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 March 31, 2018
Commission File Number: 000-55838
Wrap Technologies, Inc.
|
Delaware
|
98-0551945
|
|
(State or other jurisdiction of
incorporation or organization) |
(I.R.S.
Employer
Identification
Number)
|
4620
Arville Street, Ste E
Las
Vegas, Nevada 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 [X] No [ ]
Indicate by check mark whether the registrant has submitted
electronically and posted on its corporate Web site, if any, every
Interactive Data File required to be submitted and posted pursuant
to Rule 405 of Regulation S-T (§232.405 of this chapter)
during the preceding 12 months (or for such shorter period that the
registrant was required to submit and post such
files). [ X ] Yes [ ]
No
Indicate by check mark 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.
|
Large Accelerated Filer [
]
|
Accelerated
filer
[ ]
|
|
Non-accelerated
filer [
]
|
Smaller
reporting company [X]
|
|
(Do not check if a smaller
reporting company)
|
Emerging
growth company [ ]
|
If an emerging growth company, indicate by check mark if the
registrant has elected not to use the extended transition period
for complying with any new or revised financial accounting
standards provided pursuant to Section 13(a) of the Exchange
Act. [ ]
Indicate by check mark whether the registrant is a shell company
(as defined in Rule 12b-2 of the Act). Yes [ ] No [ X
]
As of May 7, 2018 a total of 22,803,533 shares of the
Registrant’s Common Stock, par value $0.0001, were issued and
outstanding.
WRAP TECHNOLOGIES, INC.
INDEX
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-i-
|
PART I. FINANCIAL INFORMATION
|
|
Item 1. Financial Statements
|
|
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March 31,
2018
(unaudited) |
December 31,
2017 |
|
ASSETS
|
|
|
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Current assets:
|
|
|
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Cash
|
$2,551,149
|
$3,083,976
|
|
Inventories,
net
|
176,395
|
131,192
|
|
Prepaid
expenses and other current assets
|
50,475
|
11,446
|
|
Total current assets
|
2,778,019
|
3,226,614
|
|
Property and equipment, net
|
40,879
|
36,668
|
|
Other assets, net
|
1,512
|
1,512
|
|
Total assets
|
$2,820,410
|
$3,264,794
|
|
|
|
|
|
LIABILITIES AND STOCKHOLDERS' EQUITY
|
|
|
|
Current liabilities:
|
|
|
|
Accounts
payable
|
$18,809
|
$36,165
|
|
Note
payable
|
31,734
|
-
|
|
Deferred
and accrued officer compensation
|
96,000
|
96,000
|
|
Accrued
liabilities
|
36,930
|
60,314
|
|
Total current liabilities
|
183,473
|
192,479
|
|
|
|
|
|
Commitments and contingencies (Note 7)
|
|
|
|
|
|
|
|
Stockholders' equity:
|
|
|
|
Preferred
stock - 5,000,000 authorized; par value $0.0001 per share; none
issued and outstanding
|
-
|
-
|
|
Common
stock - 150,000,000 authorized; par value $0.0001 per share;
22,803,533 shares issued and outstanding each period,
respectively
|
2,280
|
2,280
|
|
Additional
paid-in capital
|
4,137,936
|
4,137,936
|
|
Accumulated
deficit
|
(1,503,279)
|
(1,067,901)
|
|
Total stockholders' equity
|
2,636,937
|
3,072,315
|
|
Total liabilities and stockholders' equity
|
$2,820,410
|
$3,264,794
|
See accompanying notes to condensed interim financial
statements.
Wrap Technologies, Inc.
Condensed Statements of Operations
(unaudited)
|
|
For the Three Months
|
|
|
|
Ended March 31,
|
|
|
|
2018
|
2017
|
|
|
|
|
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Operating expenses:
|
|
|
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Selling,
general and administrative
|
$339,167
|
$75,792
|
|
Research
and development
|
95,985
|
125,963
|
|
Total
operating expenses
|
435,152
|
201,755
|
|
Loss
from operations
|
(435,152)
|
(201,755)
|
|
|
|
|
|
Other income (expense):
|
|
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|
Interest
expense
|
(447)
|
-
|
|
Other
|
221
|
-
|
|
|
(226)
|
-
|
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Net loss
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$(435,378)
|
$(201,755)
|
|
|
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Net
loss per basic common share
|
$(0.02)
|
$(0.01)
|
|
Weighted
average common shares used to compute net loss per basic common
share
|
22,803,533
|
19,134,044
|
See accompanying notes to condensed interim financial
statements.
Wrap Technologies, Inc.
Condensed Statements of Cash Flows
(unaudited)
|
|
For the Three Months
|
|
|
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Ended March 31,
|
|
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2018
|
2017
|
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Cash Flows From Operating Activities:
|
|
|
|
Net
loss
|
$(435,378)
|
$(201,755)
|
|
Adjustments
to reconcile net loss to net cash used
in operating activities:
|
|
|
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Depreciation
|
2,261
|
795
|
|
Changes
in assets and liabilities:
|
|
|
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Inventories
|
(45,203)
|
-
|
|
Prepaid
expenses and other current assets
|
(7,295)
|
(472)
|
|
Accounts
payable
|
(17,356)
|
23,190
|
|
Deferred
and accrued officer compensation
|
-
|
26,000
|
|
Accrued
liabilities
|
(23,384)
|
20,895
|
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Net
cash used in operating activities
|
(526,355)
|
(131,347)
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Cash Flows From Investing Activities:
|
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Capital
expenditures for property and equipment
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(6,472)
|
(4,096)
|
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Net
cash used in investing activities
|
(6,472)
|
(4,096)
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Cash Flows From Financing Activities:
|
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Sale
of common stock
|
-
|
225,000
|
|
Net
cash provided by financing activities
|
-
|
225,000
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Net increase (decrease) in cash and cash equivalents
|
(532,827)
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89,557
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Cash, beginning of period
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3,083,976
|
255,072
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Cash, end of period
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$2,551,149
|
$344,629
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Supplemental Disclosure of Non-Cash Investing
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and Financing Activities:
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Prepaid
insurance financed with note payable
|
$39,435
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$-
|
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|
See accompanying notes to condensed interim financial
statements.
-3-
1.
ORGANIZATION AND SUMMARY OF
SIGNIFICANT ACCOUNTING POLICIES
Organization and Business Description
Wrap Technologies, Inc.,a Delaware corporation
(the “Company”) is a developer of security products
designed for use by law enforcement and security personnel. The
Company's first product is the BolaWrap™ 100 remote restraint
device.
The Company resulted from the March 31, 2017
merger of Wrap Technologies, LLC (“Wrap LLC”) with and into its wholly-owned subsidiary
MegaWest Energy Montana Corp. (“MegaWest”). Wrap LLC ceased separate existence, and
MegaWest continued as the surviving entity. MegaWest then changed
its name to Wrap Technologies, Inc. and an amended and restated
certificate of incorporation, changing the Company’s
corporate name, authorizing 150,000,000 shares of common stock, par
value $0.0001 per share, and 5,000,000 shares of preferred stock,
par value $0.0001 per share were filed with the Delaware Division
of Corporations. All outstanding 835.75 membership units of Wrap
LLC outstanding immediatedly prior to the merger were exchanged, on
a pro rate basis, for an aggregate of 20,000,000 shares of common
stock of the Company in the merger.
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
(the
“Recapitalization”).
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 were recorded as part of the
recapitalization of the Company.
Prior to the Recapitalization, on March 22, 2017,
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 was 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 and was not considered an operating
business.
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, 2017 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, 2017. 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.
-4-
1.
ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(continued)
Going Concern
Since
inception in March 2016, Wrap LLC, continuing as the Company
following the Meger, has generated significant losses from
operations and anticipates that it will continue to generate
significant losses from operations for the foreseeable
future.
While
management believes that the Company has adequate financial
resources for the next year, management cannot assure that if any
future financing is required that it will be available on favorable
terms or at all. Additionally, if additional capital is raised
through the sale of equity or convertible debt securities, the
issuance of such securities would result in dilution to the
Company’s existing stockholders. Furthermore, despite
management’s optimism regarding the Company’s
technology and products, there is no guarantee that any products
will perform as hoped or that such products can be successfully
commercialized.
Net Loss per Share
Basic
loss per common share is computed by dividing net loss for the
period by the weighted-average number of shares of common stock
outstanding during the period. Diluted loss per common share is
computed by dividing net loss by the weighted-average number of
shares of common stock outstanding during the period increased to
include the number of additional shares of common stock that would
have been outstanding if any 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 period
ended March 31, 2018 due to losses incurred.
Deferred
tax assets and liabilities are determined based on temporary
differences between the bases of certain assets and liabilities for
income tax and financial reporting purposes. The deferred tax
assets and liabilities are classified according to the financial
statement classification of the assets and liabilities generating
the differences.
The
Company maintains a valuation allowance with respect to deferred
tax assets. The Company establishes a valuation allowance based
upon the potential likelihood of realizing the deferred tax asset
and taking into consideration the Company’s financial
position and results of operations for the current period. Future
realization of the deferred tax benefit depends on the existence of
sufficient taxable income within the carry-forward period under the
Federal tax laws. Changes in circumstances, such as the Company
generating taxable income, could cause a change in judgment about
the realizability of the related deferred tax asset. Any change in
the valuation allowance will be included in income in the year of
the change in estimates.
Recent Accounting Pronouncements
In May 2014, the Financial Accounting Standards
Board (“FASB”)
issued Accounting Standards Update (“ASU”) 2014-09, Revenue from Contracts with
Customers (Topic 606). ASU
2014-09 requires entities to recognize revenue through the
application of a five-step model, which includes identification of
the contract, identification of the performance obligations,
determination of the transaction price, allocation of the
transaction price to the performance obligations and recognition of
revenue as the entity satisfies the performance obligations.
Subsequently, the FASB issued the following accounting standard
updates related to Topic 606, Revenue from Contracts with
Customers:
●
ASU 2016-08, Revenue from Contracts with
Customers (Topic 606):
Principal versus
Agent Considerations (Reporting Revenue Gross versus Net)
in March 2016. ASU 2016-08 does not
change the core principle of revenue recognition in Topic 606 but
clarifies the implementation guidance on principal versus agent
considerations.
●
ASU 2016-10, Revenue from Contracts with
Customers (Topic 606):
Identifying
Performance Obligations and Licensing in April 2016. ASU 2016-10 does not change the
core principle of revenue recognition in Topic 606 but clarifies
the implementation guidance on identifying performance obligations
and its licensing.
●
ASUs 2016-12 and 2016-20, Revenue from Contracts with
Customers (Topic 606):
Narrow-Scope
Improvements and Practical Expedients, and Technical Corrections
and Improvements to Topic 606, Revenue from Contracts with
Customers, respectively, issued
in May and December 2016, respectively. These ASUs do not change
the core principle of revenue recognition in Topic 606 but clarify
the implementation guidance on a few narrow areas and add some
practical expedients to the guidance.
-5-
Topic 606
was effective for the Company as of January 1, 2018 and
permits the use of either a retrospective or a modified
retrospective method. The Company is using the modified
retrospective method but had no previously reported
revenues.
In February 2016, the FASB issued ASU
2016-02, Leases (Topic
842), which requires lessees to
recognize right-of-use assets and corresponding liabilities for all
leases with an initial term in excess of 12 months. This ASU is to
be adopted using a modified retrospective approach, including a
number of practical expedients, that requires leases to be measured
and recognized under the new guidance at the beginning of the
earliest period presented. This ASU is effective for the Company as
of January 1, 2019. Early adoption is permitted. The Company
is currently evaluating the effect this ASU will have on its
financial statements and related disclosures.
In July
2017, the FASB issued ASU 2017-11, Earnings Per Share (Topic 260),
Distinguishing Liabilities from Equity (Topic 480), Derivatives and
Hedging (Topic 815). The amendments in Part I of this ASU
change the classification analysis of certain equity-linked
financial instruments (or embedded features) with down round
features. When determining whether certain financial instruments
should be classified as liabilities or equity instruments should be
classified as liabilities or equity instruments, a down round
feature no longer precludes equity classification when assessing
whether the instrument is indexed to an entity’s own stock.
The amendments also clarify existing disclosure requirements for
equity-classified instruments. The amendments in Part I of this ASU
are effective for the Company as of January 1, 2019. The
amendments in Part II of this ASU replace the indefinite deferral
of certain guidance in Topic 480 with a scope exception. The
amendments in Part II of this ASU do not require any transition
guidance. The Company does not expect adoption of this ASU to have
any impact on its financial statements.
Although
there are several other new accounting pronouncements issued or
proposed by the FASB, the Company does not believe any of these
accounting pronouncements has had or will have a material impact on
its financial position or operating results.
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:
|
|
March 31,
|
December 31,
|
|
|
2018
|
2017
|
|
Finished
goods
|
$41,517
|
$5,308
|
|
Work
in process
|
7,569
|
5,484
|
|
Raw
materials
|
127,309
|
120,400
|
|
|
$176,395
|
$131,192
|
3.
PROPERTY AND EQUIPMENT, NET
Property
and equipment consisted of the following:
|
|
March 31,
|
December 31,
|
|
|
2018
|
2017
|
|
Laboratory
equipment
|
$13,980
|
$12,730
|
|
Tooling
|
22,683
|
18,165
|
|
Computer
equipment
|
4,855
|
4,151
|
|
Furniture
and fixtures
|
9,595
|
9,595
|
|
|
51,113
|
44,641
|
|
Accumulated
depreciation
|
(10,234)
|
(7,973)
|
|
|
$40,879
|
$36,668
|
Depreciation
expense was $2,261 and $795 for the three months ended March 31,
2018 and 2017, respectively.
4.
NOTE PAYABLE
In
January 2018 the Company financed $39,435 of insurance obligations
pursuant to a short-term note agreement at 7.15% with ten monthly
principal and interest payments of $4,074 through November
2018.
5.
DEFERRED AND ACCRUED COMPENSATION
From March 2016 through February 2017 the Company
accrued monthly compensation for the services of two officers in
the aggregate amount of $7,000 per month payable to Syzygy
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 March 31, 2018 was $84,000 and the
accrued deferred compensation aggregated $12,000. These balances
accrue without interest. No payment terms or schedule has been
established.
-6-
6.
STOCKHOLDERS’ EQUITY AND SHARE-BASED
COMPENSATION
The
Company’s authorized capital consists of 150,000,000 shares
of common stock, par value $0.0001 per share, and 5,000,000 shares
of preferred stock, par value $0.0001 per share. To reflect the
recapitalization (see Note 1) historical shares of common stock and
additional paid-in capital were 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 (the
“Plan”)
authorizing 2,000,000 shares of common stock for issuance as stock
options and restricted stock units to employees, directors or
consultants. At March 31, 2018, there had been no option grants or
restricted stock awards made under the Plan and none were
outstanding.
7. COMMITMENTS AND CONTINGENCIES
Facility Lease
Commencing
December 1, 2016, Wrap LLC and then the Company have leased 1,890
square feet of improved office, assembly and warehouse space in Las
Vegas, Nevada. The term of the lease agreement is 37 months, with a
termination date of December 31, 2019. The gross monthly base rent
is currently $1,550, which will increase 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 three month period ended March 31, 2018 was $4,529.
The remaining future annual minimum lease obligations under the
foregoing facility lease are $12,474 and $19,051 for the balance of
2018 and 2019, respectively.
Related Party Technology License Agreement
The
Company is obligated to pay royalties and pay development and
patent costs pursuant to an exclusive Amended and Restated
Intellectual Property License Agreement dated as of September 30,
2016 with Syzygy, a company owned and controlled by
stockholders/officers Mr. Elwood Norris and Mr. James Barnes. The
agreement provides for royalty payments of 4% of revenues from
products employing the licensed ensnarement device technology up to
an aggregate of $1,000,000 in royalties or until September 30,
2026, whichever occurs earlier.
8.
RELATED PARTY TRANSACTIONS
Commencing
in October 2017 the Company began reimbursing stockholder/officer
Mr. Elwood Norris $1,500 per month on a month to month basis for
laboratory facility costs for an aggregate of $4,500 during the
period ended March 31, 2018.
See
Notes 1, 5, and 7 for information on related party transactions and
information.
Item 2. Management's Discussion
and Analysis of Financial Condition and Results of
Operations
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 and other information presented in our
Annual Report on Form 10-K for the year ended December 31, 2017.
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 began demonstrations of our
first product, the BolaWrap 100, in November 2017. We do not expect
to report revenues until prospective customers test and evaluate
our product. There can be no assurance regarding the timing or
amount of future revenues from this product, if
any.
Organization and Recapitalization
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’s acquisition of MegaWest
and its subsequent merger with and into MegaWest as a wholly-owned
subsidiary of the Company, and the 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, was
deemed the accounting acquirer with MegaWest the accounting
acquiree. Our financial statements are in substance those of Wrap
LLC, and are deemed to be a continuation of its business from its
inception date of March 2, 2016. The Company’s balance sheet
continues at historical cost as the accounting acquiree had no
assets or liabilities and no goodwill or intangible assets were
recorded as part of the Recapitalization.
To reflect the Recapitalization, historical shares of common stock
and additional paid-in capital have been retroactively adjusted
using the exchange ratio of approximately 23,930.60 shares of
common stock for each membership unit of Wrap LLC.
Business Highlights, Outlook and Challenges
In December 2017, we completed a self-underwritten public offering
raising gross proceeds of approximately $3.49 million from the sale
of 2,328,533 shares of Company common stock, par value $0.0001 per
share, at the public offering price of $1.50 per share. Three
officers of the Company purchased an aggregate of 40,000 shares of
common stock during the offering for an aggregate purchase price of
$60,000.
We are currently establishing and growing business functions
including production, marketing, sales, distribution, service and
administration. Until we generate revenues and margins or obtain
additional financing, we expect to have limited personnel to
accomplish these functions and will primarily rely on our
executives along with outside consultants and suppliers for
production and certain other services. Given our limited personnel,
there is risk and uncertainty whether we can timely accomplish
required functional activities and achieve important milestones,
including introducing new products and obtaining orders from
customers.
We are unable to predict the market acceptance of our new product
or the level of future sales, if any. A small number of law
enforcement agencies are currently testing and evaluating our
BolaWrap 100 product; however, to date we have no orders or
customers for our products.
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.
While we believe that we have adequate financial resources to
sustain our operations for the next year, no assurances can be
given, and we may need additional capital for future operations and
to market and further develop our product line or new products.
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 effect on our
operations.
Given our limited personnel and financial resources we face
significant challenges in establishing, operating and growing our
new business. We expect that 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
(“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. We
evaluate our estimates, on an on-going basis, including those
estimates related to recognition and measurement of contingencies
and accrued costs. We base our estimates on historical experience
and on various other assumptions we believe to be reasonable under
the circumstances. Actual results may differ from these estimates
under different assumptions or conditions.
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 expenditures on sales and marketing,
the use of outside resources, public company and regulatory costs,
and other factors, some of which are outside of 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 March 31, 2018 Compared to Three Months Ended
March 31, 2017
We had no revenues or product costs for the three months ended
March 31, 2018 or 2017.
Selling, General and Administrative Expense. Selling, general and administrative expenses for
the three-month period ended March 31, 2018 were $339,167 compared
to $75,792 for three-month period ended March 31, 2017. The most
recent period included $5,829 of promotional product costs,
compensation and sales consulting costs of $188,153, trade show and
marketing costs of $11,435, occupancy and office costs of $13,319,
travel and entertainment costs of $21,000, legal and audit costs of
$31,377, and director fees and other public company costs of
$54,890. In the prior comparable period our activities were just
beginning with the focus being on research and development, with
the $75,792 of selling, general and administrative expenses
including $42,733 of audit and merger related
costs.
Research and Development Expense. Research and development expenses for the three
months ended March 31, 2018 were $95,985, which included $67,578 of
compensation costs and contract research costs of $11,000. This is
a decrease from $125,963 for the comparable prior period ended
March 31, 2017, which included $20,000 of deferred related party
research and compensation costs, $75,062 of consulting and contract
research costs related to the BolaWrap 100 product, $13,489 of
prototype and supply costs and $15,337 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.
Net Loss. Our net loss for the
three-month period ended March 31, 2018 was $435,378 compared to a
net loss of $201,755 for the prior period ended March 31, 2017 with
the increased loss resulting from costs associated with increased
staffing after our December 2017 IPO and the commencement of sales
and marketing activities related to the BolaWrap 100
product.
Liquidity and Capital Resources
Overview. Our sole source of
liquidity to date has been funding from our shareholders and the
sale of common stock. We expect our primary source of future
liquidity will be from the sale of future product, if any, and if
required from future equity or debt financings.
Capital Requirements.
In December 2017, we completed a self-underwritten public offering
raising gross proceeds of approximately $3.49 million from the sale
of 2,328,533 shares of Common Stock at the public offering price of
$1.50 per share. Other than $2,551,149 cash on hand at March 31,
2018, we have no additional sources of liquidity.
We cannot currently estimate our future liquidity requirements or
future capital needs, which will depend, amongst other things, on
capital required to introduce our new product and the staffing and
support requirements, and the timing and amount of future revenues
and product costs. We anticipate that demands for operating and
working capital could grow rapidly based on decisions regarding
staffing, development, production, marketing and other functions
and based on factors outside our control. We believe we have
sufficient capital to sustain our operations for the next twelve
months, although no assurances can be given. Additionally, no
assurances can be provided that any future debt or equity capital
will be available to us under favorable terms, if at all. Failure
to quickly produce and sell our new product and timely obtain any
required additional capital in the future will have a material
adverse effect on the Company.
Our future capital requirements, cash flows and results of
operations could be affected by and will depend on many factors
that are currently unknown to us, including, amongst other
things:
●
decisions regarding staffing, development, production, marketing
and other functions;
●
the timing and extent of any market acceptance of our
products;
●
the costs, timing and outcome of planned production and required
customer and regulatory compliance of our new
products;
●
the costs of preparing, filing and prosecuting our patent
applications and defending any future intellectual property-related
claims;
●
the costs and timing of additional product
development;
●
the costs, timing and outcome of any future warranty claims or
litigation against us associated with any of our products;
and
●
the timing and costs associated with any new
financing.
Off-Balance Sheet Arrangments
We have no off-balance sheet arrangements.
Cash Flow
Operating Activities. During
the three months ended March 31, 2018, net cash used in operating
activities was $526,355. The net loss of $435,378 was increased by a
$45,203 investment in inventories, $7,295 increase in prepaid
expense, and a $40,740 decrease in accounts payable and
accruals.
During the prior period ended March 31, 2017, net cash used in
operating activities was $131,347. The net loss of
$201,755 was reduced by $26,000 of deferred and accrued officer
compensation and $44,085 of accounts payable and
accruals.
Investing Activities. We used
$6,472 and $4,096 of cash for the purchase of property and
equipment during the three months ended March 31, 2018 and 2017,
respectively.
Financing Activities. We
obtained $225,000 of cash from our shareholders from the sale of
common stock during the three months ended March 31,
2017.
Contractual Obligations
We are obligated to pay to Syzygy Licensing, LLC
(“Syzygy”) a 4% royalty fee on future product sales
up to an aggregate of $1.0 million in royalties. Other than our
facility lease of approximately $18,600 per year, we have no other
contractual obligations.
Effects of Inflation
We do not believe that inflation has had a material impact on our
business, revenues or operating results during the periods
presented.
Recent Accounting Pronouncements
There have been no recent accounting pronouncements or changes in
accounting pronouncements during the period ended March 31, 2018,
or subsequently thereto, that we believe are of potential
significance to our financial statements.
Item 3. Quantitative and Qualitative
Disclosures about Market Risk.
Not applicable.
Item 4. Controls and Procedures.
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, as of March 31, 2018 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 not
effective at the reasonable assurance level due to the existence of
a known material weakness in our internal control over financial
reporting as summarized in the following paragraph.
As of March 31, 2018 we had limited employees and our Chief
Financial Officer was responsible for initiating transactions, had
custody of assets, recorded and reconciled transactions and
prepared our quarterly financial reports without the sufficient
segregation of conflicting duties normally required for effective
internal control. We believe that the lack of segregation of duties
is a material weakness in our internal controls at March 31, 2018
affecting management’s ability to conclude that our
disclosure controls and procedures were effective at the reasonable
assurance level.
While we plan to attempt to remediate the above noted material
weakness in the future, there is no assurance that we can remediate
any control deficiencies in a timely manner.
Changes in Internal Control over Financial Reporting
There have been no changes in our internal control over financial
reporting during our fiscal quarter ended March 31, 2018, that have
materially affected, or are reasonably likely to materially affect,
our internal control over financial reporting. Our process for
evaluating controls and procedures is continuous and encompasses
constant improvement of the design and effectiveness of established
controls and procedures and the remediation of any deficiencies,
which may be identified during this process.
Item 1. Legal
Proceedings
We may at times become involved in litigation in the ordinary
course of business. We will also, from time to time, when
appropriate in management’s estimation, record adequate
reserves in our financial statements for pending litigation.
Currently, there are no pending material legal proceedings to which
the Company is a party or to which any of its property is
subject.
Item
1A. Risk
Factors
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 when and if it
commences trading 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 year ended December 31, 2017 was $833,545 and our net
loss for the three months ended March 31, 2018 was $435,278. Our
ability to achieve future profitability is dependent on a variety
of factors, many outside our control. Failure to achieve
profitability or sustain profitability, if achieved, may require us
to continue to raise additional financing which could have a
material negative impact on the market value of our common
stock.
We may need additional capital to execute our business plan, and
raising additional capital, if possible, by issuing additional
equity securities may cause dilution to existing shareholders. In
addition, raising additional capital by issuing additional debt
financing may restrict our operations.
While we believe we have adequate financial resources for the next
twelve months and we may be able to generate some funds from
product sales, existing working capital may not be sufficient to
achieve profitable operations due to product introduction costs,
operating losses and other factors. Principal factors affecting the
availability of internally generated funds include:
●
failure of product sales to meet planned projections;
●
working capital requirements to support business
growth;
●
our ability to control spending; and
●
acceptance of our product in planned markets.
In the event we are required to raise additional capital through
the issuance of equity or convertible debt securities, the
percentage ownership of our 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 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:
●
successfully commercialize BolaWrap™ 100, and develop future
products for commercialization;
●
Develop, obtain and maintain required regulatory approvals for
commercialization of products we produce;
●
establish an intellectual property portfolio for BolaWrap™
100 and other future products;
●
establish and maintain sales, distribution and marketing
capabilities, and/or enter into strategic partnering arrangements
to access such capabilities;
●
gain market acceptance for BolaWrap™ 100 and/or other future
products; and
●
obtain adequate capital resources and manage our spending as costs
and expenses increase due to research, production, development,
regulatory approval and commercialization of BolaWrap™ 100
and/or other future products.
Our principal product remains under development, and has not yet
been produced in recurring commercial quantities. We may incur
significant and unpredictable warranty costs as our products are
introduced and produced.
Our principal product has only recently been introduced for testing
into the marketplace and remains under development as we make
improvements based on ongoing customer trials. While we are
producing small numbers of commercial products, no assurance can be
provided that we can successfully produce higher volume commercial
quantities of our principal product or that additional development
will be required for a commercially viable product. We generally
expect to warrant our products to be free from defects in materials
and workmanship for a period of up to one year from the date of
purchase. We may incur substantial and unpredictable warranty costs
from post-production product or component failures. Future warranty
costs could further adversely affect our financial position,
results of operations and business prospects.
We are materially dependent on the acceptance of our product by the
law enforcement market. If law enforcement agencies do not purchase
our product, our revenues will be adversely affected and we may not
be able to expand into other markets, or otherwise continue as a
going concern.
A substantial number of law enforcement agencies may not purchase
our remote restraint product. In addition, if our product is not
widely accepted by the law enforcement market, we may not be able
to expand sales of our product into other markets. Law enforcement
agencies may be influenced by claims or perceptions that our
product is not effective or may be used in an abusive manner. Sales
of our product to these agencies may be delayed or limited by such
claims or perceptions.
We will be dependent on sales of the BolaWrap™ 100 product,
and if this product is not widely accepted, our growth prospects
will be diminished.
We expect to depend on sales of the BolaWrap™ 100 and related
cartridges for the foreseeable future. A lack of demand for this
product, or its failure to achieve broad market acceptance, would
significantly harm our growth prospects, operating results and
financial condition.
If we are unable to manage our projected growth, our growth
prospects may be limited and our future profitability may be
adversely affected.
We intend to expand our sales and marketing programs and our
manufacturing capability. Rapid expansion may strain our
managerial, financial and other resources. If we are unable to
manage our growth, our business, operating results and financial
condition could be adversely affected. Our systems, procedures,
controls and management resources also may not be adequate to
support our future operations. We will need to continually improve
our operational, financial and other internal systems to manage our
growth effectively, and any failure to do so may lead to
inefficiencies and redundancies, and result in reduced growth
prospects and profitability.
We may face personal injury and other liability claims that harm
our reputation and adversely affect our sales and financial
condition.
Our product is intended to be used in confrontations that could
result in injury to those involved, whether or not involving our
product. Our product may cause or be associated with such injuries.
A person injured in a confrontation or otherwise in connection with
the use of our product may bring legal action against us to recover
damages on the basis of theories including personal injury,
wrongful death, negligent design, dangerous product or inadequate
warning. We may also be subject to lawsuits involving allegations
of misuse of our product. If successful, personal injury, misuse
and other claims could have a material adverse effect on our
operating results and financial condition. Although we carry
product liability insurance, significant litigation could also
result in a diversion of management’s attention and
resources, negative publicity and an award of monetary damages in
excess of our insurance coverage.
Our future success is dependent on our ability to expand sales
through direct sales or distributors, and our inability to grow our
sales force or recruit new distributors would negatively affect our
sales.
Our distribution strategy is to pursue sales through multiple
channels with an emphasis on direct sales and, in the future,
independent distributors. Our inability to recruit and retain sales
personnel and police equipment distributors who can successfully
sell our products could adversely affect our sales. If we do not
competitively price our products, meet the requirements of any
future distributors or end-users, provide adequate marketing
support, or comply with the terms of any distribution arrangements,
such distributors may fail to aggressively market our product or
may terminate their relationships with us. These developments would
likely have a material adverse effect on our sales. Should we
employ distributors our reliance on the sales of our products by
others also makes it more difficult to predict our revenues, cash
flow and operating results.
We expect to expend significant resources to generate sales due to
our lengthy sales cycle, and such efforts may not result in sales
or revenue.
Generally, law enforcement agencies consider a wide range of issues
before committing to purchase a product, including product
benefits, training costs, the cost to use our product in addition
to, or in place of other use of force products, product reliability
and budget constraints. The length of our sales cycle may range
from 30 days to a year or more. We may incur substantial
selling costs and expend significant effort in connection with the
evaluation of our product by potential customers before they place
an order. If these potential customers do not purchase our product,
we will have expended significant resources without corresponding
revenue.
Most of our intended end-users are subject to budgetary and
political constraints that may delay or prevent sales.
Most of our intended end-user customers are government agencies.
These agencies often do not set their own budgets and therefore
have little control over the amount of money they can spend. In
addition, these agencies experience political pressure that may
dictate the manner in which they spend money. As a result, even if
an agency wants to acquire our product, it may be unable to
purchase due to budgetary or political constraints. Some government
agency orders may also be canceled or substantially delayed due to
budgetary, political or other scheduling delays which frequently
occur in connection with the acquisition of products by such
agencies.
Government regulation of our products may adversely affect
sales.
Our device is classified as a firearm regulated by the Bureau of
Alcohol, Tobacco and Firearms involving substantial regulatory
compliance. Our device may also face state restrictions especially
regarding sales to security agencies. Our product sales may be
significantly affected by federal, state and local regulation.
Failure to comply with regulations could also result in the
imposition of fines, penalties and other actions that could
adversely impact our financial position, cash flows and operating
results.
Our product is also be controlled by the United States Department
of Commerce (“DOC”) for exports directly from the United
States. Consequently, we need to maintain our export license from
the DOC for the export of our product from the United States other
than to Canada. Compliance with or changes in U.S. export
regulations could significantly and adversely affect any future
international sales.
Certain foreign jurisdictions may restrict the sale of our device
limiting our international sales opportunities.
Our products, including BolaWrap™ 100, have no issued patents
or other intellectual property protection. If we are unable to
protect our intellectual property, we may lose a competitive
advantage or incur substantial litigation costs to protect our
rights.
Our future success depends in part upon our proprietary technology.
None of our products, including BolaWrap™ 100, have any
issued patented or other intellectual property protection. Our
protective measures taken thus far, including pending patents,
trademarks and trade secret laws, may prove inadequate to protect
our proprietary rights. There can be no assurance we will be
granted any patent rights from pending patents. The scope of any
possible patent rights may not prevent others from developing and
selling competing products. The validity and breadth of claims
covered in any possible patents involve complex legal and factual
questions, and the resolution of such claims may be highly
uncertain, lengthy, and expensive. In addition, any patents, if
granted, may be held invalid upon challenge, or others may claim
rights in or ownership of our patents.
Our competitive position will be seriously damaged if our products
are found to infringe on the intellectual property rights of
others.
Other companies and our competitors may currently own or obtain
patents or other proprietary rights that might prevent, limit or
interfere with our ability to make, use or sell our products. Any
intellectual property infringement claims against us, with or
without merit, could be costly and time-consuming to defend and
divert our management’s attention from our business. In the
event of a successful claim of infringement against us and our
failure or inability to license the infringed technology, our
business and operating results could be adversely affected. Any
litigation or claims, whether or not valid, could result in
substantial costs and diversion of our resources. An adverse result
from intellectual property litigation could force us to do one or
more of the following:
●
cease selling, incorporating or using products or services that
incorporate the challenged intellectual property;
●
obtain a license from the holder of the infringed intellectual
property right, which license may not be available on reasonable
terms, if at all; and
●
redesign products or services that incorporate the disputed
technology.
If we are forced to take any of the foregoing actions, we could
face substantial costs and shipment delays and our business could
be seriously harmed. Although we carry general liability insurance,
our insurance may not cover potential claims of this type or be
adequate to indemnify us for all liability that may be
imposed.
In addition, it is possible that our customers may seek indemnity
from us in the event that our products are found or alleged to
infringe the intellectual property rights of others. Any such claim
for indemnity could result in substantial expenses to us that could
harm our operating results.
We have no experience developing law enforcement products. Our lack
of experience and competition in the law enforcement market could
reduce our sales and prevent us from achieving
profitability.
The law enforcement market is highly competitive and our management
team has no experience developing law enforcement products. We face
competition from numerous larger, better capitalized, more
experienced and more widely known companies that make restraint
devices, less-lethal weapons and other law enforcement products.
Increased competition could result in greater pricing pressure,
lower gross margins and reduced sales, and prevent us from
achieving profitability.
We cannot predict our future operating results. Our quarterly and
annual results will likely be subject to fluctuations caused by
many factors, any of which could result in our failure to achieve
our expectations.
We currently expect our BolaWrap™ 100 product will be the
source of all of any future revenues. Revenues, if any, are
expected to vary significantly due to a number of factors. Many of
these factors are beyond our control. Any one or more of these
factors, including those listed below, could cause us to fail to
achieve our revenue expectations. These factors
include:
●
our ability to develop and supply product to
customers;
●
market acceptance of, and changes in demand for, our
products;
●
gains or losses of significant customers, distributors or strategic
relationships;
●
unpredictable volume and timing of customer orders;
●
the availability, pricing and timeliness of delivery of components
for our products;
●
fluctuations in the availability of manufacturing capacity or
manufacturing yields and related manufacturing costs;
●
timing of new technological advances, product announcements or
introductions by us and by our competitors;
●
unpredictable warranty costs associated with our
product;
●
budgetary cycles and order delays by customers or production delays
by us or our suppliers;
●
regulatory changes affecting the marketability of our
products;
●
general economic conditions that could affect the timing of
customer orders and capital spending and result in order
cancellations or rescheduling; and
●
general political conditions in this country and in various other
parts of the world that could affect spending for the products that
we intend to offer.
Some or all of these factors could adversely affect demand for our
products and, therefore, adversely affect our future operating
results. As a result of these and other factors, we believe that
period-to-period comparisons of our operating results may not be
meaningful in the near term and accordingly you should not rely
upon our performance in a particular period as indicative of our
performance in any future period.
Our expenses may vary from period to period, which could affect
quarterly results and our stock price.
If we incur additional expenses in a quarter in which we do not
experience increased revenue, our results of operations will be
adversely affected and we may incur larger losses than anticipated
for that quarter. Factors that could cause our expenses to
fluctuate from period to period include:
●
the timing and extent of our research and development
efforts;
●
investments and costs of maintaining or protecting our intellectual
property;
●
the extent of marketing and sales efforts to promote our products
and technologies; and
●
the timing of personnel and consultant hiring.
Our dependence on third-party suppliers for key components of our
product could delay shipment of our products and reduce our
sales.
We depend on certain domestic and foreign suppliers for the
delivery of components used in the assembly of our product. Our
reliance on third-party suppliers creates risks related to our
potential inability to obtain an adequate supply of components or
subassemblies and reduced control over pricing and timing of
delivery of components and subassemblies. Specifically, we will
depend on suppliers of sub-assemblies, machined parts, injection
molded plastic parts, and other miscellaneous custom parts for our
product. We do not have any long-term supply agreements with any
planned suppliers. Any interruption of supply for any material
components of our products could significantly delay the shipment
of our products and have a material adverse effect on our revenues,
profitability and financial condition.
Foreign currency fluctuations may reduce our competitiveness and
sales in foreign markets.
The relative change in currency values creates fluctuations in
product pricing for future potential international customers. These
changes in foreign end-user costs may result in lost orders and
reduce the competitiveness of our products in certain foreign
markets. These changes may also negatively affect the financial
condition of some foreign customers and reduce or eliminate their
future orders of our products.
Loss of key management and other personnel could impact our
business.
Our business is substantially dependent on our officers and other
key personnel. The loss of an officer or any key personnel could
materially adversely affect our business, financial condition,
results of operations and cash flows. In addition, competition for
skilled and non-skilled employees among companies like ours is
intense, and the future loss of skilled or non-skilled employees or
an inability to attract, retain and motivate additional skilled and
non-skilled employees required for the operation and expansion of
our business could hinder our ability to conduct research
activities successfully, develop new products, attract customers
and meet customer shipments.
Inadequate internal controls and accounting practices could lead to
errors, which could negatively impact our business, financial
condition, results of operations and cash flows.
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 or that approval for quotation will be
obtained. 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:
●
any market for our Shares will develop;
●
the prices at which our common stock will trade; or
●
the extent to which investor interest in us will lead to the
development of an active, liquid trading market. Active trading
markets generally result in lower price volatility and more
efficient execution of buy and sell orders for
investors.
In addition, our common stock is unlikely to be followed by any
market analysts, and there may be few institutions acting as market
makers for our common stock. Either of these factors could
adversely affect the liquidity and trading price of our common
stock. Until an orderly market develops in our common stock, if
ever, the price at which it trades is likely to fluctuate
significantly. Prices for our common stock will be determined in
the marketplace and may be influenced by many factors, including
the depth and liquidity of the market for shares of our common
stock, developments affecting our business, including the impact of
the factors referred to elsewhere in these Risk Factors, investor
perception of BoloWrap 100
and general economic and market conditions. No assurances can
be given that an orderly or liquid market will ever develop for the
shares of our common stock.
Our common stock
will be subject to “penny stock”
rules.
We expect that our common stock will be defined as a “penny
stock” under Rule 3a51-1 promulgated under the Exchange Act.
“Penny stocks” are subject to Rules 15g-2 through 15g-7
and Rule 15g-9, which impose additional sales practice requirements
on broker-dealers that sell penny stocks to persons other than
established customers and institutional accredited investors. Among
other things, for transactions covered by these rules, a
broker-dealer must make a special suitability determination for the
purchaser and have received the purchaser’s written consent
to the transaction prior to sale. Consequently, these rules may
affect the ability of broker-dealers to sell our common stock and
affect the ability of holders to sell their shares of our common
stock in the secondary market. To the extent our common stock is
subject to the penny stock regulations, the market liquidity for
our shares will be adversely affected.
We cannot predict the price range or volatility of our common
stock, and sales of a substantial number of shares of our common
stock may adversely affect the market price of our common
stock.
From time to time, the market price and volume of shares traded of
companies in the industry in which we operate experience periods of
significant volatility. Company-specific issues and developments
generally affecting our industries or the economy may cause this
volatility. The market price of our common stock may fluctuate in
response to a number of events and factors, including:
●
general economic, market and political conditions;
●
quarterly variations in results of operations or results of
operations that are below public market analyst and investor
expectations;
●
changes in financial estimates and recommendations by securities
analysts;
●
operating and market price performance of other companies that
investors may deem comparable;
●
press releases or publicity relating to us or our competitors or
relating to trends in our markets; and
●
sales of common stock or other securities by insiders.
In addition, broad market and industry fluctuations, investor
perception and the depth and liquidity of the market for our common
stock may adversely affect the trading price of our common stock,
regardless of actual operating performance.
Sales or distributions of a substantial number of shares of our
common stock in the public market, or the perception that such
sales could occur, could adversely affect the market price of our
common stock. Many of the shares of our common stock, other than
the shares held by executive officers and directors, will be
eligible for immediate resale in the public market. Substantial
selling of our common stock could adversely affect the market price
of our common stock.
We cannot assure you as to the price at which our common stock will
trade following initial quotation, if any. Until our common stock
is fully distributed and an orderly market develops in our common
stock, the price at which our common stock trades may fluctuate
significantly and may be lower or higher than the price that would
be expected for a fully distributed issue.
Our officers and directors are among our largest shareholders, and
may have certain personal interests that may affect the
Company.
Management owns 74% of our common stock at March 31, 2018. As a
result, our management, acting individually or as a group, have the
potential ability to exert influence on the outcome of issues
requiring approval by the Company’s shareholders. This
concentration of ownership may have effects such as delaying or
preventing a change in control of the Company that may be favored
by other shareholders or preventing transactions in which
shareholders might otherwise recover a premium for their shares
over current market prices.
We may issue additional common stock in the future. The issuance of
additional common stock may reduce the value of your common
stock.
We may issue additional shares of common stock without further
action by our shareholders. Moreover, the economic and voting
interests of each stockholder will be diluted as a result of any
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 authorizes
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.
Item 2. Unregistered Sales of Equity Securities and Use of
Proceeds
No unregistered securities were issued during the three months
ended March 31, 2018 that were not previously
reported.
Item 3. Defaults Upon Senior Securities
None.
Item 4. Mine Safety
Disclosures
Not Applicable.
Item 5. Other
Information
NONE
Item 6. Exhibits
Exhibit 31.1 – Certification of David Norris, Principal
Executive Officer, pursuant to Rule 13a-14(a) or 15d-14(a) of the
Securities and Exchange Act of 1934, as amended, as adopted
pursuant to Section 302 of the Sarbanes-Oxley Act of
2002.*
Exhibit 31.2 – Certification of James A. Barnes, Principal
Financial Officer, pursuant to Rule 13a-14(a) or 15d-14(a) of the
Securities and Exchange Act of 1934, as amended, as adopted
pursuant to Section 302 of the Sarbanes-Oxley Act of
2002.*
Exhibit 32.1 – Certification pursuant to 18 U.S.C.
Section 1350, as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002, executed by David Norris, Principal
Executive Officer and James A. Barnes, Principal Financial
Officer.*
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Extensible Business Reporting Language (XBRL)
Exhibits*
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101.INS
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XBRL Instance Document*
|
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101.SCH
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XBRL Taxonomy Extension Schema Document*
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101.CAL
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XBRL Taxonomy Extension Calculation Linkbase Document*
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101.DEF
|
XBRL Taxonomy Extension Definition Linkbase Document*
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101.LAB
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XBRL Taxonomy Extension Labels Linkbase Document*
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101.PRE
|
XBRL Taxonomy Extension Presentation Linkbase
Document*
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* Filed concurrently herewith
SIGNATURES
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.
By: /s/ JAMES A
BARNES
James
A Barnes
President and Chief Financial Officer
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Date:
May
8, 2018
-20-