WRAP TECHNOLOGIES, INC.
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2017
Commission File Number: 000-55838
Wrap Technologies, Inc.
(Exact name of registrant as specified in its charter)
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Delaware
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98-0551945
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(State or other jurisdiction of
incorporation or
organization)
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(I.R.S.
Employer
Identification Number)
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4620
Arville Street, Ste E
Las
Vegas, Nevada 89104
(Address
of principal executive offices) (Zip Code)
(800)
583-2652
(Registrant’s
Telephone Number, Including Area Code)
Indicate by check mark whether the registrant (1) has filed all
reports required to be filed by Section 13 or 15(d) of the
Securities Exchange Act of 1934 during the preceding 12 months (or
for such shorter period that the registrant was required to file
such reports), and (2) has been subject to such filing requirements
for the past 90 days. YES
[ ]
NO
[X]
Indicate by check mark whether the registrant has submitted
electronically and posted on its corporate Web site, if any, every
Interactive Data File required to be submitted and posted pursuant
to Rule 405 of Regulation S-T (§232.405 of this chapter)
during the preceding 12 months (or for such shorter period that the
registrant was required to submit and post such
files). [X] Yes [ ] No
Indicate by check mark whether the registrant is a large
accelerated filer, an accelerated filer, a non-accelerated filer or
a smaller reporting company. See the definitions of “large
accelerated filer,” “accelerated filer”,
“smaller reporting company” and “emerging growth
company” in Rule 12b-2 of the Exchange Act.
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Large
Accelerated Filer [ ]
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Accelerated
filer [ ]
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Non-accelerated
filer [ ] (Do not check if a smaller reporting
company)
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Smaller
reporting company [X]
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Emerging
growth company [ ]
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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]
As of November 6, 2017 a total of 20,885,867 shares of the
Registrant’s Common Stock, par value $0.0001, were issued and
outstanding.
WRAP TECHNOLOGIES, INC.
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Page
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| PART I. FINANCIAL INFORMATION |
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Item 1. |
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1
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2
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3
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4
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5
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Item 2. |
9
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Item 3. |
13
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Item 4. |
14
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| PART II. OTHER INFORMATION |
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Item 1. |
14
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Item 1A. |
14
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23
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23
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23
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23
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24
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Wrap Technologies, Inc.
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Condensed Balance Sheets
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September 30,
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December
31,
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2017
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2016
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(unaudited)
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ASSETS
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Current assets:
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Cash
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$
23,708
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$
255,072
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Inventories,
net
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96,667
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-
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Prepaid
expenses and other current assets
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45,268
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28,299
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Total current assets
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165,643
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283,371
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Property and equipment, net
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37,310
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8,226
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Other assets, net
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1,512
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1,512
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Total assets
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$
204,465
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$
293,109
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LIABILITIES AND STOCKHOLDERS' EQUITY
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Current liabilities:
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Accounts
payable
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$
64,935
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$
12,065
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Deferred
and accrued officer compensation
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96,000
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70,000
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Accrued
liabilities
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23,915
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2,900
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Total current liabilities
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184,850
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84,965
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Commitments and contingencies (Note 6)
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Stockholders' equity:
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Preferred
stock - 5,000,000 authorized; par value $0.0001 per share; none
issued and outstanding
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-
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-
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Common
stock - 150,000,000 authorized; par value $0.0001 per share;
20,475,000 and 17,445,408 shares issued and outstanding,
respectively
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2,047
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1,745
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Additional
paid-in capital
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715,453
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440,755
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Common
stock subscribed
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60,000
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-
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Accumulated
deficit
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(757,885
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(234,356
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Total stockholders' equity
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19,615
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208,144
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Total liabilities and stockholders' equity
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$
204,465
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$
293,109
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See
accompanying notes to condensed interim financial
statements.
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Wrap Technologies, Inc.
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Condensed Statements of
O
perations
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(unaudited)
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Period From
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Nine
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Inception
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Months
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March 2,
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For the Three Months
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Ended
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2016 to
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Ended September 30,
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September 30,
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September 30,
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2017
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2016
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2017
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2016
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Operating expenses:
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Selling,
general and administrative
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$
105,210
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$
1,738
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$
270,854
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$
6,554
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Research
and development
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46,334
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66,550
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252,675
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122,747
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Total
operating expenses
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151,544
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68,288
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523,529
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129,301
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Loss
from operations
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(151,544
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(68,288
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(523,529
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(129,301
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Net loss
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$
(151,544
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$
(68,288
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$
(523,529
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$
(129,301
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Net
loss per basic common share
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$
(0.01
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$
(0.01
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$
(0.03
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$
(0.03
)
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Weighted
average common shares used to compute net loss per basic common
share
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20,402,717
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4,942,190
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19,850,234
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4,402,328
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See
accompanying notes to condensed interim financial
statements.
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Wrap Technologies, Inc.
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Condensed Statements of Stockholders'
E
quity
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(unaudited)
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Additional
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Common
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Total
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Common Stock
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Paid-In
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Stock
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Accumulated
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Stockholders'
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Shares
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Amount
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Capital
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Subscribed
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Deficit
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Equity
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Balance at Inception (March 2, 2016)
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-
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$
-
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$
-
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$
-
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$
-
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$
-
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Sale
of common stock in March 2016 at $0.00836 per share
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4,786,121
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479
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39,521
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-
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-
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40,000
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Sale
of common stock in September 2016 at $0.00836 per
share
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4,786,120
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479
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39,521
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-
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-
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40,000
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Sale
of common stock in October 2016 at $0.00836 per share
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4,786,120
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479
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39,521
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-
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-
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40,000
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Sale
of common stock in December 2016 at $0.10447 per share
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3,087,047
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308
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322,192
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-
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-
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322,500
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Net
loss for the period
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-
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(234,356
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(234,356
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Balance at December 31, 2016
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17,445,408
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$
1,745
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$
440,755
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$
-
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$
(234,356
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$
208,144
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Sale
of common stock in January 2017 at $0.10447 per share
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2,153,754
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215
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224,785
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-
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-
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225,000
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Shares
issued to acquire merger subsidiary to effect reverse
recapitalization
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400,838
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40
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(40
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-
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-
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-
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Sale
of common stock in July 2017 at $0.10447 per share
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475,000
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47
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49,953
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-
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-
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50,000
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Common
stock subscribed
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-
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-
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-
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60,000
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-
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60,000
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Net
loss for the period
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-
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-
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(523,529
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(523,529
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Balance at September 30, 2017
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20,475,000
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$
2,047
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$
715,453
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$
60,000
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$
(757,885
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$
19,615
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See
accompanying notes to condensed interim financial
statements.
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Wrap Technologies, Inc.
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Condensed Statements of Cash
F
lows
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(unaudited)
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Period From
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Nine
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Inception
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Months
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March 2,
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Ended
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2016 to
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September 30,
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September 30,
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2017
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2016
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Cash Flows From Operating Activities:
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Net
loss
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$
(523,529
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$
(129,301
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Adjustments
to reconcile net loss to net cash used in operating
activities:
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Depreciation
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4,511
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875
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Changes
in assets and liabilities:
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Inventories
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(96,667
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-
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Prepaid
expenses and other current assets
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(16,969
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-
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Accounts
payable
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52,870
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21,982
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Deferred
and accrued officer compensation
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26,000
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49,000
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Accrued
liabilities
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21,015
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-
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Net
cash used in operating activities
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(532,769
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(57,444
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Cash Flows From Investing Activities:
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Capital
expenditures for property and equipment
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(33,595
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(5,248
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Net
cash used in investing activities
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(33,595
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(5,248
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Cash Flows From Financing Activities:
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Proceeds
from common stock subscribed
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60,000
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-
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Sale
of common stock
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275,000
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80,000
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Net
cash provided by financing activities
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335,000
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80,000
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Net increase (decrease) in cash and cash equivalents
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(231,364
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17,308
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Cash, beginning of period
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255,072
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-
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Cash, end of period
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$
23,708
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$
17,308
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See
accompanying notes to condensed interim financial
statements.
1.
ORGANIZATION AND SUMMARY OF SIGNIFICANT
ACCOUNTING POLICIES
Organization and Business Description
Wrap Technologies, Inc. (the
“
Company
”) is a developer of security products
designed for use by law enforcement and security personnel. The
Company plans to introduce its first product, the BolaWrap™
100 remote restraint device, during late 2017.
The Company resulted from the March 31, 2017
merger of Wrap Technologies, LLC (“
Wrap LLC
”) with and into its wholly-owned subsidiary
MegaWest Energy Montana Corp. (“
MegaWest
”). Wrap LLC ceased separate existence with
MegaWest continuing as the surviving entity. MegaWest changed its
name to Wrap Technologies, Inc. and amended and restated new
articles of incorporation authorizing 150,000,000 shares of common
stock, par value $0.0001, and 5,000,000 shares of preferred stock,
par value $0.0001. All outstanding 835.75 membership units of Wrap
LLC were exchanged for 20,000,000 shares of common stock of the
Company.
Wrap LLC acquired privately held MegaWest from
Petro River Oil Corp. (“
Petro River
”) on March 22, 2017 through the issuance of
16.75 membership units representing a 2% ownership interest in Wrap
LLC. Petro River is owned 11% by Scot Cohen its Executive Chairman
who also was a Manager and 26% owner of Wrap LLC and a director and
officer of the Company. MegaWest had no assets or liabilities at
the date of acquisition nor at December 31, 2016 and is not
considered an operating business.
Wrap
LLC’s acquisition of MegaWest and its subsequent merger with
and into the MegaWest wholly-owned subsidiary and exchange of
member units for common stock has been accounted for as a reverse
recapitalization of Wrap LLC. Wrap LLC, now the Company, is deemed
the accounting acquirer with MegaWest the accounting acquiree. The
Company’s financial statements are in substance those of Wrap
LLC and deemed to be a continuation of its business from its
inception date of March 2, 2016. The balance sheet of the Company
continues at historical cost as the accounting acquiree had no
assets or liabilities and no goodwill or intangible assets was
recorded as part of the recapitalization of the
Company.
To
reflect the recapitalization historical common shares and
additional paid-in capital have been retroactively adjusted using
the exchange ratio of approximately 23,930.60 shares for each
membership unit of Wrap LLC.
Basis of Presentation and Use of Estimates
The Company’s unaudited
interim financial statements included herein have been
prepared in accordance with Article 8 of Regulation S-X and
the rules and regulations of the Securities and Exchange
Commission (“
SEC
”). The condensed balance sheet at December
31, 2016 was derived from audited financial statement but certain
information and footnote disclosures normally included in financial
statements prepared in accordance with U.S. generally accepted
accounting principles have been condensed or omitted pursuant to
such rules and regulations. In management’s opinion, the
accompanying statements reflect adjustments necessary to present
fairly the financial position, results of operations, and cash
flows for the periods indicated, and contain adequate disclosure to
make the information presented not misleading. Adjustments included
herein are of a normal, recurring nature unless otherwise disclosed
in the footnotes. The interim financial statements and notes
thereto should be read in conjunction with the Company’s
audited financial statements and notes thereto for the year ended
December 31, 2016. Results of operations for interim periods are
not necessarily indicative of the results of operations for a full
year.
The
preparation of financial statements in conformity with accounting
principles generally accepted in the United States of America
requires management to make estimates and assumptions (e.g.,
recognition and measurement of contingencies and accrued costs)
that affect the reported amounts of assets and liabilities, and
disclosure of contingent assets and liabilities at the date of the
financial statements and affect the reported amounts of revenues
and expenses during the reporting period. Actual results could
materially differ from those estimates.
Wrap Technologies,
Inc.
Notes to Unaudited
Condensed Interim Financial Statements
1.
ORGANIZATION AND SUMMARY OF SIGNIFICANT
ACCOUNTING POLICIES (continued)
Going Concern
Since
inception in March 2016, the Company has generated significant
losses from operations and anticipates that it will continue to
generate significant losses from operations for the foreseeable
future, and that in order to continue as a going concern, the
business will require substantial additional investment that has
not yet been secured. The Company’s loss from
operations was $234,356 for the period ended December 31, 2016 and
$523,529 for the nine months ended September 30, 2017. The net cash
used from operations and investing was $187,428 for the period
ended December 31, 2016 and $566,364 for the nine months ended
September 30, 2017. On September 30, 2017 the Company had $23,708
in cash. As of September 30, 2017, the Company’s
obligations included $184,850 of current liabilities and lease
commitments of approximately $39,200.
Management
has concluded that due to the conditions described above, there is
substantial doubt about the entity’s ability to continue as a
going concern through November 7, 2018.
Management
has evaluated the significance of the conditions in relation to the
Company’s ability to meet its obligations and believes that
the current cash balance plus $556,300 of gross proceeds received
in October 2017 from sale of stock will provide sufficient capital
to continue operations through approximately March 2018. While the
Company plans to raise capital to address its capital deficiencies
and meet its operating cash requirements, there is no assurance
that its plans will be successful. Management cannot assure you
that financing will be available on favorable terms or at all.
Additionally, if additional capital is raised through the sale of
equity or convertible debt securities, the issuance of such
securities would result in dilution to the Company’s existing
shareholders. Furthermore, despite management’s optimism
regarding the Company’s technology and planned products, even
in the event that the Company is adequately funded, there is no
guarantee that any products or product candidates will perform as
hoped or that such products can be successfully
commercialized.
Net Loss per Share
Basic
loss per common share is computed by dividing net loss for the
period by the weighted-average number of shares of common stock
outstanding during the period. Diluted loss per common share is
computed by dividing net loss by the weighted-average number of
shares of common stock outstanding during the period increased to
include the number of additional shares of common stock that would
have been outstanding if the potentially dilutive securities had
been issued. There were no common stock equivalents outstanding
during the periods presented; accordingly, the Company’s
basic and diluted net loss per share are the same.
Income Taxes
Until
its reverse recapitalization on March 31, 2017, the Company was
treated as a partnership for federal and state income tax purposes
and did not incur income taxes. Instead, its losses were included
in the income tax returns of the member partners. Accordingly, no
provision or liability for federal or state income taxes has been
included in these financial statements for the period prior to
March 31, 2017 and no income tax expense was recorded for the
period ended September 30, 2017 due to losses
incurred.
Deferred
tax assets and liabilities are determined based on temporary
differences between the bases of certain assets and liabilities for
income tax and financial reporting purposes. The deferred tax
assets and liabilities are classified according to the financial
statement classification of the assets and liabilities generating
the differences.
The
Company maintains a valuation allowance with respect to deferred
tax assets. The Company establishes a valuation allowance based
upon the potential likelihood of realizing the deferred tax asset
and taking into consideration the Company’s financial
position and results of operations for the current period. Future
realization of the deferred tax benefit depends on the existence of
sufficient taxable income within the carry-forward period under the
Federal tax laws. Changes in circumstances, such as the Company
generating taxable income, could cause a change in judgment about
the realizability of the related deferred tax asset. Any change in
the valuation allowance will be included in income in the year of
the change in estimates.
Wrap Technologies, Inc.
Notes to Unaudited Condensed Interim Financial
Statements
1.
ORGANIZATION AND
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(continued
)
Recent Accounting Pronouncements
The
Company has reviewed recently issued, but not yet effective,
accounting pronouncements and does not believe the future adoptions
of any such pronouncements will be expected to cause a material
impact on its financial condition or the results of
operations.
2.
INVENTORIES, NET
Inventory
is recorded at the lower of cost or net realizable value. The cost
of substantially all the Company’s inventory is determined by
the weighted average cost method. Inventories consisted of the
following:
|
|
September 30,
|
December 31,
|
|
|
2017
|
2016
|
|
Raw
materials
|
$
86,667
|
$
-
|
|
Other
components
|
10,000
|
-
|
|
|
$
96,667
|
$
-
|
3.
PROPERTY AND EQUIPMENT, NET
Property
and equipment consisted of the following:
|
|
September 30,
|
December 31,
|
|
|
2017
|
2016
|
|
Laboratory
equipment
|
$
11,222
|
$
7,342
|
|
Tooling
|
18,165
|
-
|
|
Computer
equipment
|
4,151
|
-
|
|
Furniture
and fixtures
|
9,595
|
2,196
|
|
|
43,133
|
9,538
|
|
Accumulated
depreciation
|
(5,823
)
|
(1,312
)
|
|
|
$
37,310
|
$
8,226
|
Depreciation
expense was $4,511 and $875 for the nine months ended September 30,
2017 and the period from March 2, 2016 to September 30, 2016,
respectively.
4.
DEFERRED AND ACCRUED
COMPENSATION
Effective
March 2016 the Company began accruing monthly compensation for the
services of two officers in the aggregate amount of $7,000 per
month payable to Syzygy Licensing, LLC (“
Syzygy
”). In March 2017 the
Company accrued and deferred $6,000 compensation to each of the two
officers. The balance payable to Syzygy as of September 30, 2017
was $84,000 and the accrued deferred compensation aggregated
$12,000. These balances accrue without interest. No payment terms
or schedule has been established.
Wrap Technologies, Inc.
Notes to Unaudited Condensed Interim Financial
Statements
5.
STOCKHOLDERS’ EQUITY AND SHARE-BASED
COMPENSATION
The
Company’s authorized capital consists of 150,000,000 shares
of common stock, par value $0.0001, and 5,000,000 shares of
preferred stock, par value $0.0001. To reflect the recapitalization
(see Note 1) historical shares of common stock and additional
paid-in capital have been retroactively adjusted using the exchange
ratio of approximately 23,930.60 shares of common stock for each
member unit of Wrap LLC.
Effective
with the merger, the Company adopted and the shareholders approved
on March 31, 2017 the 2017 Stock Incentive Plan authorizing
2,000,000 shares of common stock for issuance as stock options and
restricted stock units to employees, directors or consultants. At
September 30, 2017, there had been no option grants or restricted
stock awards made and none were outstanding.
6.
COMMITMENTS AND
CONTINGENCIES
Facility Lease
Commencing
December 1, 2016 the Company leased 1,890 square feet of improved
office, assembly and warehouse space in Las Vegas, Nevada for a
period of 37 months terminating December 31, 2019. The gross
monthly base rent is $1,512 increasing approximately 3.5% per year,
subject to certain future adjustments. The Company may receive an
aggregate of three months of base rent concessions over the term of
the lease subject to timely rent payments.
Rent
expense for the period ended September 30, 2017 was $13,590. The
remaining future annual minimum lease obligations under the
foregoing facility lease are $3,062, $17,123 and $19,051 for the
balance of 2017, 2018 and 2019, respectively.
Related Party Technology License Agreement
The
Company is obligated to pay royalties and pay development and
patent costs pursuant to an exclusive Amended and Restated
Intellectual Property License Agreement dated as of September 30,
2016 with Syzygy, a company owned and controlled by
stockholder/officers Mr. Norris and Mr. Barnes. The agreement
provides for royalties of 4% of revenues from products employing
the licensed ensnarement device technology up to an aggregate of
$1,000,000 of royalties or until September 30, 2026, whichever is
earlier.
7.
RELATED
PARTY TRANSACTIONS
See
Notes 1, 4, 6 and 8 for information on related party transactions
and information.
8.
SUBSEQUENT EVENT
On August 10, 2017, our Registration
Statement on Form S-1 (File No. 333-217340) was declared
effective by the SEC for our initial self-underwritten public
offering of up to 2,666,666 shares of our common stock, par value
$0.0001, at a public offering price of $1.50 per share (the
“
Offering
”). As of the date of this report 410,867
shares have been sold pursuant to the Offering, resulting in gross
proceeds of $616,300 to the Company, including $60,000 subscribed
by existing stockholders (including two officers/directors) as of
September 30, 2017. There is no assurance, however, that the
Company will complete any future sales or receive additional
proceeds from the Offering.
You should read the following discussion in conjunction with the
financial statements and other financial information included
elsewhere in this Quarterly Report on Form 10-Q and with our
audited financial statements included in our prospectus dated
August 10, 2017 (“Prospectus”) as filed with the
Securities and Exchange Commission pursuant to Rule 424(b) under
the Securities Act 1933, as amended (File No. 333-217340). 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. Factors that could cause or contribute to these
differences include, but are not limited to, those discussed below
and elsewhere in this Quarterly Report on Form 10-Q particularly in
the sections entitled “Risk Factors”.
We are a security technology company organized in March 2016
focused on delivering solutions to customers, primarily law
enforcement and security personnel. We plan to introduce our first
product, the BolaWrap™ 100, during late 2017. We do not
expect to report revenues until production quantities are available
for sale to customers. There can be no assurance regarding the
timing or amount of future revenues from this product, if
any.
Organization and Reverse Capitalization
Our Company resulted from the March 31, 2017 merger of Wrap
Technologies, LLC (“
Wrap LLC
”) with and into our wholly-owned subsidiary
MegaWest Energy Montana Corp. (“
MegaWest
”). Wrap LLC ceased separate existence with
MegaWest continuing as the surviving entity. MegaWest changed its
name to Wrap Technologies, Inc. and amended and restated new
articles of incorporation authorizing 150,000,000 shares of common
stock, par value $0.0001, and 5,000,000 shares of preferred stock,
par value $0.0001. All issued and outstanding 835.75 membership
units of Wrap LLC were exchanged for 20.0 million shares of common
stock of the Company.
Wrap LLC acquired privately held MegaWest from Petro River Oil
Corp. (“
Petro River
”) on March 22, 2017 through the issuance of
16.75 membership units, representing a 2% membership interest in
Wrap LLC. Petro River is owned 11% by Scot Cohen, its Executive
Chairman, who also was a Manager and the owner of a 26% membership
interest in Wrap LLC, and is currently the Executive Chairman and
Secretary of the Company. MegaWest had no assets or liabilities at
the date of acquisition nor at December 31, 2016, and is not
considered an operating business.
Wrap LLC’s acquisition of MegaWest and its subsequent merger
with and into MegaWest as a wholly-owned subsidiary of the Company,
and exchange of membership interests for common stock was accounted
for as a reverse recapitalization of Wrap LLC (the
“
Recapitalization
”).
Wrap LLC, now the Company as a result of the Recapitalization, is
deemed the accounting acquirer with MegaWest the accounting
acquiree. Our financial statements are in substance those of Wrap
LLC and are deemed to be a continuation of its business from its
inception date of March 2, 2016. The Company’s balance sheet
continues at historical cost as the accounting acquiree had no
assets or liabilities and no goodwill or intangible assets were
recorded as part of the Recapitalization.
To reflect the Recapitalization, historical shares of common stock
and additional paid-in capital have been retroactively adjusted
using the exchange ratio of approximately 23,930.60 shares of
common stock for each membership unit of Wrap LLC.
Basis of Presentation – Going Concern
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. In
order to continue as a going concern, our business will require
substantial additional investment that has not yet been
secured. Our loss from operations was $234,356 for the period
ended December 31, 2016 and $523,529 for the nine months ended
September 30, 2017. The net cash used from operations and investing
was $187,428 for the period ended December 31, 2016 and $566,364
for the nine months ended September 30, 2017. On September 30,
2017, we had $23,708 in cash. As of September 30, 2017, our
obligations included $184,850 of current liabilities and lease
commitments of approximately $39,200.
Our management has concluded that due to the conditions described
above, there is substantial doubt about our ability to continue as
a going concern through November 7, 2018.
Management has evaluated the significance of the conditions in
relation to our ability to meet our obligations and believes that
the current cash balance, plus $556,300 received in October 2017
from sale of stock will provide sufficient capital to continue
operations through approximately March 2018. While we plan to raise
capital to address our capital deficiencies and meet our operating
cash requirements, there is no assurance that our plans will be
successful. Management cannot assure you that financing will be
available on favorable terms or at all. Additionally, if additional
capital is raised through the sale of equity or convertible debt
securities, the issuance of such securities would result in
dilution to our existing shareholders. Furthermore, despite
management’s optimism regarding our technology and planned
products, even in the event that the Company is adequately funded,
there is no guarantee that any products or product candidates will
perform as hoped or that such products can be successfully
commercialized.
Equity Compensation Plan
On March 31, 2017, the Company approved the 2017 Equity
Compensation Plan (the “
Plan
”). The Plan provides for the granting of
nonqualified stock options, incentive stock options, and restricted
stock grants and units. The Plan allows for an issuance of a
maximum of 2,000,000 shares of common stock, with awards made at
the discretion of the board of directors. No awards have been made
to date. The Company plans to issue stock options in the future to
executive officers, directors, employees and
consultants.
Challenges, Opportunities, and Uncertainties
We will be required to establish and grow business functions
including production, marketing, sales, distribution, service and
administration. Until we generate revenues and margins or obtain
additional financing, we expect to have limited personnel to
accomplish these functions and will primarily rely on our
executives along with outside consultants and suppliers for
production and certain other services. Given our limited personnel,
there is risk and uncertainty whether we can timely accomplish
required functional activities and achieve important milestones,
including introducing new products and obtaining orders from new
customers.
We are unable to predict the market acceptance of our new product
or the level of future sales, if any. We have no orders or
customers for our products.
We will need additional capital for operations and to finish
development and marketing of our new product line and working
capital to produce product for sale to customers. Obtaining any
required additional financing in the future could be a significant
management challenge and failure to secure necessary financing
would have a material adverse affect on our operations. Our ability
to continue as a going concern is dependent upon achieving a
profitable level of operations and until then obtaining additional
financing.
Given our limited personnel and financial resources we face
significant challenges in establishing, operating and growing our
new business. We expect we will need to continue to innovate new
applications for our security technology, develop new products and
technologies to meet diverse customer requirements and identify and
develop new markets for our products.
Critical Accounting Policies and Estimates
The preparation of financial statements in accordance with
accounting principles generally accepted in the United States,
which we refer to as U.S. GAAP, requires us to make estimates and
judgments that affect the reported amounts of assets, liabilities,
revenue and expenses, and related disclosure of contingent assets
and liabilities. On an on-going basis, we evaluate our estimates,
including those related to recognition and measurement of
contingencies and accrued costs. We base our estimates on
historical experience and on various other assumptions we believe
to be reasonable under the circumstances. Actual results may differ
from these estimates under different assumptions or
conditions.
Until consummation of the Recapitalization on March 31, 2017, we
were treated as a partnership for federal and state income tax
purposes and did not incur income taxes. Instead, our losses were
included in the income tax returns of the member partners.
Following the Recapitalization, we are responsible for federal,
state and foreign taxes for jurisdictions in which we conduct
business. As part of the process of preparing our financial
statements we are required to estimate our provision for income
taxes. Significant management judgment will be required in
determining our provision for income taxes, deferred tax assets and
liabilities, tax contingencies, unrecognized tax benefits, and any
required valuation allowance, including taking into consideration
the probability of the tax contingencies being incurred. Management
assesses this probability based upon information provided by its
tax advisers, its legal advisers and similar tax cases. If at a
later time our assessment of the probability of these tax
contingencies changes, our accrual for such tax uncertainties may
increase or decrease. Our effective tax rate for annual and interim
reporting periods could be impacted if uncertain tax positions that
are not recognized are settled at an amount which differs from our
estimates.
Operating Expense
Our operating expenses have included (i) selling, general and
administrative expense, and (ii) research and development expense.
Research and development expense comprises the costs incurred in
performing research and development activities on our behalf,
including compensation and consulting, design and prototype costs,
contract services, patent costs and other outside expenses. The
scope and magnitude of our future research and development expense
is difficult to predict at this time and will depend on elections
made regarding research projects, staffing levels and outside
consulting and contract costs. The actual level of future selling,
general and administrative expense will be dependent on staffing
levels, elections regarding the use of outside resources, public
company and regulatory costs, and other factors, some outside our
control
.
Our operating costs could increase rapidly as we
introduce our product and expand our research and development,
production, distribution, service and administrative functions in
future months. We may also incur future financing costs and
substantial noncash stock-based compensation costs depending on
future option grants that are impacted by stock prices and other
valuation factors. Historical expenditures are not indicative of
future expenditures.
Results of Operations
Three Months Ended September 30, 2017 Compared to Three Months
Ended September 30, 2016
We had no revenues or product costs for the three months ended
September 30, 2017 or 2016.
Selling, General and Administrative Expense.
Selling, general and administrative expenses for
the three month period ended September 30, 2017 were $105,210
compared to $1,738 for three month period ended September 30, 2016.
The most recent period included legal and audit costs of $15,549,
compensation and benefits of $28,847, marketing consulting costs of
$19,220, occupancy and office costs of $9,454, travel and
entertainment costs of $12,222 and trade show and marketing costs
of $13,425. In the prior comparable period our activities were just
beginning with the focus being on research and
development.
Research and Development Expense.
Research and development expenses for the three
months ended September 30, 2017 were $46,334 and included $19,921
of compensation costs, consulting and contract research costs of
$4,870, and patent costs of $14,645. This compared to $66,650 for
the comparable prior period ended September 30, 2016 including
$21,000 of deferred related party research costs, $35,578 of
consulting and contract research costs, $3,417 of prototype and
supply costs and $6,341 of patent costs. Our research and
development costs will vary depending on specific research projects
and levels of internal and external staffing and prototype costs.
The decrease resulted primarily to the start of production
activities in the most recent quarter and completion of contract
research costs on the development of the BolaWrap 100 incurred in
2016.
Net Loss.
Our net loss for the
three-month period ended September 30, 2017 was $151,544 compared
to a net loss of $68,288 for the prior period ended September 30,
2016 when activity was focused on product development
activities.
Nine Months Ended September 30, 2017 Compared to the Period from
Inception (March 2, 2016) to September 30, 2016
We had no revenues or product costs for the nine months ended
September 30, 2017 nor for the prior period including from
inception (March 2, 2016) to September 30, 2016
(“
prior short
period
”).
Selling, General and Administrative Expense.
Selling, general and administrative expenses for
the nine month period ended September 30, 2017 were $270,854
compared to $6,554 for short period ended September 30, 2016. The
most recent period included legal, merger and audit costs of
$67,062, compensation and benefits of $28,847, marketing consulting
costs of $17,591, occupancy and office costs of $26,527, travel and
entertainment costs of $22,800 and trade show and marketing costs
of $30,442. In the prior period our activities were just beginning
with the focus being on research and
development.
Research and Development Expense.
Research and development expenses for the nine
months ended September 30, 2017 were $252,675. The most recent
period included $45,916 of compensation costs including $20,000 of
deferred officer compensation, consulting and contract research
costs of $148,484, prototype and supply costs of $11,060, and
patent costs of $38,926. This compared to $122,747 for the prior
short period ended September 30, 2016 including $49,000 of deferred
related party research costs, consulting and contract research
costs of $39,088, $11,361 of prototype and supply costs and $22,154
of patent costs.
Net Loss.
Our net loss for the
nine month period ended September 30, 2017 was $523,529 compared to
a net loss of $129,301 for the short prior period ended September
30, 2016 when development activities were
beginning.
Liquidity and Capital Resources
Overview.
Our sole source of
liquidity has been funding from our shareholders. We expect our
primary source of future liquidity will be any future equity or
debt financings and from the sale of future product, if
any.
Capital Requirements.
On August
10, 2017, our Registration Statement on Form S-1 (File
No. 333-217340) was declared effective by the SEC for our
initial self-underwritten public offering of up to 2,666,666 shares
of our common stock, par value $0.0001, at a public offering price
of $1.50 per share (the “
Offering
”). As of the date of this report 410,867
shares have been sold pursuant to the Offering, resulting in gross
proceeds of $616,300 to the Company, including $60,000 subscribed
by existing stockholders (including two officers/directors) as of
September 30, 2017. There is no assurance, however, that we will
complete any future sales or receive additional proceeds from the
Offering.
Other
than $23,708 cash on hand at September 30, 2017, and $556,300 of
gross proceeds from the Offering in October 2017, we have no
additional sources of liquidity.
We cannot currently estimate our future liquidity requirements or
future capital needs which will depend on capital required to
introduce our new product and the staffing and support required
along with the timing and amount of future revenues and product
costs. We anticipate that demands for operating and working capital
could grow rapidly based on decisions regarding staffing,
development, production, marketing and other functions and based on
factors outside our control. Accordingly additional capital will be
required during the next twelve months. No assurances can be
provided that any future debt or equity capital will be available
to us. Failure to quickly produce and sell our new product and
timely obtain any required additional capital in the future will
have a material adverse affect on the Company. Our ability to
continue as a going concern is in substantial doubt and is
dependent upon achieving a profitable level of operations and until
then obtaining additional capital.
Our future capital requirements, cash flows and results of
operations could be affected by and will depend on many factors
that are currently unknown to us, including:
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the timing of
the availability of our new product line for sale to
customers;
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decisions
regarding staffing, development, production, marketing and other
functions;
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the timing and
extent of any market acceptance of our
products;
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the costs,
timing and outcome of planned production and required customer and
regulatory compliance of our new products;
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the costs of
preparing, filing and prosecuting our patent applications and
defending any future intellectual property-related
claims;
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the costs and
timing of additional product development;
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the costs,
timing and outcome of any future warranty claims or litigation
against us associated with any of our products;
and
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the timing and
costs associated with any new financing.
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Cash Flow
Operating Activities.
During
the nine month period ended September 30, 2017, net cash used in
operating activities was $532,769.
The net loss of $523,529 was reduced by $26,000 of
deferred and accrued officer compensation and a $73,885 increase of
accounts payable and accruals. A total of $96,667 was invested in
inventories for production and $16,969 increase in prepaid expenses
and public offering costs.
During the short period ended September 30, 2016, net cash used in
operating activities was $57,444. The net loss of
$129,301 was reduced by $49,000 of deferred officer compensation
and $21,982 of accounts payable.
Investing Activities.
We used
$33,595 and $5,248 of cash for the purchase of property and
equipment during the nine month period ended September 30, 2017 and
the short period ended September 30, 2016,
respectively.
Financing Activities.
We
obtained $335,000 of cash from our shareholders during the period
ended September 30, 2017. During the short period ended September
30, 2016 we obtained $80,000 of cash from our
shareholders.
Contractual Obligations
Other than our facility lease of approximately $18,100 per year, we
have no contractual obligations. We are obligated to pay to Syzygy
Licensing, LLC (“
Syzygy
”) a 4% royalty on future product sales up
to an aggregate of $1.0 million in royalties.
Effects of Inflation
We do not believe that inflation has had a material impact on our
business, revenues or operating results during the period
presented.
Recent Accounting Pronouncements
There have been no recent accounting pronouncements or changes in
accounting pronouncements during the period ended September 30,
2017, or subsequently thereto, that we believe are of potential
significance to our financial statements.
Not applicable.
We are required to maintain disclosure controls and procedures
designed to ensure that material information related to us,
including our consolidated subsidiaries, is recorded, processed,
summarized and reported within the time periods specified in the
SEC rules and forms.
Conclusion Regarding the Effectiveness of Disclosure Controls and
Procedures
Under the supervision and with the participation of our management,
including our principal executive officer and our principal
financial officer, we conducted an evaluation of our disclosure
controls and procedures as such term is defined under Rules
13a-15(e) and 15d-15(e) promulgated under the Securities Exchange
Act of 1934. Based on this evaluation, our principal executive
officer and our principal financial officer concluded that our
disclosure controls and procedures were effective at the reasonable
assurance level as of September 30, 2017.
Changes in Internal Control over Financial Reporting
There have been no changes in our internal control over financial
reporting during our fiscal quarter ended September 30, 2017, that
have materially affected, or are reasonably likely to materially
affect, our internal control over financial reporting.
Limitations on Effectiveness of Controls and
Procedures
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.
Because of the inherent limitations of internal control over
financial reporting, including the possibility of collusion or
improper management override of controls, material misstatements
due to error or fraud may not be prevented or detected on a timely
basis. Also, projections of any evaluation of the effectiveness of
the internal control over financial reporting to future periods are
subject to the risk that the controls may become inadequate because
of changes in conditions, or that the degree of compliance with the
policies or procedures may deteriorate.
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
consolidated financial statements for pending litigation.
Currently, there are no pending material legal proceedings to which
the Company is a party or to which any of its property is
subject.
You should carefully consider the risks and uncertainties described
below, together with all the other information in this Quarterly
Report on Form 10-Q, including “Management’s Discussion
and Analysis of Financial Condition and Results of
Operations” and the condensed financial statements and the
related notes. If any of the following risks actually occurs, our
business, reputation, financial condition, results of operations,
revenue, and future prospects could be negatively impacted. In that
event, the market price of our common stock could decline, and you
could lose part or all of your investment.
Risk Factors Relating to Our Business
We have a history of operating losses, expect additional losses and
may not achieve or sustain profitability.
We have a history of operating losses and expect additional losses
as we introduce our new product line and until we achieve revenues
and resulting margins to offset our operating costs. Our net
loss for the period from inception (March 2, 2016) to December 31,
2016 was $234,356 and for the nine months ended September 30, 2017
was $523,529. Our ability to achieve future profitability is
dependent on a variety of factors, many outside our control.
Failure to achieve profitability or sustain profitability, if
achieved, may require us to continue to raise additional financing
which could have a material negative impact on the market value of
our common stock.
Our independent auditors have expressed substantial doubt about our
ability to continue as a going concern.
In their audit opinion issued in connection with our balance sheet
as of December 31, 2016 and our related statements of operations,
changes in owners equity and cash flows for the period then ended,
our independent registered public accounting firm stated that our
net losses and our requirement to secure additional financing
raised substantial doubt about our ability to continue as a going
concern. We have prepared our financial statements on a
going concern basis which contemplates the realization of assets
and the satisfaction of liabilities in the normal course of
business for the foreseeable future. Our financial statements do
not include any adjustments that would be necessary should we be
unable to continue as a going concern and, therefore, be required
to liquidate our assets and discharge our liabilities in other than
the normal course of business, and at amounts different from those
reflected in our financial statements. If we are unable
to continue as a going concern, our shareholders may lose a
substantial portion or all of their investment.
We need additional capital to execute our business plan, and
raising additional capital, if possible, by issuing additional
equity securities may cause dilution to existing shareholders. In
addition, raising additional capital by issuing additional debt
financing may restrict our operations.
While we may be able to generate some funds from product sales,
existing working capital will not be sufficient due to product
introduction costs, operating losses and other factors. Principal
factors affecting the availability of internally generated funds
include:
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failure
of product sales to meet planned projections;
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working capital requirements to support business
growth;
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our ability to control spending; and
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acceptance of our product in planned markets.
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In the event we are required to raise additional capital through
the issuance of equity or convertible debt securities, the
percentage ownership of our shareholders could be diluted
significantly, and these newly issued securities may have rights,
preferences or privileges senior to those of our existing
shareholders. In addition, the issuance of any equity
securities could be at a discount to the market price.
If we incur debt financing, the payment of principal and interest
on such indebtedness may limit funds available for our business
activities, and we could be subject to covenants that restrict our
ability to operate our business and make distributions to our
shareholders. These restrictive covenants may include
limitations on additional borrowing and specific restrictions on
the use of our assets, as well as prohibitions on our ability to
create liens, pay dividends, redeem stock or make
investments. There is no assurance that any equity or debt
financing transaction will be available on acceptable terms, or at
all.
We are a development stage technology company with no current
revenues and limited experience developing security technology for
law enforcement or other security personnel, as well as other areas
required for the successful development and commercialization of
BolaWrap™ 100, our first product, which makes it difficult to
assess our future viability.
We are a development stage technology company. Although our we are
currently in the process of commercializing our first product,
BolaWrap™ 100, we currently generate no revenues, and we have
not yet fully demonstrated an ability to overcome many of the
fundamental risks and uncertainties frequently encountered by
development stage companies in new and rapidly evolving fields of
technology. To execute our business plan successfully, we will need
to accomplish the following fundamental objectives, either on our
own or with strategic collaborators:
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successfully commercialize BolaWrap™ 100, and develop future
products for commercialization;
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Develop, obtain and maintain required regulatory approvals for
commercialization of products we produce;
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establish an intellectual property portfolio for BolaWrap™
100 and other future products;
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establish and maintain sales, distribution and marketing
capabilities, and/or enter into strategic partnering arrangements
to access such capabilities;
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gain market acceptance for BolaWrap™ 100 and/or other future
products; and
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obtain adequate capital resources and manage our spending as costs
and expenses increase due to research, production, development,
regulatory approval and commercialization of BolaWrap™ 100
and/or other future products.
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Our principal product remains under development, and has not yet
been produced in any commercial quantities. We may incur
significant and unpredictable warranty costs as our products are
introduced and produced.
Our principal product remains under development, and is just being
introduced for testing into the marketplace. No assurance can be
provided that we can successfully produce commercial quantities of
our principal product or that additional development will be
required for a commercially viable product. We generally expect to
warrant our products to be free from defects in materials and
workmanship for a period of up to one year from the date of
purchase. We may incur substantial and unpredictable warranty costs
from post-production product or component failures. Future warranty
costs could further adversely affect our financial position,
results of operations and business prospects.
We are materially dependent on the acceptance of our product by the
law enforcement market. If law enforcement agencies do not purchase
our product, our revenues will be adversely affected and we may not
be able to expand into other markets, or otherwise continue as a
going concern.
A substantial number of law enforcement agencies may not purchase
our remote restraint product. In addition, if our product is not
widely accepted by the law enforcement market, we may not be able
to expand sales of our product into other markets. Law enforcement
agencies may be influenced by claims or perceptions that our
product is not effective or may be used in an abusive manner. Sales
of our product to these agencies may be delayed or limited by such
claims or perceptions.
We will be dependent on sales of the BolaWrap™ 100 product,
and if this product is not widely accepted, our growth prospects
will be diminished.
We expect to depend on sales of the BolaWrap™ 100 and related
cartridges for the foreseeable future. A lack of demand for this
product, or its failure to achieve broad market acceptance, would
significantly harm our growth prospects, operating results and
financial condition.
If we are unable to manage our projected growth, our growth
prospects may be limited and our future profitability may be
adversely affected.
We intend to expand our sales and marketing programs and our
manufacturing capability. Rapid expansion may strain our
managerial, financial and other resources. If we are unable to
manage our growth, our business, operating results and financial
condition could be adversely affected. Our systems, procedures,
controls and management resources also may not be adequate to
support our future operations. We will need to continually improve
our operational, financial and other internal systems to manage our
growth effectively, and any failure to do so may lead to
inefficiencies and redundancies, and result in reduced growth
prospects and profitability.
We may face personal injury and other liability claims that harm
our reputation and adversely affect our sales and financial
condition.
Our product is intended to be used in confrontations that could
result in injury to those involved, whether or not involving our
product. Our product may cause or be associated with such injuries.
A person injured in a confrontation or otherwise in connection with
the use of our product may bring legal action against us to recover
damages on the basis of theories including personal injury,
wrongful death, negligent design, dangerous product or inadequate
warning. We may also be subject to lawsuits involving allegations
of misuse of our product. If successful, personal injury, misuse
and other claims could have a material adverse effect on our
operating results and financial condition. Although we carry
product liability insurance, significant litigation could also
result in a diversion of management’s attention and
resources, negative publicity and an award of monetary damages in
excess of our insurance coverage.
Our future success is dependent on our ability to expand sales
through direct sales or distributors, and our inability to grow our
sales force or recruit new distributors would negatively affect our
sales.
Our distribution strategy is to pursue sales through multiple
channels with an emphasis on direct sales and, in the future,
independent distributors. Our inability to recruit and retain sales
personnel and police equipment distributors who can successfully
sell our products could adversely affect our sales. If we do not
competitively price our products, meet the requirements of any
future distributors or end-users, provide adequate marketing
support, or comply with the terms of any distribution arrangements,
such distributors may fail to aggressively market our product or
may terminate their relationships with us. These developments would
likely have a material adverse effect on our sales. Should we
employ distributors our reliance on the sales of our products by
others also makes it more difficult to predict our revenues, cash
flow and operating results.
We expect to expend significant resources to generate sales due to
our lengthy sales cycle, and such efforts may not result in sales
or revenue.
Generally, law enforcement agencies consider a wide range of issues
before committing to purchase a product, including product
benefits, training costs, the cost to use our product in addition
to, or in place of other use of force products, product reliability
and budget constraints. The length of our sales cycle may range
from 30 days to a year or more. We may incur substantial
selling costs and expend significant effort in connection with the
evaluation of our product by potential customers before they place
an order. If these potential customers do not purchase our product,
we will have expended significant resources without corresponding
revenue.
Most of our intended end-users are subject to budgetary and
political constraints that may delay or prevent sales.
Most of our intended end-user customers are government agencies.
These agencies often do not set their own budgets and therefore
have little control over the amount of money they can spend. In
addition, these agencies experience political pressure that may
dictate the manner in which they spend money. As a result, even if
an agency wants to acquire our product, it may be unable to
purchase due to budgetary or political constraints. Some government
agency orders may also be canceled or substantially delayed due to
budgetary, political or other scheduling delays which frequently
occur in connection with the acquisition of products by such
agencies.
Government regulation of our products may adversely affect
sales.
Our device is classified as a firearm regulated by the Bureau of
Alcohol, Tobacco and Firearms involving substantial regulatory
compliance. Our device may also face state restrictions especially
regarding sales to security agencies. Our product sales may be
significantly affected by federal, state and local regulation.
Failure to comply with regulations could also result in the
imposition of fines, penalties and other actions that could
adversely impact our financial position, cash flows and operating
results.
Our product is also be controlled by the United States Department
of Commerce (“
DOC
”) for exports directly from the United
States. Consequently, we need to maintain our export license from
the DOC for the export of our product from the United States other
than to Canada. Compliance with or changes in U.S. export
regulations could significantly and adversely affect any future
international sales.
Certain foreign jurisdictions may restrict the sale of our device
limiting our international sales opportunities.
Our products, including BolaWrap™ 100, have no issued patents
or other intellectual property protection. If we are unable to
protect our intellectual property, we may lose a competitive
advantage or incur substantial litigation costs to protect our
rights.
Our future success depends in part upon our proprietary technology.
None of our products, including BolaWrap™ 100, have any
issued patented or other intellectual property protection. Our
protective measures taken thus far, including pending patents,
trademarks and trade secret laws, may prove inadequate to protect
our proprietary rights. There can be no assurance we will be
granted any patent rights from pending patents. The scope of any
possible patent rights may not prevent others from developing and
selling competing products. The validity and breadth of claims
covered in any possible patents involve complex legal and factual
questions, and the resolution of such claims may be highly
uncertain, lengthy, and expensive. In addition, any patents, if
granted, may be held invalid upon challenge, or others may claim
rights in or ownership of our patents.
Our competitive position will be seriously damaged if our products
are found to infringe on the intellectual property rights of
others.
Other companies and our competitors may currently own or obtain
patents or other proprietary rights that might prevent, limit or
interfere with our ability to make, use or sell our products. Any
intellectual property infringement claims against us, with or
without merit, could be costly and time-consuming to defend and
divert our management’s attention from our business. In the
event of a successful claim of infringement against us and our
failure or inability to license the infringed technology, our
business and operating results could be adversely affected. Any
litigation or claims, whether or not valid, could result in
substantial costs and diversion of our resources. An adverse result
from intellectual property litigation could force us to do one or
more of the following:
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cease selling, incorporating or using products or services that
incorporate the challenged intellectual property;
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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
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redesign products or services that incorporate the disputed
technology.
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If we are forced to take any of the foregoing actions, we could
face substantial costs and shipment delays and our business could
be seriously harmed. Although we carry general liability insurance,
our insurance may not cover potential claims of this type or be
adequate to indemnify us for all liability that may be
imposed.
In addition, it is possible that our customers may seek indemnity
from us in the event that our products are found or alleged to
infringe the intellectual property rights of others. Any such claim
for indemnity could result in substantial expenses to us that could
harm our operating results.
We have no experience developing law enforcement products. Our lack
of experience and competition in the law enforcement market could
reduce our sales and prevent us from achieving
profitability.
The law enforcement market is highly competitive and our management
team has no experience developing law enforcement products. We face
competition from numerous larger, better capitalized, more
experienced and more widely known companies that make restraint
devices, less-lethal weapons and other law enforcement products.
Increased competition could result in greater pricing pressure,
lower gross margins and reduced sales, and prevent us from
achieving profitability.
We cannot predict our future operating results. Our quarterly and
annual results will likely be subject to fluctuations caused by
many factors, any of which could result in our failure to achieve
our expectations.
We currently expect our BolaWrap™ 100 product will be the
source of all of any future revenues. Revenues, if any, are
expected to vary significantly due to a number of factors. Many of
these factors are beyond our control. Any one or more of these
factors, including those listed below, could cause us to fail to
achieve our revenue expectations. These factors
include:
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our ability to develop and supply product to
customers;
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market acceptance of, and changes in demand for, our
products;
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gains or losses of significant customers, distributors or strategic
relationships;
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unpredictable volume and timing of customer orders;
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the availability, pricing and timeliness of delivery of components
for our products;
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fluctuations in the availability of manufacturing capacity or
manufacturing yields and related manufacturing costs;
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timing of new technological advances, product announcements or
introductions by us and by our competitors;
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unpredictable warranty costs associated with our
product;
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budgetary cycles and order delays by customers or production delays
by us or our suppliers;
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regulatory changes affecting the marketability of our
products;
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general economic conditions that could affect the timing of
customer orders and capital spending and result in order
cancellations or rescheduling; and
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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.
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Some or all of these factors could adversely affect demand for our
products and, therefore, adversely affect our future operating
results. As a result of these and other factors, we believe that
period-to-period comparisons of our operating results may not be
meaningful in the near term and accordingly you should not rely
upon our performance in a particular period as indicative of our
performance in any future period.
Our expenses may vary from period to period, which could affect
quarterly results and our stock price.
If we incur additional expenses in a quarter in which we do not
experience increased revenue, our results of operations will be
adversely affected and we may incur larger losses than anticipated
for that quarter. Factors that could cause our expenses to
fluctuate from period to period include:
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the timing and extent of our research and development
efforts;
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investments and costs of maintaining or protecting our intellectual
property;
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the extent of marketing and sales efforts to promote our products
and technologies; and
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the timing of personnel and consultant hiring.
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Our dependence on third-party suppliers for key components of our
product could delay shipment of our products and reduce our
sales.
We will depend on certain domestic and foreign suppliers for the
delivery of components used in the assembly of our product. Our
reliance on third-party suppliers creates risks related to our
potential inability to obtain an adequate supply of components or
subassemblies and reduced control over pricing and timing of
delivery of components and subassemblies. Specifically, we will
depend on suppliers of sub-assemblies, machined parts, injection
molded plastic parts, and other miscellaneous custom parts for our
product. We do not have any long-term supply agreements with any
planned suppliers. Any interruption of supply for any material
components of our products could significantly delay the shipment
of our products and have a material adverse effect on our revenues,
profitability and financial condition.
Foreign currency fluctuations may reduce our competitiveness and
sales in foreign markets.
The relative change in currency values creates fluctuations in
product pricing for future potential international customers. These
changes in foreign end-user costs may result in lost orders and
reduce the competitiveness of our products in certain foreign
markets. These changes may also negatively affect the financial
condition of some foreign customers and reduce or eliminate their
future orders of our products.
Loss of key management and other personnel could impact our
business.
Our business is substantially dependent on our officers and other
key personnel. The loss of an officer or any key personnel could
materially adversely affect our business, financial condition,
results of operations and cash flows. In addition, competition for
skilled and non-skilled employees among companies like ours is
intense, and the future loss of skilled or non-skilled employees or
an inability to attract, retain and motivate additional skilled and
non-skilled employees required for the operation and expansion of
our business could hinder our ability to conduct research
activities successfully, develop new products, attract customers
and meet customer shipments.
Inadequate internal controls and accounting practices could lead to
errors, which could negatively impact our business, financial
condition, results of operations and cash flows.
We will need to establish internal controls and management
oversight systems. Our small size and limited personnel and
consulting resources will 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 system
errors, the potential for human error, unauthorized actions of
employees or contractors, inadequacy of controls, temporary lapses
in controls due to shortfalls in transition planning and oversight
resource contracts and other factors. In addition, due to their
inherent limitations, such controls may not prevent or detect
misstatements in our reported financial results as required under
SEC rules, which could increase our operating costs or impair our
ability to operate our business. Controls may also become
inadequate due to changes in circumstances. It will be necessary to
replace, upgrade or modify our internal information systems from
time to time. If we are unable to implement these changes in a
timely and cost-effective manner, our ability to capture and
process financial transactions and support our customers as
required may be materially adversely impacted, which could harm our
business, financial condition, results of operations and cash
flows.
Risk Factors Relating to Our Common Stock
Currently, there is no established public market for our common
stock, and there can be no assurances that any established public
market will ever develop or that our common stock will be quoted
for trading, and even if quoted, it is likely to be subject to
significant price fluctuations.
There has not yet been any established trading market for our
common stock, and there is currently no established public market
for our securities. A market maker has filed an application with
FINRA on our behalf so as to be able to quote the price of our
common stock on the OTC Markets commencing upon the effectiveness
of our registration statement and other requirements. There can be
no assurance that the market maker’s application will be
accepted by FINRA nor can we estimate as to the time period that
the application will require. We are not permitted to file such
application on our own behalf. If the application is
accepted, there can be no assurances as to whether:
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the prices at which our common stock will trade; or
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the extent to which investor interest in us will lead to the
development of an active, liquid trading market. Active
trading markets generally result in lower price volatility and more
efficient execution of buy and sell orders for
investors.
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In addition, our common stock is unlikely to be followed by any
market analysts, and there may be few institutions acting as market
makers for our common stock. Either of these factors could
adversely affect the liquidity and trading price of our common
stock. Until an orderly market develops in our common stock, if
ever, the price at which it trades is likely to fluctuate
significantly. Prices for our common stock will be determined in
the marketplace and may be influenced by many factors, including
the depth and liquidity of the market for shares of our common
stock, developments affecting our business, including the impact of
the factors referred to elsewhere in these Risk Factors, investor
perception of BoloWrapTM
100
and general economic and market conditions. No assurances can
be given that an orderly or liquid market will ever develop for the
shares of our common stock.
Our common stock
will be subject to “penny stock”
rules
.
We expect that our common stock will be defined as a “penny
stock” under Rule 3a51-1 promulgated under the Exchange Act.
“Penny stocks” are subject to Rules 15g-2 through 15g-7
and Rule 15g-9, which impose additional sales practice requirements
on broker-dealers that sell penny stocks to persons other than
established customers and institutional accredited investors. Among
other things, for transactions covered by these rules, a
broker-dealer must make a special suitability determination for the
purchaser and have received the purchaser’s written consent
to the transaction prior to sale. Consequently, these rules may
affect the ability of broker-dealers to sell our common stock and
affect the ability of holders to sell their shares of our common
stock in the secondary market. To the extent our common stock is
subject to the penny stock regulations, the market liquidity for
our shares will be adversely affected.
We cannot predict the price range or volatility of our common
stock, and sales of a substantial number of shares of our common
stock may adversely affect the market price of our common
stock.
From time to time, the market price and volume of shares traded of
companies in the industry in which we operate experience periods of
significant volatility. Company-specific issues and developments
generally affecting our industries or the economy may cause this
volatility. The market price of our common stock may fluctuate in
response to a number of events and factors, including:
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general economic, market and political conditions;
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quarterly variations in results of operations or results of
operations that are below public market analyst and investor
expectations;
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changes in financial estimates and recommendations by securities
analysts;
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operating and market price performance of other companies that
investors may deem comparable;
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press releases or publicity relating to us or our competitors or
relating to trends in our markets; and
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sales of common stock or other securities by insiders.
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In addition, broad market and industry fluctuations, investor
perception and the depth and liquidity of the market for our common
stock may adversely affect the trading price of our common stock,
regardless of actual operating performance.
Sales or distributions of a substantial number of shares of our
common stock in the public market, or the perception that such
sales could occur, could adversely affect the market price of our
common stock. Many of the shares of our common stock, other than
the shares held by executive officers and directors, will be
eligible for immediate resale in the public market. Substantial
selling of our common stock could adversely affect the market price
of our common stock.
We cannot assure you as to the price at which our common stock will
trade following initial quotation, if any. Until our common stock
is fully distributed and an orderly market develops in our common
stock, the price at which our common stock trades may fluctuate
significantly and may be lower or higher than the price that would
be expected for a fully distributed issue.
Our directors are among our largest shareholders, and may have
certain personal interests that may affect the
Company.
Our directors, James A. Barnes, Elwood G. Norris and Scot Cohen
owned 70.6% of our common stock at September 30, 2017. As a result,
our directors, acting individually or as a group, have the
potential ability to exert influence on the outcome of issues
requiring approval by the Company’s shareholders. This
concentration of ownership may have effects such as delaying or
preventing a change in control of the Company that may be favored
by other shareholders or preventing transactions in which
shareholders might otherwise recover a premium for their shares
over current market prices.
We may issue additional common stock in the future. The issuance of
additional common stock may reduce the value of your common
stock.
In addition to the planned sale of up to 2,666,666 shares of common
stock in our current self-underwritten public offering, we may
issue additional shares of common stock without further action by
our shareholders. Moreover, the economic and voting interests of
each stockholder will be diluted as a result of such issuances.
Although the number of shares of common stock that shareholders
presently own will not decrease, such shares will represent a
smaller percentage of the total shares that will be outstanding
after the issuance of additional shares. The issuance of
additional shares of common stock may cause the market price of our
common stock to decline.
Sales of common stock issuable on the exercise of any future
options or warrants may lower the price of our common
stock.
We adopted a stock option plan on March 31, 2017, which will
authorize the grant of options or restricted stock awards to
purchase up to 2.0 million shares of our common stock to our
employees, directors and consultants. The issuance of shares of
common stock issuable upon the exercise or conversion of options
could cause substantial dilution to existing holders of common
stock, and the sale of those shares in the market could cause the
market price of our common stock to decline. The potential dilution
from the issuance of these shares could negatively affect the terms
on which we are able to obtain equity financing.
We may issue preferred stock in the future, and the terms of the
preferred stock may reduce the value of your common
stock.
We are authorized to issue up to 5,000,000 shares of preferred
stock in one or more series. Our Board of Directors may determine
the terms of future preferred stock offerings without further
action by our shareholders. If we issue preferred stock, it could
affect your rights or reduce the value of your common stock. In
particular, specific rights granted to future holders of preferred
stock could be used to restrict our ability to merge with or sell
our assets to a third party. Preferred stock terms may include
voting rights, preferences as to dividends and liquidation,
conversion and redemption rights and sinking fund
provisions.
The payment of dividends will be at the discretion of our Board of
Directors.
The declaration and amount of future dividends, if any, will be
determined by our Board of Directors and will depend on our
financial condition, earnings, capital requirements, financial
covenants, regulatory constraints, industry practice and other
factors our Board deems relevant.
(a)
Recent Sales of
Unregistered Securities
–
No securities were sold during the period covered by this report
that were not registered under the Securities Act of 1933, as
amended (the “
Securities
Act
”) and not previously reported.
(b)
Use of Proceeds for
Initial Public Offering
- On
August 10, 2017, our Registration Statement on Form S-1 (File
No. 333-217340) was declared effective by the SEC for our
initial self-underwritten public offering of up to 2,666,666 shares
of common stock, par value $0.0001, at a public offering price of
$1.50 per share (the “
Offering
”). As of the date of this report 410,867
shares have been sold pursuant to the Offering, resulting in gross
proceeds of $616,300 to the Company, including $60,000 subscribed
by existing stockholders (including two officers/directors) as of
September 30, 2017, and we have incurred approximately $40,000 in
expenses in connection with the Offering. We have used proceeds
from the Offering for research and development costs associated
with production of BolaWrap™100 components, sales and
marketing expense, and general corporate expense. We may continue
to sell shares of common stock under the Offering until August 15,
2018, unless we elect to terminate the Offering before such date.
There is no assurance, however, that we will complete any future
sales or receive additional proceeds from the
Offering.
We
have no paid any commissions in connection with the Offering, and
no Offering expenses were paid directly or indirectly to any of our
directors or officers (or their associates) or persons owning ten
percent or more of any class of our equity securities or to any
other affiliates. There has been no material change in the planned
use of proceeds from those disclosed in the final prospectus for
the Offering dated as of August 15, 2017 and filed with the SEC
pursuant to Rule 424(b)(5).
(c)
Purchases of Equity
Securities by the Issuer and Affiliated Purchasers
- NONE
NONE
Not Applicable.
NONE
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Exhibit 31.1
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Exhibit 31.2
–
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Exhibit 32.1
–
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Extensible Business Reporting Language (XBRL)
Exhibits*
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101.INS
|
XBRL Instance Document*
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101.SCH
|
XBRL Taxonomy Extension Schema Document*
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101.CAL
|
XBRL Taxonomy Extension Calculation Linkbase Document*
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101.DEF
|
XBRL Taxonomy Extension Definition Linkbase Document*
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101.LAB
|
XBRL Taxonomy Extension Labels Linkbase Document*
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101.PRE
|
XBRL Taxonomy Extension Presentation Linkbase
Document*
|
* Filed concurrently herewith
S
IGNATURES
Pursuant to the requirements 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.
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WRAP
TECHNOLOGIES, INC.
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By:
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/s/ JAMES A
BARNES
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James
A Barnes
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President
and Chief Financial Officer
(Principal
Accounting Officer)
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Date: November 7, 2017
-24-
TABLE OF CONTENTS
Part I. Financial InformationItem 1. Financial StatementsItem 2. Management's Discussion and Analysis Of Financial Condition and Results Of OperationsItem 3. Quantitative and Qualitative Disclosures About Market RiskItem 4. Controls and ProceduresPart II. Other InformationItem 1. Legal ProceedingsItem 1A. Risk FactorsItem 2. Unregistered Sales Of Equity Securities and Use Of ProceedsItem 3. Defaults Upon Senior SecuritiesItem 4. Mine Safety DisclosuresItem 5. Other InformationItem 6. Exhibits