Patrick Kinsella
|
|
|
|
|
|
/s/MICHAEL PARRIS
|
|
Director
|
|
March 10, 2020
|
|
Michael Parris
|
|
|
|
|
|
/s/WAYNE R. WALKER
|
|
Director
|
|
March 10, 2020
|
|
Wayne R. Walker
|
|
|
|
|
-32-
WRAP TE
C
HNOLOGIES,
INC.
INDEX TO FINANCIAL STATEMENTS
|
Audited Financial Statements:
|
|
Page
|
|
|
|
|
|
|
F-2
|
|
|
|
|
|
|
|
F-3
|
|
|
|
|
|
|
F-4
|
||
|
|
|
|
|
F-5
|
||
|
|
|
|
|
|
F-6
|
|
|
|
|
|
|
|
F-7
|
|
F-1
REP
O
RT 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, 2019 and 2018, and the related
statements of operations, stockholders’ equity, and cash
flows for each of the years in the two years ended December 2019,
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, 2019 and 2018, and the results of its
operations and its cash flows for each of the years in the two
years ended December 31, 2019, 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,
New Jersey
|
|
|
March
10, 2020
|
|
|
|
|
|
|
|
F-2
|
|
December 31,
|
|
|
|
2019
|
2018
|
|
ASSETS
|
|
|
|
Current assets:
|
|
|
|
Cash
and cash equivalents
|
$
16,983,864
|
$
12,358,896
|
|
Accounts
receivable
|
195,347
|
4,396
|
|
Inventories,
net
|
2,244,541
|
158,267
|
|
Prepaid
expenses and other current assets
|
250,947
|
114,863
|
|
Total current assets
|
19,674,699
|
12,636,422
|
|
Property and equipment, net
|
242,876
|
30,373
|
|
Operating lease right-of-use asset, net
|
260,931
|
-
|
|
Intangible assets, net
|
230,283
|
118,715
|
|
Other assets, net
|
12,681
|
1,512
|
|
Total assets
|
$
20,421,470
|
$
12,787,022
|
|
|
|
|
|
LIABILITIES AND STOCKHOLDERS' EQUITY
|
|
|
|
Current liabilities:
|
|
|
|
Accounts
payable
|
$
406,967
|
$
232,915
|
|
Accrued
liabilities
|
194,294
|
68,453
|
|
Customer
deposits
|
343,724
|
-
|
|
Deferred
revenue
|
2,684
|
-
|
|
Operating
lease liability- short term
|
128,131
|
-
|
|
Deferred
and accrued officer compensation
|
-
|
96,000
|
|
Total current liabilities
|
1,075,800
|
397,368
|
|
|
|
|
|
Operating Lease Liability - Long Term
|
150,018
|
-
|
|
Total liabilities
|
1,225,818
|
397,368
|
|
|
|
|
|
Commitments and contingencies (Note 11)
|
|
|
|
|
|
|
|
Stockholders' equity:
|
|
|
|
Preferred
stock - 5,000,000 authorized; par value $0.0001 per share; none
issued and outstanding
|
-
|
-
|
|
Common
stock - 150,000,000 authorized; par value $0.0001 per share;
29,829,916 and 27,364,607 shares issued and outstanding each
period, respectively
|
2,983
|
2,736
|
|
Additional
paid-in capital
|
31,922,493
|
16,791,254
|
|
Accumulated
deficit
|
(12,729,824
)
|
(4,404,336
)
|
|
Total stockholders' equity
|
19,195,652
|
12,389,654
|
|
Total liabilities and stockholders' equity
|
$
20,421,470
|
$
12,787,022
|
See
accompanying notes to financial statements.
F-3
|
Wr
a
p Technologies, Inc.
|
|||||
|
Statements of Operations
|
|
|
Year Ended December 31,
|
|
|
|
2019
|
2018
|
|
Revenues:
|
|
|
|
Product
sales
|
$
656,071
|
$
18,830
|
|
Other
revenue
|
40,719
|
4,320
|
|
Total
revenues
|
696,790
|
23,150
|
|
Cost
of revenues
|
420,016
|
18,611
|
|
Gross profit
|
276,774
|
4,539
|
|
|
|
|
|
Operating expenses:
|
|
|
|
Selling,
general and administrative
|
6,653,465
|
2,607,397
|
|
Research
and development
|
2,236,985
|
734,776
|
|
Total
operating expenses
|
8,890,450
|
3,342,173
|
|
Loss
from operations
|
(8,613,676
)
|
(3,337,634
)
|
|
|
|
|
|
Other income (expense):
|
|
|
|
Interest
income
|
291,494
|
2,912
|
|
Interest
expense
|
-
|
(1,304
)
|
|
Other
|
(3,306
)
|
(409
)
|
|
|
288,188
|
1,199
|
|
Net loss
|
$
(8,325,488
)
|
$
(3,336,435
)
|
|
|
|
|
|
Net
loss per basic and diluted common share
|
$
(0.29
)
|
$
(0.14
)
|
|
Weighted
average common shares used to compute net loss per basic and
diluted common share
|
28,652,625
|
23,578,291
|
See
accompanying notes to financial statements.
F-4
|
|
|
|
Additional
|
|
Total
|
|
|
Common Stock
|
Paid-In
|
Accumulated
|
Stockholders'
|
|
|
|
Shares
|
Amount
|
Capital
|
Deficit
|
Equity
|
|
Balance at December 31, 2017
|
22,803,533
|
$
2,280
|
$
4,137,936
|
$
(1,067,901
)
|
$
3,072,315
|
|
Sale
of common stock and warrants at $3.00 per share and placement agent
warrants in private offering, net of issuance costs
|
4,561,074
|
456
|
12,140,330
|
|
12,140,786
|
|
Share-based compensation expense
|
|
512,988
|
|
512,988
|
|
|
Net
loss for the period
|
-
|
-
|
-
|
(3,336,435
)
|
(3,336,435
)
|
|
Balance at December 31, 2018
|
27,364,607
|
$
2,736
|
$
16,791,254
|
$
(4,404,336
)
|
$
12,389,654
|
|
Sale
of common stock and warrants at $6.50 per share and placement agent
warrants in public offering, net of issuance costs
|
1,923,076
|
192
|
11,351,022
|
|
11,351,214
|
|
Common
shares issued upon exercise of warrants at $3.00 per
share
|
127,649
|
13
|
382,934
|
|
382,947
|
|
Common
shares issued upon exercise of warrants at $5.00 per share, net of
issuance costs
|
345,834
|
35
|
1,700,469
|
|
1,700,504
|
|
Common
shares issued upon exercise of stock options
|
38,750
|
4
|
58,121
|
|
58,125
|
|
Share-based compensation expense
|
|
1,536,096
|
|
1,536,096
|
|
|
Common
shares issued for services
|
30,000
|
3
|
102,597
|
|
102,600
|
|
Net
loss for the period
|
-
|
-
|
-
|
(8,325,488
)
|
(8,325,488
)
|
|
Balance at December 31, 2019
|
29,829,916
|
$
2,983
|
$
31,922,493
|
$
(12,729,824
)
|
$
19,195,652
|
See
accompanying notes to financial statements.
F-5
W
r
ap Technologies, Inc.
Statements of Cash Flows
(unaudited)
|
|
Year Ended December 31,
|
|
|
|
2019
|
2018
|
|
Cash Flows From Operating Activities:
|
|
|
|
Net
loss
|
$
(8,325,488
)
|
$
(3,336,435
)
|
|
Adjustments
to reconcile net loss to net cash
|
|
|
|
used
in operating activities:
|
|
|
|
Depreciation
and amortization
|
46,945
|
21,875
|
|
Warranty
provision
|
13,495
|
-
|
|
Inventory
write-off
|
(193,506
)
|
-
|
|
Non-cash
lease expense
|
80,069
|
-
|
|
Share-based
compensation
|
1,536,096
|
512,988
|
|
Common
shares issued for services
|
102,600
|
-
|
|
Changes
in assets and liabilities:
|
|
|
|
Accounts
receivable
|
(190,951
)
|
(4,396
)
|
|
Inventories
|
(1,892,768
)
|
(27,075
)
|
|
Prepaid
expenses and other current assets
|
(136,084
)
|
(63,982
)
|
|
Accounts
payable
|
174,052
|
196,750
|
|
Operating
lease liability
|
(62,851
)
|
-
|
|
Customer
deposits
|
343,724
|
-
|
|
Accrued
liabilities and other
|
112,346
|
8,139
|
|
Deferred
compensation
|
(96,000
)
|
-
|
|
Deferred
revenue
|
2,684
|
-
|
|
Net
cash used in operating activities
|
(8,485,637
)
|
(2,692,136
)
|
|
|
|
|
|
Cash Flows From Investing Activities:
|
|
|
|
Capital
expenditures for property and equipment
|
(256,742
)
|
(14,225
)
|
|
Investment
in patents and trademarks
|
(114,274
)
|
(120,070
)
|
|
Long-term
deposits
|
(11,169
)
|
-
|
|
Net
cash used in investing activities
|
(382,185
)
|
(134,295
)
|
|
|
|
|
|
Cash Flows From Financing Activities:
|
|
|
|
Sale
of common stock and warrants
|
12,499,994
|
13,683,222
|
|
Offering
costs paid on sale of stock and warrants
|
(1,148,780
)
|
(1,542,436
)
|
|
Proceeds
from exercise of warrants
|
2,112,117
|
-
|
|
Offering
costs paid on exercise of warrants
|
(28,666
)
|
-
|
|
Proceeds
from exercise of stock options
|
58,125
|
-
|
|
Payment
of notes payable
|
-
|
(39,435
)
|
|
Net
cash provided by financing activities
|
13,492,790
|
12,101,351
|
|
|
|
|
|
Net increase in cash and cash equivalents
|
4,624,968
|
9,274,920
|
|
Cash and cash equivalents, beginning of period
|
12,358,896
|
3,083,976
|
|
Cash and cash equivalents, end of period
|
$
16,983,864
|
$
12,358,896
|
|
|
|
|
|
Supplemental Disclosure of Non-Cash Investing
|
|
|
|
and Financing Activities:
|
|
|
|
Interest
paid
|
$
-
|
$
1,304
|
|
Prepaid
insurance financed with note payable
|
$
-
|
$
39,435
|
|
Right-of-use
assets and liabilites recorded during period
|
$
341,000
|
$
-
|
|
Issuance
costs relating to warrants issued to offering selling
agent
|
$
205,894
|
$
664,427
|
See
accompanying notes to financial statements.
|
1.
|
ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING
POLICIES
|
Organization and Business Description
Wrap Technologies, Inc., a Delaware corporation
(the “
Company
”), is a publicly traded company listed on
the Nasdaq Capital Market (“
Nasdaq
”) under the trading symbol
“WRTC”. 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 that discharges an eight-foot bola style
Kevlar® tether to entangle a subject at a range of 10-25 feet.
The principal markets for the Company’s proprietary products
are in North and South America, Europe, Middle East and
Asia.
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., share-based
compensation valuation, allowance for doubtful accounts, valuation
of inventory and intangible assets, warranty reserve, accrued costs
and recognition and measurement of contingencies) that affect the
reported amounts of assets and liabilities, and disclosure of
contingent assets and liabilities at the date of the financial
statements and affect the reported amounts of revenues and expenses
during the reporting period. Actual results could materially differ
from those estimates.
Public and Private Offerings
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.
On October 30, 2018 the Company obtained gross
cash proceeds of $13.68 million and net cash proceeds of
approximately $12.14 million from the sale of 4,561,074 units
(“
Units
”) for $3.00 per Unit in a private offering.
Each Unit consisted of one share of common stock and one detachable
two-year warrant to purchase one share of common stock at an
exercise price of $5.00 per share.
On
June 18, 2019, the Company consummated a June 2019 Follow-On
Offering, pursuant to which a total of 1,923,076 Units were offered
and sold at a public offering price of $6.50 per Unit. Each Unit
sold consisted of one share of Common Stock and one detachable
two-year warrant to purchase one share of Common Stock at an
exercise price of $6.50 per share. The offering resulted in the
Company’s receipt of gross cash proceeds of $12.5 million, or
net cash proceeds of $11.35 million after deduction of commissions
and offering costs.
Concentrations of Risk
Credit Risk
– Financial instruments that
potentially subject the Company to concentration of credit risk
consisted primarily of cash and cash equivalents and accounts
receivable from customers. The Company maintains its cash deposits
at two domestic financial institutions. The Company is exposed to
credit risk in the event of default by a financial institution to
the extent that cash and cash equivalents are in excess of the
amount insured by the Federal Deposit Insurance Corporation. The
Company places its cash and cash equivalents with high-credit
quality financial institutions. To date, the Company has not
experienced any losses on its cash and cash
equivalents.
Concentrations of Accounts
Receivable and Revenue
–
The Company has recently commenced sales activities with a limited
number of customers. The Company may experience concentrations in
both accounts receivable and revenue due to the timing of sales and
collections of related payments.
Concentration of
Suppliers
– The Company
relies on a limited number of component suppliers and contract
suppliers. In particular, a single supplier is currently the sole
manufacturer of the Company’s laser assembly with some parts
sole sourced from other suppliers. If supplier shortages occur, or
quality problems arise, then production schedules could be
significantly delayed or costs significantly increased, which could
in turn have a material adverse effect on the Company’s
financial condition, results of operation and cash
flows.
F-7
Wrap Technologies, Inc.
Notes to Financial Statements
|
1.
|
ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(Cont’d)
|
Stock Based Compensation
The Company follows the fair value recognition
provisions issued by the Financial Accounting Standards Board
(“
FASB
”) in Accounting Standards Codification
(“
ASC
”) Topic 718, Stock Compensation
(“
ASC
718
”) and has adopted
Accounting Standards Update (“
ASU
”) 2018-07 for share-based transactions with
non-employees. Share-based compensation expense recognized during
2019 and 2018 includes stock option and restricted stock unit
compensation expense.
The grant date fair
value of stock options is determined using the Black-Scholes
option-pricing model.
The grant
date is the date at which an employer and employee or non-employee
reach a mutual understanding of the key terms and conditions of a
share-based payment award.
The Black-Scholes
option-pricing model requires inputs including the market price of
the Company’s Common Stock on the date of grant, the term
that the stock options are expected to be outstanding, the implied
stock volatilities of several publicly-traded peers over the
expected term of stock options, risk-free interest rate and
expected dividend. Each of these inputs is subjective and generally
requires significant judgment to determine.
The grant date fair
value of restricted stock units is based upon the market price of
the Company’s Common Stock on the date of the grant. The fair
value of share-based compensation is amortized to compensation
expense over the vesting term.
Loss per Share
Basic
loss per common share is computed by dividing net loss for the
period by the weighted-average number of shares of common stock
outstanding during the period. Diluted net loss per common share
reflects the potential dilution of securities that could share in
the earnings of an entity. The Company’s losses for the
periods presented cause the inclusion of potential common stock
instruments outstanding to be antidilutive. Stock options,
restricted stock units and warrants exercisable or issuable for a
total of 9,857,457 and 7,084,681 shares of Common Stock were
outstanding at December 31, 2019 and 2018, respectively. These
securities are not included in the computation of diluted net loss
per common share for the periods presented as their inclusion would
be antidilutive due to losses incurred by the Company.
Fair Value of Financial Instruments
The
carrying amounts of cash, accounts receivable, accounts payable and
accrued liabilities approximate fair values due to the short nature
of these instruments.
Accounts Receivable and Allowance for Doubtful
Accounts
The
Company’s policy is to evaluate the collectability of
accounts receivable based on an assessment of the collectability of
specific customer accounts and then record an allowance for
doubtful accounts to reduce the receivables to an amount that
management reasonably estimates will be collected. There was no
allowance for doubtful accounts recorded at December 31, 2019 or
2018. Accounts that are deemed uncollectible will be written off
against the allowance for doubtful accounts. If a major
customer’s creditworthiness deteriorates, or actual defaults
exceed our historical experience, such estimates could change and
impact our future reported financial results.
Inventories
Inventories
are valued at the lower of cost or net realizable value. Prior to
October 1, 2019 substantially all of the Company’s inventory
was determined by the weighted average cost method which
approximated the first in first out (FIFO) cost method.
Effective October 1, 2019, with the change to a new computerized
inventory system, the Company commenced identifying FIFO layers.
The Company believes this transition change to FIFO will improve
financial reporting by better reflecting the current value
of inventory on the balance sheet, more closely aligning the
flow of physical inventory with the accounting for
the inventory and providing better matching of revenues and
expenses. As the Company has only recently started selling
products, and had limited purchase and sales activity, the weighted
average method approximated FIFO and this change to FIFO had no
material effect on the prior balance sheet, statement of operations
or cash flows. Accordingly, no retrospective changes have been
recorded.
Inventory is comprised of raw materials,
assemblies and finished products intended for sale to
customers
.
The Company evaluates the need for reserves for
excess and obsolete inventories determined primarily based upon
estimates of future demand for the Company’s products. At
December 31, 2019 or 2018 the Company had no reserve for
obsolescence.
F-8
Wrap Technologies, Inc.
Notes to Financial Statements
|
1.
|
ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(Cont’d)
|
Contract Manufacturers
The
Company employs contract manufacturers for production of certain
components and sub-assemblies. The Company may provide parts and
components to such parties from time to time, but recognizes no
revenue or markup on such transactions. During 2019 and 2018, the
Company performed assembly of products in-house using components
and sub-assemblies from a variety of contract manufacturers and
suppliers.
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.
Intangible Assets
Intangible
assets consisted of capitalized legal fees and filing costs related
to obtaining patents and trademarks. Upon the Company’s first
patent approval in July 2018 the Company commenced capitalizing
patent and trademark costs. When a patent or trademark is issued
the cost is amortized using the straight-line method over the
estimated remaining lives which is 20 years from the initial
filing. Trademarks are amortized on a straight-line basis over
ten years, the estimated useful life of the assets.
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, 2018 and
2019.
Classification and Valuation of Warrants
The
Company accounts for warrants as either equity or liabilities based
upon the characteristics and provisions of each particular
instrument. Warrants valued and classified as equity are recorded
as additional paid-in capital based on the issue date fair value
and no further adjustment to valuation is made. As of December 31,
2019, the Company has no warrants or other derivative financial
instruments that require separate accounting as liabilities and
periodic revaluation. However, in accordance with ASC 480 changes
in director and officer ownership or other factors in future
periods could require reclassification of outstanding warrants as a
liability with changes in value thereafter reflected in the
statement of operations.
Advertising and Promotion Costs
The
Company expenses advertising costs in the period in which they are
incurred. The Company incurred advertising costs of $165,119 and
$27,218 for the years ended December 31, 2019 and 2018,
respectively. The Company incurred product promotion costs for
demonstration products delivered to prospective customers of
$433,172 and $192,484 for the years ended December 31, 2019 and
2018, respectively. Advertising and promotion 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 costs.
Research and development costs with no alternative use are expensed
as incurred.
F-9
Wrap Technologies, Inc.
Notes to Financial Statements
|
1.
|
ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(Cont’d)
|
Leases
At
the commencement date of a lease, the Company recognizes a
liability to make lease payments and an asset representing the
right to use the underlying asset during the lease term. The lease
liability is measured at the present value of lease payments over
the lease term. As its leases typically do not provide an implicit
rate and due to lack of borrowing history or ability, the Company
uses as its incremental borrowing rate a low-grade debt rate
published by the Federal Reserve Bank. The right-of-use
(“ROU”) asset is measured at cost, which includes the
initial measurement of the lease liability and initial direct costs
incurred by the Company and excludes lease incentives.
Lease liabilities are recorded as a current liability for
the portion due within one year with the balance as a long-term
liability. ROU assets are recorded as other asset,
net.
Revenue Recognition
In May 2014, the FASB issued ASU 2014-09, Revenue
from Contracts with Customers (“
ASU 2014-09
”) and ASC Subtopic 340-40, Other Assets and
Deferred Costs - Contracts with Customers
(“
ASC
340-40
”), (collectively,
“
Topic 606
”). On January 1, 2018, the Company adopted
Topic 606 and, as it had no prior revenue or contracts with
customers, there was no transition required nor any impact on prior
results. ASU 2014-09 requires entities to recognize revenue through
the application of a five-step model, which includes identification
of the contract, identification of the performance obligations,
determination of the transaction price, allocation of the
transaction price to the performance obligations and recognition of
revenue as the entity satisfies the performance obligations. See
Note 2 for additional information.
Shipping and Handling Costs
Shipping
and handling costs are included in cost of revenues. Shipping and
handling costs invoiced to customers are included in revenue.
Actual shipping and handling costs were $22,177 and $1,570 for the
years ended December 31, 2019 and 2018, respectively. Actual
revenues from shipping and handling were $21,414 and $670 for the
years ended December 31, 2019 and 2018, respectively.
Warranty Reserves
The
Company warrants its products and accessories to be free from
defects in materials and workmanship for a period of one year from
the date of purchase. The warranty is generally limited. The
Company currently provides direct warranty service. International
market warranties are generally similar to the U.S.
market.
The
Company establishes a warranty reserve based on anticipated
warranty claims at the time product revenues are recognized.
Factors affecting warranty reserve levels include the number of
units sold, anticipated cost of warranty repairs and anticipated
rates of warranty claims. The Company evaluates the adequacy of the
provision for warranty costs each reporting period. The warranty
reserve was $13,923 and $428 at December 31, 2019 and 2018. Actual
warranty costs could differ from estimates.
Segment Information
The
Company has one operating segment with one business activity,
providing restraint solutions. The Company’s chief operating
decision maker is its Chief Executive Officer, who manages
operations for purposes of allocating resources.
Income Taxes
Until
its conversion to a corporation on March 31, 2017, the Company was
treated as a partnership for federal and state income tax purposes
and did not incur income taxes. Instead, its losses were included
in the income tax returns of the member partners. No income tax
expense was recorded for the periods ended December 31, 2019 and
2018 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.
F-10
Wrap Technologies, Inc.
Notes to Financial Statements
|
1.
|
ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(Cont’d)
|
Income Taxes (Cont’d)
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.
Subsequent Events
Management
has evaluated events subsequent to December 31, 2019 through the
date the accompanying financial statements were filed with the
Securities and Exchange Commission and noted that there have been
no events or transactions which would affect the Company’s
financial statements for the year ended December 31,
2019.
Recent Issued Accounting Guidance
Recently Adopted Accounting Pronouncement:
In February 2016, the FASB issued ASU 2016-02,
Leases (Topic 842), which is intended to increase transparency and
comparability among organizations by requiring the recognition of
right-of-use (“
ROU
”) assets and lease liabilities on the
balance sheet. In July 2018, the FASB issued additional guidance
which provided an additional transition method for adopting the
updated guidance. Under the additional transition method, entities
may elect to recognize a cumulative-effect adjustment to the
opening balance of retained earnings in the year of adoption. The
Company adopted this standard on January 1, 2019 using this
modified retrospective approach. The adoption of the standard
resulted in the recognition of a ROU asset and lease liability of
approximately $12,900 for one operating lease as of January 1,
2019, with no impact to retained earnings.
Effective the First Quarter of 2020:
In August 2018, the FASB issued ASU No. 2018-13,
Fair Value Measurement (“
Topic 820
”): Disclosure Framework - Changes to the
Disclosure Requirements for Fair Value Measurement. The ASU
modifies the disclosure requirements in Topic 820, Fair Value
Measurement, to improve the effectiveness of fair value measurement
disclosures by removing or modifying certain disclosure
requirements and adding other requirements. This ASU is effective
for public companies for annual reporting periods and interim
periods within those annual periods beginning after December 15,
2019. The Company is currently evaluating the effect, if any, that
ASU 2018-13 will have on its financial
statements.
Other Pronouncements:
The
Company has reviewed other recently issued, but not yet effective,
accounting pronouncements and does not believe the future adoptions
of any such pronouncements will be expected to cause a material
impact on its financial condition or the results of
operations.
F-11
Wrap Technologies, Inc.
Notes to Financial Statements
|
2.
|
REVENUE AND PRODUCT COSTS
|
The
Company enters into contracts that include various combinations of
products, accessories and services, such as training, each of which
are generally distinct and are accounted for as separate
performance obligations.
A performance obligation is a promise in a
contract to transfer a distinct good or service to a customer, and
is the unit of account in Topic 606. For contracts with a single
performance obligation, the entire transaction price is allocated
to the single performance obligation. For contracts with multiple
performance obligations, the Company allocates the contract
transaction price to each performance obligation using the
Company’s estimate of the standalone selling price
(“
SSP
”) of each distinct good or service in a
contract. The Company determines standalone selling prices based on
the price at which the performance obligation is sold separately.
If the standalone selling price is not observable through past
transactions, the Company estimates the standalone selling price
considering available information such as market conditions and
internally approved pricing guidelines related to the performance
obligations.
Performance
obligations to deliver products and accessories are generally
satisfied at the point in time the Company ships the product, as
this is when the customer obtains control of the asset under our
standard terms and conditions. The Company has elected to recognize
shipping costs as an expense in cost of revenue when control has
transferred to the customer. The revenue and cost of training, when
part of the performance obligations, is recognized when the
training is completed, generally following delivery of related
products.
The
timing of revenue recognition may differ from the timing of
invoicing to customers. The Company generally has an unconditional
right to consideration when customers are invoiced and a receivable
is recorded. A contract asset is recognized when revenue is
recognized prior to invoicing, or a contract liability (deferred
revenue) when revenue will be recognized subsequent to invoicing.
At December 31, 2018 the Company had no contract assets and no
deferred revenue related to products or training for product
delivered during the year. At December 31, 2019 the Company had
deferred revenue of $2,684 related to future training.
We
may also receive consideration, per terms of a contract, from
customers prior to transferring goods to the customer. We record
customer deposits as a contract liability.
The
Company recognizes an asset if there are incremental costs of
obtaining a contract with a customer such as commissions. These
costs are ascribed to or allocated to the underlying performance
obligations in the contract and amortized consistent with the
recognition timing of the revenue for any such underlying
performance obligations. The Company had no such assets at December
31, 2019 and December 31, 2018. The Company will apply the
practical expedient to expense any sales commissions related to
performance obligations with an amortization of one year or less
when incurred within selling, general and administrative
expense.
Estimated
costs for the Company’s standard one-year warranty are
charged to cost of products sold when revenue is recorded for the
related product. Royalties are also charged to cost of products
sold.
|
3.
|
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 FIFO cost method. Inventories consisted of the
following:
|
|
December 31,
|
|
|
|
2019
|
2018
|
|
Finished
goods
|
$
653,323
|
$
82,313
|
|
Work
in process
|
413
|
12,695
|
|
Raw
materials
|
1,590,805
|
63,259
|
|
|
$
2,244,541
|
$
158,267
|
During
the year ended December 31, 2019 the Company wrote off $193,506 of
raw material and scrap parts primarily due to startup production,
model changes and improvements.
F-1
2
Wrap Technologies, Inc.
Notes to Financial Statements
|
4.
|
PROPERTY
AND EQUIPMENT, NET
|
Property
and equipment consisted of the following:
|
|
December 31,
|
|
|
|
2019
|
2018
|
|
Laboratory
equipment
|
$
44,454
|
$
13,980
|
|
Tooling
|
59,004
|
22,683
|
|
Computer
equipment
|
83,368
|
12,608
|
|
Furniture,
fixtures and improvements
|
128,782
|
9,595
|
|
|
315,608
|
58,866
|
|
Accumulated
depreciation
|
(72,732
)
|
(28,493
)
|
|
|
$
242,876
|
$
30,373
|
Depreciation
expense was $44,239 and $20,520 for the years ended December 31,
2019 and 2018, respectively.
|
5.
|
INTANGIBLE ASSETS, NET
|
Intangible
assets consisted of the following:
|
|
December 31,
|
|
|
|
2019
|
2018
|
|
|
|
|
|
Patents
|
$
176,425
|
$
111,160
|
|
Trademarks
|
57,919
|
8,910
|
|
|
234,344
|
120,070
|
|
Accumulated
amortization
|
(4,061
)
|
(1,355
)
|
|
|
$
230,283
|
$
118,715
|
Amortization
expense was $2,706 and $1,355 for the years ended December 31, 2019
and 2018, respectively.
|
6.
|
ACCOUNTS PAYABLE AND ACCRUED LIABILITIES
|
Accounts payable includes $18,809 due to related
party Syzygy Licensing, LLC (“
Syzygy
”). See Note 11.
Accrued
liabilities consist of the following:
|
|
December 31,
|
|
|
|
2019
|
2018
|
|
Patent
costs
|
$
6,851
|
$
11,600
|
|
Accrued
compensation
|
144,193
|
55,493
|
|
Warranty
costs
|
13,923
|
428
|
|
Taxes
and other
|
29,327
|
932
|
|
|
$
194,294
|
$
68,453
|
F-1
3
Wrap Technologies, Inc.
Notes to Financial Statements
|
7.
|
LEASES
|
The
Company adopted ASU 2016-02, Leases (Topic 842) on January 1, 2019
using the modified retrospective approach. The Company has elected
not to apply ASC Topic 842 to arrangements with lease terms of 12
months or less. The adoption of the standard resulted in the
recognition of a ROU asset and lease liability of $12,900 for one
operating lease as of January 1, 2019, with no impact to retained
earnings. Prior year amounts have not been restated. That lease is
for 1,890 square feet of improved office, assembly and warehouse
space in Las Vegas, Nevada. In January 2019 the Company recorded an
additional $17,101 ROU remeasurement asset and liability from an
extension of the operating facility lease to December 31,
2020.
In
March 2019 the Company recorded a $57,587 ROU asset and liability
for a two-year facility operating lease for 1,906 square feet of
improved office, assembly and warehouse space in Lake Forest,
California expiring in February 2021.
In
June 2019 the Company recorded a $253,412 ROU asset and liability
for a 38-month facility operating lease for 11,256 square feet of
improved office, assembly, training and warehouse space in Tempe,
Arizona expiring in July 2022.
Due
to lack of borrowing history or ability the Company used as its
incremental borrowing rate a low-grade debt rate published by the
Federal Reserve Bank and determined a discount rate of 7.5% for the
remeasurement in January 2019, 6.8% for the March 2019 operating
lease and 7.0% for the June 2019 operating lease. Management
determined these are reasonable borrowing rates.
Amortization
of ROU operating lease assets was $80,069 for the year ended
December 31, 2019.
Operating
lease expense for capitalized operating leases included in
operating activities was $94,599 for the year ended December 31,
2019. Operating lease obligations recorded on the balance sheet at
December 31, 2019 are:
|
Operating
lease liability- short term
|
$
128,131
|
|
Operating
lease liability - long term
|
150,018
|
|
Total
Operating Lease Liability
|
$
278,149
|
Future
lease payments included in the measurement of lease liabilities on
the balance sheet at December 31, 2019 for future periods are as
follows:
Table
|
2020
|
$
143,574
|
|
2021
|
101,406
|
|
2022
|
57,328
|
|
Total
future minimum lease payments
|
302,308
|
|
Less
imputed interest
|
(24,159
)
|
|
Total
|
$
278,149
|
The
weighted average remaining lease term is 2.3 years and the weighted
average discount rate is 7.0%.
The
Company does not have any finance leases.
|
8.
|
DEFERRED AND ACCRUED COMPENSATION
|
From
March 2016 through February 2017, the Company accrued monthly
compensation for the services of two officers in the aggregate
amount of $7,000 per month payable to Syzygy. In March 2017 the
Company accrued and deferred $6,000 compensation to each of the two
officers. The balance payable to Syzygy of $84,000 and deferred
compensation of an aggregate of $12,000 was paid in August 2019
without interest.
F-1
4
Wrap Technologies, Inc.
Notes to Financial Statements
9.
STOCKHOLDERS’ EQUITY
The Company’s authorized capital consists of
150,000,000 shares of Common Stock, par value $0.0001 per share,
and 5,000,000 shares of preferred stock, par value $0.0001 per
share (“
Preferred
Stock
”).
2018 Private Offering
On October 30, 2018 the Company consummated a
private offering of 4,561,074 units (“
Units
”) for $3.00 per Unit. Each Unit consists of
one share of common stock and one detachable two-year warrant to
purchase one share of common stock at an exercise price of $5.00
per share. The offering resulted in the receipt of gross cash
proceeds of $13,683,222 and net cash proceeds of $12,140,786 after
deduction of commissions and offering costs. One officer, Elwood G.
Norris, purchased 333,334 of the Units for cash of $1,000,000 on
the same terms.
In
connection with the offering the Company also issued placement
agent warrants exercisable for 456,107 shares of common stock for
two years at an exercise price of $3.00 per share. The estimated
fair value of these warrants was $664,427, as determined using the
Black-Scholes methodology (assuming estimated volatility of 49%,
risk-free interest rate of 2.84%, and expected dividend yield of
0.0%). This amount was recorded as both an increase to additional
paid in capital and as a non-cash issuance cost of the
offering.
2019 Follow-On Public Offering
On
June 18, 2019, the Company consummated the June 2019 Follow-On
Offering, pursuant to which a total of 1,923,076 Units were offered
and sold at the public offering price of $6.50 per Unit. Each Unit
sold consisted of one share of Common Stock and one detachable
two-year warrant to purchase one share of Common Stock at an
exercise price of $6.50 per share. The offering resulted in the
Company’s receipt of gross cash proceeds of $12.5 million, or
net cash proceeds of $11.35 million after deduction of commissions
and offering costs.
In
connection with the June 2019 Follow-On Offering, the Company also
issued placement agent warrants exercisable for 153,846 shares of
Common Stock for two years at an exercise price of $8.125 per
share. The estimated fair value of these warrants was $205,894, as
determined using the Black-Scholes methodology (assuming estimated
volatility of 49%, risk-free interest rate of 1.86%, and expected
dividend yield of 0.0%). This amount was recorded as both an
increase to additional paid in capital and as a non-cash issuance
cost of the offering.
Summary of Stock Purchase Warrants
The
following table summarizes warrant activity during the years ended
December 31, 2018 and 2019:
|
|
Number
|
Average Purchase Price Per Share
|
|
Stock
purchase warrants issued October 30, 2018
|
5,017,181
|
$
4.82
|
|
Stock
purchase warrants exercised
|
-
|
|
|
Shares
purchasable under outstanding warrants at December 31,
2018
|
5,017,181
|
$
4.82
|
|
Stock
purchase warrants issued
|
2,076,922
|
$
6.62
|
|
Stock
purchase warrants exercised
|
(473,483
)
|
$
4.46
|
|
Shares
purchasable under outstanding warrants at December 31,
2019
|
6,620,620
|
$
5.41
|
The
Company determined that the warrants issued in connection with the
2018 Private Offering and the June 2019 Follow-On Offering should
be classified as equity in accordance with ASC 480. However,
changes in director and officer ownership or other factors in
future periods could require reclassification of outstanding
warrants as a liability with changes in value thereafter reflected
in the statement of operations.
F-1
5
Wrap Technologies, Inc.
Notes to Financial Statements
9.
STOCKHOLDERS’ EQUITY (Cont’d)
The
Company has outstanding Common Stock purchase warrants as of
December 31, 2019 as follows:
|
|
Number of
|
Exercise Price
|
|
|
Description
|
Common Shares
|
Per Share
|
Expiration Date
|
|
Purchase
Warrants (1)
|
4,215,240
|
$
5.00
|
October
30, 2020
|
|
Agent
Warrants
|
328,458
|
$
3.00
|
October
30, 2020
|
|
Purchase
Warrants
|
1,923,076
|
$
6.50
|
June
18, 2021
|
|
Agent
Warrants
|
153,846
|
$
8.125
|
June
18, 2021
|
(1)
333,334
warrants are held by a family trust of officer Elwood G.
Norris.
Subsequent
to December 31, 2019 a total of 129,950 warrants were exercised for
cash proceeds of $628,650.
10.
SHARE-BASED COMPENSATION
On March 31, 2017, the Company adopted and the
stockholders approved the 2017 Stock Incentive Plan (the
“
Plan
”) authorizing 2,000,000 shares of Company
Common Stock for issuance as stock options and restricted stock
units (“
RSUs
”) to employees, directors or consultants.
In March 2019, the Board of the Company approved and in May 2019,
the stockholders ratified, an increase in the Plan authorizing an
additional 2,100,000 shares of Common Stock for a total of
4,100,000 shares. The Company generally recognizes share-based
compensation expense on the grant date and over the period of
vesting or period that services will be
provided.
In
October 2018 the Company granted consultant options outside of the
Plan exercisable for 100,000 shares of common stock at an exercise
price of $3.00 per share with 50% vesting ratably over 18 months
and the balance vesting based on performance.
The
following table summarizes stock option activity for the years
ended December 31, 2018 and 2019:
|
|
|
Weighted Average
|
|
|
|
|
Options on
|
|
Remaining
|
Aggregate
|
|
|
Common
|
Exercise
|
Contractual
|
Intrinsic
|
|
|
Shares
|
Price
|
Term
|
Value
|
|
Outstanding
January 1, 2018
|
-
|
-
|
|
|
|
Granted
|
2,067,500
|
$
1.68
|
|
|
|
Exercised
|
-
|
-
|
|
|
|
Forfeited,
cancelled, expired
|
-
|
-
|
|
|
|
Outstanding
December 31, 2018
|
2,067,500
|
$
1.68
|
4.44
|
|
|
Granted
|
1,000,000
|
5.41
|
5.00
|
|
|
Exercised
|
(38,750
)
|
1.50
|
-
|
|
|
Forfeited,
cancelled, expired
|
(100,000
)
|
1.50
|
-
|
|
|
Outstanding
December 31, 2019
|
2,928,750
|
$
2.96
|
3.71
|
$10,031,388
|
|
Vested
and exercisable at December 31, 2019
|
1,573,853
|
$
1.64
|
3.43
|
$7,479,791
|
Subsequent
to December 31, 2019 a total of 84,375 options were exercised for
cash proceeds of $126,562.
F-1
6
Wrap Technologies, Inc.
Notes to Financial Statements
10.
SHARE-BASED COMPENSATION (Cont’d)
The
Company uses the Black-Scholes option pricing model to determine
the fair value of the options granted. The following table
summarizes the assumptions used to compute the fair value of
options granted to employees and nonemployees:
|
|
Year Ended December 31,
|
|
|
|
2019
|
2018
|
|
Expected
stock price volatility
|
49
%
|
47% to
49%
|
|
Risk-free
interest rate
|
2.41
%
|
2.67%
to 2.99%
|
|
Forfeiture
rate
|
0
%
|
0
%
|
|
Expected
dividend yield
|
0
%
|
0
%
|
|
Expected
life of options - years
|
3.50
|
2.75-5.00
|
|
Weighted-average
fair value of options granted
|
$
2.06
|
$
0.72
|
Estimated
volatility is a measure of the amount by which the Company’s
stock price is expected to fluctuate each year during the expected
life of awards. The Company’s estimated volatility was based
on an average of the historical volatility of peer entities whose
stock prices were publicly available. The Company’s
calculation of estimated volatility is based on historical stock
prices of these peer entities over a period equal to the expected
life of the awards. The Company uses the historical volatility of
peer entities due to the lack of sufficient historical data of its
stock price, as it only recently commenced trading.
The
risk-free interest rate assumption is based upon observed interest
rates on zero coupon U.S. Treasury bonds whose maturity period is
appropriate for the term of the options. The dividend yield of zero
is based on the fact that the Company has never paid cash dividends
and has no present intention to pay cash dividends. The Company
calculates the expected life of the options using the Simplified
Method for the employee stock options as the Company does not have
sufficient historical data.
The
following table summarizes information about stock options
outstanding at December 31, 2019:
|
|
|
Average
|
Weighted
|
|
Weighted
|
|
|
|
Remaining
|
Average
|
|
Average
|
|
Range of
|
Number
|
Contractual
|
Exercise
|
Number
|
Exercise
|
|
Exercise Prices
|
Outstanding
|
Life
|
Price
|
Exercisable
|
Price
|
|
$
1.50
|
1,708,750
|
3.4
|
$
1.50
|
1,448,853
|
$
1.50
|
|
$
3.00 - $3.61
|
220,000
|
4.07
|
$
3.23
|
125,000
|
3.83
|
|
$
5.41
|
1,000,000
|
4.22
|
$
5.41
|
-
|
-
|
During
2019 the Company granted a total of 308,087 service-based RSUs to
employees and consultants vesting over three years that convert to
Common Stock as vesting occurs. A summary is set forth
below:
|
|
|
Weighted Average
|
|
|
|
Service-Based
|
Grant Date
|
Vesting
|
|
|
RSU's
|
Fair Value
|
Period
|
|
Unvested
at January 1, 2019
|
-
|
|
|
|
Granted
|
308,087
|
$
6.77
|
3
Years
|
|
Vested
|
-
|
|
|
|
Forfeited
and cancelled
|
-
|
|
|
|
Unvested
at December 31, 2019
|
308,087
|
|
|
F-1
7
Wrap Technologies, Inc.
Notes to Financial Statements
10.
SHARE-BASED COMPENSATION (Cont’d)
The
Company recorded stock-based compensation in its statements of
operations for the relevant periods as follows:
|
|
Year Ended December 31,
|
|
|
|
2019
|
2018
|
|
Selling,
general and administrative
|
$
1,410,095
|
$
417,151
|
|
Research
and development
|
126,001
|
95,837
|
|
Total
stock-based expense
|
$
1,536,096
|
$
512,988
|
As
of December 31, 2019, total estimated compensation cost of stock
options and RSUs granted but not yet vested was $3.5 million which
is expected to be recognized over the weighted average period of
2.14 years.
|
11.
|
COMMITMENTS AND CONTINGENCIES
|
Facility Leases
See
Note 7.
Related Party Technology License Agreement
The
Company is obligated to pay royalties and pay development and
patent costs pursuant to an exclusive Amended and Restated
Intellectual Property License Agreement dated as of September 30,
2016 with Syzygy, a company owned and controlled by
stockholders/officers Mr. Elwood Norris and Mr. James Barnes. The
agreement provides for royalty payments of 4% of revenue from
products employing the licensed ensnarement device technology up to
an aggregate of $1,000,000 in royalties or until September 30,
2026, whichever occurs earlier. The Company recorded $23,297 and
$871 for royalties incurred during the years ended December 31,
2019 and 2018, respectively.
Purchase Commitments
At
December 31, 2019 the Company was committed for approximately
$82,000 for future component deliveries that are generally subject
to modification or rescheduling in the normal course of
business.
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.
F-1
8
Wrap Technologies, Inc.
Notes to Financial Statements
|
12.
|
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, 2019, the
Company has federal net operating loss carryforwards of
approximately $11,080,000 to reduce future taxable income that will
expire beginning in 2038. 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, 2019, 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 periods
ended December 31, 2018 and 2019 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:
|
|
Year Ended December 31,
|
|
|
|
2019
|
2018
|
|
|
|
|
|
Current
tax benefit
|
$
-
|
$
-
|
|
Deferred
tax benefit
|
1,800,000
|
678,000
|
|
Change
in valuation allowance
|
(1,800,000
)
|
(678,000
)
|
|
Income
tax benefit (provision)
|
$
-
|
$
-
|
A
reconciliation of the provision for income taxes at the federal
statutory rate of 21% to the Company’s provision for income
tax is as follows:
|
|
Year Ended December 31,
|
|
|
|
2019
|
2018
|
|
|
|
|
|
Income
taxes benefit computed at federal statutory rate
|
$
1,748,000
|
$
701,000
|
|
State
income taxes, net of federal effect
|
114,000
|
-
|
|
Research
tax credits
|
-
|
15,000
|
|
Permanent
differences and other
|
(62,000
)
|
(38,000
)
|
|
Change
in valuation allowance
|
(1,800,000
)
|
(678,000
)
|
|
Income
tax benefit (provision)
|
$
-
|
$
-
|
F-1
9
Wrap Technologies, Inc.
Notes to Financial Statements
|
12.
|
INCOME TAXES (Cont’d)
|
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:
|
|
December 31,
|
|
|
|
2019
|
2018
|
|
|
|
|
|
Deferred
tax assets:
|
|
|
|
Net
operating losses
|
$
2,430,000
|
$
756,000
|
|
Research
tax credits
|
26,000
|
23,000
|
|
Deferred
compensation
|
-
|
20,000
|
|
Stock
compensation
|
239,000
|
76,000
|
|
Accruals
and other
|
9,000
|
-
|
|
|
2,704,000
|
875,000
|
|
Deferred
tax liabilities:
|
|
|
|
Depreciation
and other
|
58,000
|
29,000
|
|
|
58,000
|
29,000
|
|
Net
deferred tax assets
|
2,646,000
|
846,000
|
|
Less
valuation allowance
|
(2,646,000
)
|
(846,000
)
|
|
Net
deferred taxes after valuation allowance
|
$
-
|
$
-
|
In accordance with
ASU 2016-09,
Compensation-Stock
Compensation (Topic 718) Improvements to Employee Share-Based
Payment Accounting
,
the Company recognizes windfall tax benefits
associated with the exercise of stock options as a component of tax
expense (rather than equity). Accordingly, our federal and state
operating loss carryforwards include windfall tax deductions from
stock option exercises of approximately $144,000 during the year
ended December 31, 2019.
|
13.
|
MAJOR CUSTOMERS AND RELATED INFORMATION
|
Major Customers
For
the year ended December 31, 2019, revenues from one distributor
accounted for 22% of revenues with no other single customer
accounting for more than 10% of total revenues. This customer
accounted for 54% of accounts receivable at December 31, 2019.
Sales were nominal for the year ended December 31, 2018 with a
limited number of customers.
The
following table summarizes revenues by geographic region. Revenues
are attributed to countries based on customer’s delivery
location.
|
|
Year Ended December 31,
|
|
|
|
2019
|
2018
|
|
Americas
|
$
481,622
|
$
18,670
|
|
Europe,
Middle East and Africa
|
116,547
|
-
|
|
Asia
Pacific
|
98,621
|
4,480
|
|
|
$
696,790
|
$
23,150
|
See Note 1 –
Concentrations of Risks
for information on reliance on
suppliers.
|
14.
|
RELATED PARTY TRANSACTIONS
|
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 $18,000 each year during the
years ended December 31, 2018 and 2019.
See
Notes 6, 9 and 11 for additional related party transactions and
information.
F-20
TABLE OF CONTENTS
Part IItem 1. BusinessItem 1A. Risk FactorsItem 1A. RiItem 1B. Unresolved Staff CommentsItem 1B. UnItem 2. PropertiesItem 3. Legal ProceedingsItem 3. Legal ProcItem 4. Mine Safety DisclosuresPart IIItem 5. Market For Common Equity and Related Stockholder Matters and Issuer Purchases Of Equity SecuritiesItem 6. Selected Financial DataItem 7. Management's Discussion and Analysis Of Financial Condition and Results Of OperationsItem 7A. Quantitative and Qualitative Disclosures About Market RiskItem 7A. QItem 8. Financial Statements and Supplementary DataItem 9. Changes in and Disagreements with Accountants on Accounting and Financial DisclosureItem 9A. Controls and ProceduresItem 9B. Other InformationItem 9B. OtPart IIIItem 10. Directors, Executive Officers and Corporate GovernanceItem 11. Executive CompensationItem 12. Security Ownership Of Certain Beneficial Owners and Management and Related Stockholder MattersItem 12. SecurityItem 13. Certain Relationships and Related Transactions and Director IndependenceItem 13. CertainItem 14. Principal Accounting Fees and ServicesPart IVItem 15. Exhibits and Financial Statement Schedules