WRAP TECHNOLOGIES, INC. - Quarter Report: 2018 September (Form 10-Q)
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, 2018
Commission
File Number: 000-55838
Wrap Technologies, Inc.
(Exact
name of registrant as specified in its charter)
|
Delaware
|
|
98-0551945
|
|
(State or other
jurisdiction of
incorporation or
organization)
|
|
(I.R.S.
Employer
Identification
Number)
|
4620 Arville
Street, Ste E
Las Vegas, Nevada
89103
(Address of
principal executive offices) (Zip Code)
(800)
583-2652
(Registrant’s
Telephone Number, Including Area Code)
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 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
November 8, 2018 a total of 27,364,607 shares of the
Registrant’s Common Stock, par value $0.0001, were issued and
outstanding.
WRAP TECHNOLOGIES, INC.
INDEX
|
|
|
||
|
|
|
||
|
|
|
||
|
|
|
1
|
|
|
|
|
2
|
|
|
|
|
3
|
|
|
|
|
4
|
|
|
|
12
|
||
|
|
17
|
||
|
|
17
|
||
|
|
|
|
|
|
|
|
||
|
|
|
|
|
|
|
17
|
||
|
|
18
|
||
|
|
24
|
||
|
|
24
|
||
|
|
24
|
||
|
|
24
|
||
|
|
24
|
||
|
|
|
|
|
|
|
|
25
|
|
-i-
|
|
September 30,
|
|
|
|
2018
|
December 31,
|
|
|
(unaudited)
|
2017
|
|
ASSETS
|
|
|
|
Current assets:
|
|
|
|
Cash
|
$1,365,495
|
$3,083,976
|
|
Inventories,
net
|
125,289
|
131,192
|
|
Prepaid
expenses and other current assets
|
18,654
|
11,446
|
|
Total current assets
|
1,509,438
|
3,226,614
|
|
Property and equipment, net
|
36,610
|
36,668
|
|
Intangible assets, net
|
48,226
|
-
|
|
Other assets, net
|
1,512
|
1,512
|
|
Total assets
|
$1,595,786
|
$3,264,794
|
|
|
|
|
|
LIABILITIES AND STOCKHOLDERS' EQUITY
|
|
|
|
Current liabilities:
|
|
|
|
Accounts
payable
|
$76,482
|
$36,165
|
|
Accrued
liabilities
|
64,456
|
60,314
|
|
Deferred
revenue
|
450
|
-
|
|
Note
payable
|
8,076
|
-
|
|
Deferred
and accrued officer compensation
|
96,000
|
96,000
|
|
Total current liabilities
|
245,464
|
192,479
|
|
|
|
|
|
Commitments and contingencies (Note 9)
|
|
|
|
|
|
|
|
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
|
4,460,747
|
4,137,936
|
|
Accumulated
deficit
|
(3,112,705)
|
(1,067,901)
|
|
Total stockholders' equity
|
1,350,322
|
3,072,315
|
|
Total liabilities and stockholders' equity
|
$1,595,786
|
$3,264,794
|
See accompanying notes to condensed interim financial
statements.
Wrap Technologies,
Inc.
Condensed Statements of Operations
(unaudited)
|
|
For the Three Months
|
For the Nine Months
|
||
|
|
Ended September 30,
|
Ended September 30,
|
||
|
|
2018
|
2017
|
2018
|
2017
|
|
Revenues:
|
|
|
|
|
|
Product
sales
|
$1,890
|
$-
|
$1,890
|
$-
|
|
Other
revenue
|
-
|
-
|
-
|
-
|
|
Total
revenues
|
1,890
|
-
|
1,890
|
-
|
|
Cost
of revenues
|
1,607
|
-
|
1,607
|
-
|
|
Gross profit
|
283
|
-
|
283
|
-
|
|
|
|
|
|
|
|
Operating expenses:
|
|
|
|
|
|
Selling,
general and administrative
|
665,910
|
105,210
|
1,586,652
|
270,854
|
|
Research
and development
|
168,432
|
46,334
|
458,046
|
252,675
|
|
Total
operating expenses
|
834,342
|
151,544
|
2,044,698
|
523,529
|
|
Loss
from operations
|
(834,059)
|
(151,544)
|
(2,044,415)
|
(523,529)
|
|
|
|
|
|
|
|
Other income (expense):
|
|
|
|
|
|
Interest
expense
|
(352)
|
-
|
(1,674)
|
-
|
|
Other
|
527
|
-
|
1,285
|
-
|
|
|
175
|
-
|
(389)
|
-
|
|
Net loss
|
$(833,884)
|
$(151,544)
|
$(2,044,804)
|
$(523,529)
|
|
|
|
|
|
|
|
Net
loss per basic common share
|
$(0.04)
|
$(0.01)
|
$(0.09)
|
$(0.03)
|
|
Weighted
average common shares used to compute net loss per basic common
share
|
22,803,533
|
20,402,717
|
22,803,533
|
19,850,234
|
See accompanying notes to condensed interim financial
statements.
Wrap Technologies,
Inc.
Condensed Statements of Cash Flows
(unaudited)
|
|
For the Nine Months
|
|
|
|
Ended September 30,
|
|
|
|
2018
|
2017
|
|
|
|
|
|
Cash Flows From Operating Activities:
|
|
|
|
Net
loss
|
$(2,044,804)
|
$(523,529)
|
|
Adjustments
to reconcile net loss to net cash
|
|
|
|
used
in operating activities:
|
|
|
|
Depreciation
and amortization
|
8,073
|
4,511
|
|
Share-based
compensation
|
322,811
|
-
|
|
Changes
in assets and liabilities:
|
|
|
|
Inventories
|
5,903
|
(96,667)
|
|
Prepaid
expenses and other current assets
|
32,227
|
(16,969)
|
|
Accounts
payable
|
40,317
|
52,870
|
|
Deferred
and accrued officer compensation
|
-
|
26,000
|
|
Accrued
liabilities and other
|
4,592
|
21,015
|
|
Net
cash used in operating activities
|
(1,630,881)
|
(532,769)
|
|
|
|
|
|
Cash Flows From Investing Activities:
|
|
|
|
Capital
expenditures for property and equipment
|
(8,015)
|
(33,595)
|
|
Investment
in patents and trademarks
|
(48,226)
|
-
|
|
Net
cash used in investing activities
|
(56,241)
|
(33,595)
|
|
|
|
|
|
Cash Flows From Financing Activities:
|
|
|
|
Proceeds
from common stock subscribed
|
-
|
60,000
|
|
Sale
of common stock
|
-
|
275,000
|
|
Payment
of notes payable
|
(31,359)
|
-
|
|
Net
cash provided by financing activities
|
(31,359)
|
335,000
|
|
|
|
|
|
Net decrease in cash and cash equivalents
|
(1,718,481)
|
(231,364)
|
|
Cash, beginning of period
|
3,083,976
|
255,072
|
|
Cash, end of period
|
$1,365,495
|
$23,708
|
|
|
|
|
|
Supplemental Disclosure of Non-Cash Investing
|
|
|
|
and Financing Activities:
|
|
|
|
Prepaid
insurance financed with note payable
|
$39,435
|
$-
|
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”) (the
“Merger”). 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 authorizing 5,000,000 shares of preferred stock, par
value $0.0001 per share, was filed with the Delaware Department of
Corporations. All 835.75 membership units of Wrap LLC outstanding
immediately prior to the Merger were exchanged, on a pro rata
basis, for an aggregate of 20,000,000 shares of common stock of the
Company in the Merger.
Prior
to the Merger, on March 22, 2017, Wrap LLC acquired privately held
MegaWest from Petro River Oil Corp. (“Petro River”) through the
issuance of 16.75 membership units, representing a 2% ownership
interest in Wrap LLC. At that time, Petro River was owned 11% by
Scot Cohen, Executive Chairman and a Manager of Petro River, a 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.
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 was accounted for as a reverse
recapitalization of Wrap LLC. Wrap LLC, now the Company, was deemed
the accounting acquirer with MegaWest the accounting acquiree. The
Company’s financial statements are in substance those of Wrap
LLC, and are deemed to be a continuation of Wrap LLC’s
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.
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 and
related notes included herein have been prepared in accordance with
accounting principles generally accepted in the United States of
America (“US GAAP”) for interim financial information
and 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 revenue and
expense during the reporting period. Actual results could
materially differ from those estimates.
-4-
1.
ORGANIZATION
AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(continued)
Liquidity
On
October 30, 2018 the Company obtained gross cash proceeds of $13.68
million and net cash proceeds of approximately $12.14 million from
the sale of 4,561,074 units (“Units”) for $3.00 per Unit. Each
Unit consists of one share of common stock and one detachable
two-year warrant to purchase one share of common stock at an
exercise price of $5.00 per share (the “Offering”). See Note
11.
At
September 30, 2018 the Company had cash of $1.36 million and
working capital of $1.26 million. 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. The Company
experienced net cash used in operating activities of $1.63 million
for the nine months ended September 30, 2018 which raised
substantial doubt about the Company’s ability to continue as
a going concern within one year after the issuance date of this
Form 10-Q. However, as a result of the Offering, as of October 31,
2018 the Company had $13.2 million of cash, which
alleviated
any substantial
doubt about the Company’s ability to continue as a going
concern. These funds will be used to fund the Company’s
operations, including product development, manufacturing,
sales and marketing and expansion of
its patent portfolio, as well as to provide working capital and
funds for other general corporate purposes. These funds are
sufficient to fund the Company’s operations beyond the next
twelve months from the date of filing of this Form
10-Q.
Stock Based Compensation
The
Company follows the fair value recognition provisions issued by the
Financial Accounting Standards Board
(“FASB”) in Accounting Standards Codification
(“ASC”)
Topic 718, Stock Compensation (“ASC 718”) and has adopted
Accounting Standards Update (“ASU”) 2018-07 for stock-based
transactions with non-employees. Stock based compensation expense
recognized during the three and nine months ended September 30,
2018 includes compensation expense for all stock-based payments
based on a grant date fair value using the Black-Scholes valuation
model. The grant date is the date at which an employer and employee
or non-employee reach a mutual understanding of the key terms and
conditions of a stock-based payment award.
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 September 30, 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
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.
-5-
1.
ORGANIZATION
AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(continued)
Recent Accounting Pronouncements
In May
2014, the FASB issued ASU 2014-09, Revenue from Contracts with
Customers (“ASU
2014-09”) and ASC Subtopic 340-40, Other Assets and
Deferred Costs - Contracts with Customers (“ASC 340-40”), (collectively,
“Topic 606”).
On January 1, 2018, the Company adopted Topic 606 and, as it had no
prior revenue or contracts with customers, there was no transition
required nor any impact on prior results. ASU 2014-09 requires
entities to recognize revenue through the application of a
five-step model, which includes identification of the contract,
identification of the performance obligations, determination of the
transaction price, allocation of the transaction price to the
performance obligations and recognition of revenue as the entity
satisfies the performance obligations. See Note 2 for further
discussion.
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, 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 with early
adoption permitted. 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 historical financial statements but is
permitted and intends to adopt retrospectively to January 1, 2018
for any equity securities with down round
features.
In June, 2018 the FASB issued ASU 2018-07
Improvements to Nonemployee Share-Based Payment Accounting to
expand the scope of and update Topic 718 to include share-based
payment transaction for acquiring goods and services from
nonemployees. ASU 2018-07 supersedes Subtopic 505-50,
Equity—Equity-Based Payments to Non-Employees. The amendment
to Topic 718 is effective for fiscal years beginning after December
15, 2018, including interim periods within that fiscal year and
early adoption is permitted, but no earlier than adoption of Topic
606. The Company adopted ASU 2018-07 with respect to option grants
made in May 2018.
In
August 2018, the FASB issued ASU No. 2018-13, Fair Value
Measurement (“Topic 820”): Disclosure Framework -
Changes to the Disclosure Requirements for Fair Value Measurement.
The ASU modifies the disclosure requirements in Topic 820, Fair
Value Measurement, to improve the effectiveness of fair value
measurement disclosures by removing or modifying certain disclosure
requirements and adding other requirements. This ASU is effective
for public companies for annual reporting periods and interim
periods within those annual periods beginning after December 15,
2019. The Company is currently evaluating the effect, if any, that
ASU 2018-13 will have on its financial statements.
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.
-6-
2.
REVENUE
AND PRODUCT COSTS
The
Company had no historical revenue prior to the quarter ended
September 30, 2018 and accordingly all revenue will be reported in
accordance with Topic 606, which the Company adopted on January 1,
2018. There were no adjustments to prior period amounts nor changes
to stockholders’ equity (accumulated deficit) required upon
adoption.
During
the nine months ended September 30, 2018 the Company delivered
demonstration products to customers at no charge, incurring
$146,346 of product and shipping costs expensed as product
promotion costs. The Company enters into contracts that include
various combinations of products, accessories and services, such as
training, each of which are generally disti4nct and are accounted
for as separate performance obligations.
A
performance obligation is a promise in a contract to transfer a
distinct good or service to a customer, and is the unit of account
in Topic 606. For contracts with a
single performance obligation, the entire transaction price is
allocated to the single performance obligation. For
contracts with multiple performance obligations, the Company
allocates the contract transaction price to each performance
obligation using the Company’s estimate of the standalone
selling price (“SSP”) of each distinct good or
service in a contract. The Company
determines standalone selling prices based on the price at which
the performance obligation is sold separately. If the standalone
selling price is not observable through past transactions, the
Company estimates the standalone selling price considering
available information such as market conditions and internally
approved pricing guidelines related to the performance
obligations.
Performance
obligations to deliver products and accessories are generally
satisfied at the point in time the Company ships the product, as
this is when the customer obtains control of the asset under our
standard terms and conditions. The Company has elected to recognize
shipping costs as an expense in cost of revenues when control has
transferred to the customer. The revenues and costs of training are
recognized when the training is completed, generally following
delivery of related products.
At
September 30, 2018 the Company had deferred revenue of $450 related
to training delivered in October for product delivered in September
2018.
Estimated costs for
the Company’s standard one-year warranty are charged to cost
of products sold when revenue is recorded for the related
product.
3.
INVENTORIES,
NET
Inventory is
recorded at the lower of cost or net realizable value. The cost of
substantially all the Company’s inventory is determined by
the weighted average cost method. As of September 30, 2018 and
December 31, 2017, respectively, inventories consisted of the
following:
|
|
September 30,
|
December 31,
|
|
|
2018
|
2017
|
|
Finished
goods
|
$40,363
|
$5,308
|
|
Work
in process
|
2,603
|
5,484
|
|
Raw
materials
|
82,323
|
120,400
|
|
|
$125,289
|
$131,192
|
-7-
4.
PROPERTY
AND EQUIPMENT, NET
As of
September 30, 2018 and December 31, 2017, respectively, property
and equipment consisted of the following:
|
|
September 30,
|
December 31,
|
|
|
2018
|
2017
|
|
Laboratory
equipment
|
$13,980
|
$12,730
|
|
Tooling
|
22,683
|
18,165
|
|
Computer
equipment
|
6,398
|
4,151
|
|
Furniture
and fixtures
|
9,595
|
9,595
|
|
|
52,656
|
44,641
|
|
Accumulated
depreciation
|
(16,046)
|
(7,973)
|
|
|
$36,610
|
$36,668
|
Depreciation
expense was $8,073 and $4,511 for the nine months ended September
30, 2018 and 2017, respectively.
5.
INTANGIBLE
ASSETS, NET
Intangible assets
at September 30, 2018 consisted of patents and trademark costs of
$48,226. Upon the Company’s first patent approval in July
2018 the Company commenced capitalizing patent and trademark costs
which consist of legal and filing fees related to the prosecution
of patent filings. The costs related to issued patents will be
amortized using the straight-line method over the estimated
remaining lives of issued patents which is 20 years from the
initial filing. An impairment charge
is recognized if the carrying amount is not recoverable and the
carrying amount exceeds the fair value of the intangible assets as
determined by projected discounted net future cash flows. There was
no amortization expense for the period ended September 30,
2018.
6.
NOTE
PAYABLE
In
January 2018, the Company financed $39,435 of insurance obligations
pursuant to a short-term note agreement, which note accrues
interest at a rate of 7.15% per annum, and which is payable in ten
monthly principal and interest payments of $4,074 due through
November 2018.
7.
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
September 30, 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.
8.
STOCKHOLDERS’
EQUITY AND STOCK 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, on March 31, 2017, the Company adopted and the shareholders
approved the 2017 Stock Incentive Plan (the “Plan”) authorizing 2,000,000
shares of Company common stock for issuance as stock options and
restricted stock units to employees, directors or consultants.
The Company generally recognizes
stock compensation expense on the grant date and over the period of
vesting or period that services will be
provided.
-8-
8.
STOCKHOLDERS’
EQUITY AND STOCK BASED COMPENSATION (continued)
In May
2018 the Company granted certain stock options under the Plan
exercisable for a total of 1,847,500 shares of common stock at an
exercise price of $1.50 per share. Subsequent to the quarter ended
September 30, 2018, the Company granted consultant options outside
of the Plan exercisable for 100,000 shares of common stock at an
exercise price of $3.00 per share with 50% vesting ratably over 18
months and the balance vesting based on performance.
The
following table summarizes stock option activity under the Plan for
the nine months ended September 30, 2018:
|
|
|
Weighted Average
|
|
|
|
|
Options on
|
|
Remaining
|
Aggregate
|
|
|
Common
|
Exercise
|
Contractual
|
Intrinsic
|
|
|
Shares
|
Price
|
Term
|
Value
|
|
Outstanding
January 1, 2018
|
-
|
-
|
-
|
$-
|
|
Granted
|
1,847,500
|
$1.50
|
5.00
|
-
|
|
Exercised
|
-
|
-
|
-
|
-
|
|
Forfeited,
cancelled, expired
|
-
|
-
|
-
|
-
|
|
Outstanding
September 30, 2018
|
1,847,500
|
$1.50
|
4.65
|
$4,434,000
|
|
Vested
and exercisable at September 30, 2018
|
225,000
|
$1.50
|
4.65
|
$540,000
|
The
Company recorded stock-based compensation in its statements of
operations for the relevant periods as follows:
|
|
For the Three Months
|
For the Nine Months
|
||
|
|
Ended Septemer 30,
|
Ended September 30,
|
||
|
|
2018
|
2017
|
2018
|
2017
|
|
Selling,
general and administrative
|
$125,467
|
$-
|
$251,345
|
$-
|
|
Research
and development
|
24,371
|
-
|
71,466
|
-
|
|
Total
stock-based expense
|
$149,838
|
$-
|
$322,811
|
$-
|
As of
September 30, 2018, total estimated compensation cost of stock
options granted but not yet vested was $696,933, which is expected
to be recognized over the weighted average period of 1.4
years.
The
Company uses the Black-Scholes option pricing model to determine
the fair value of the options granted. The following table
summarizes the assumptions used to compute the fair value of
options granted to employees and nonemployees:
|
|
Nine Months
|
|
|
Ended
|
|
|
September 30,
|
|
|
2018
|
|
Expected
stock price volatility
|
47%
|
|
Risk-free
interest rate
|
2.67%
|
|
Forfeiture
rate
|
0%
|
|
Expected
divident yield
|
0%
|
|
Expected
life of options - years
|
2.75 - 5.00
|
|
Weighted-average
fair value of options granted
|
$0.55
|
-9-
8.
STOCKHOLDERS’
EQUITY AND STOCK BASED COMPENSATION (continued)
Estimated
volatility is a measure of the amount by which the Company’s
stock price is expected to fluctuate each year during the expected
life of awards. The Company’s estimated volatility was based
on an average of the historical volatility of peer entities whose
stock prices were publicly available. The Company’s
calculation of estimated volatility is based on historical stock
prices of these peer entities over a period equal to the expected
life of the awards. The Company uses the historical volatility of
peer entities due to the lack of sufficient historical data of its
stock price, as it only recently commenced trading.
The
risk-free interest rate assumption is based upon observed interest
rates on zero coupon U.S. Treasury bonds whose maturity period is
appropriate for the term of the options. The dividend yield of zero
is based on the fact that the Company has never paid cash dividends
and has no present intention to pay cash dividends. The Company
calculates the expected life of the options using the Simplified
Method for the employee stock options as the Company does not have
sufficient historical data.
9.
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 nine-month period ended September 30, 2018 was
$13,590. The remaining future annual minimum lease obligations
under the foregoing facility lease are $3,175 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 revenue from
products employing the licensed ensnarement device technology up to
an aggregate of $1,000,000 in royalties or until September 30,
2026, whichever occurs earlier.
10.
RELATED
PARTY TRANSACTIONS
Commencing in
October 2017 the Company began reimbursing Mr. Elwood Norris, an
officer and stockholder of the Company, $1,500 per month on a month
to month basis for laboratory facility costs, for an aggregate of
$13,500 during the nine months ended September 30,
2018.
See
Notes 1, 7, and 9 for information on related party transactions and
information.
11.
SUBSEQUENT
EVENT
On
October 30, 2018 the Company consummated the Offering, resulting in
the receipt of gross cash proceeds of $13,683,222 and net cash
proceeds of approximately $12,140,000 after deduction of
commissions and offering costs, from the sale of 4,561,074 Units
for $3.00 per Unit. Each Unit consists of one share of common stock
and one detachable two-year warrant to purchase one share of common
stock at an exercise price of $5.00 per share. The Company issued
4,561,074 shares of common stock and 4,561,074 detachable warrants.
The Company also issued placement agent warrants exercisable for
456,107 shares of common stock for two years at an exercise price
of $3.00 per share.
-10-
11.
SUBSEQUENT
EVENT (continued)
The
following table represents the unaudited pro forma Balance Sheet
data as of September 30, 2018 and has been prepared to reflect the
consummation of the Offering as of September 30, 2018:
|
|
As
of September 30, 2018
|
|
|
|
Actual
|
Pro
Forma
|
|
|
|
|
|
Cash
|
$1,365,495
|
$13,505,495
|
|
Total
assets
|
$1,595,786
|
$13,735,786
|
|
Total
stockholders' equity:
|
$1,350,322
|
$13,490,322
|
See
note 8 for additional subsequent event
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 modern policing solutions to customers, primarily
consisting of law enforcement and security personnel. We began
demonstrations of our first product, the BolaWrap 100 remote
restraint device, in November 2017. The immediate addressable
domestic market consists of approximately 701,000 full-time sworn
law enforcement officers in the U.S. We do not expect to report
significant revenue until prospective customers test and evaluate
our product. We have made improvements to our product as a result
of law agency input and we expect to commence taking orders for an
enhanced version of the BolaWrap 100 with a new green line-laser
accessory late in the fourth quarter of 2018. There can be no
assurance regarding the timing or amount of future revenue from
this product or future products, 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’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 Wrap LLC’s 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.
On May
18, 2018, the Financial Industry
Regulatory Authority (“FINRA”) issued a quotation clearance to our
sponsoring market maker and assigned the ticker symbol
“WRTC” to our common stock. Quotations for our common
stock now appear under the WRTC ticker symbol on the OTCQB Venture
Market for early stage and developing U.S. and international
companies. Our common stock is also Depository Trust Company
(“DTC”) eligible allowing for electronic clearing
of trades.
During
2018, the U.S. Patent and Trademark Office granted the first four
U.S. patents on our BolaWrap remote restraint device and
technology. In September 2018 we commenced filing our first foreign
patent applications targeting the European Union (17 countries) and
17 other countries. We currently have eight U.S. patents pending.
We have additional patents being drafted as part of our strategy to
protect our innovations in the U.S. and in targeted countries
internationally.
Our strategy is to focus on the immediate addressable
domestic market of approximately 701,000 full-time sworn officers
in 15,300 federal, state and
local law enforcement agencies while also beginning to explore other markets
including military, border patrol and international markets.
According to Stratistics MRC, we participate in a segment of
the non-lethal products market expected to grow to $11.85 billion
by 2023. We are unable to predict the
market acceptance of our new product or the level of future sales,
if any. We have demonstrated the product to over 60 agencies across
the country often with media in attendance resulting in dozens of
media reports including television and print that have driven
hundreds of inquiries from domestic and international prospects.
Over 30 law enforcement agencies took delivery of BolaWrap 100
devices during 2018. We have delivered over 200 devices at no cost
to these agencies for evaluation and feedback as a result of these
initial inquiries. We are making product updates as a result of
initial feedback and in October 2018 announced a patent pending
green line laser accessory expected to be available late in the
fourth calendar quarter of 2018. We believe the enhanced version of
our product with the laser accessory will meet customer
requirements and we expect to pursue orders late in the
fourth quarter of 2018 for delivery in early 2019. We believe we
can accelerate orders in 2019. However there can be no assurance of
the timing or quantity of orders or sales in future
periods.
In October 2018 we completed a private placement of equity
securities resulting in net cash proceeds of approximately
$12,140,000. We expect to grow business functions, including
production, marketing, sales, distribution, service and
administration. Until we generate revenue and net cash flow from
operations 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, substantial risk and uncertainty exists whether we can
timely execute our business plan and achieve our operating
objectives, including obtaining orders from customers and
introducing new products in the future.
In October 2018 we also made application to up-list the trading of
our common stock to the Nasdaq Capital Market. There is no
assurance of the success or timing of the proposed up-listing to
the Nasdaq exchange.
Since inception in March 2016, we have generated significant losses
from operations and anticipate that we will continue to generate
significant losses from operations for the foreseeable
future. Although we believe that we have adequate financial
resources to sustain our operations for the next year, no
assurances can be given, and we may
need additional capital for future operations and to market and
further develop our product line and introduce new products.
Obtaining any required additional financing in the future could be
a significant challenge for management, and failure to secure
necessary financing would have a material adverse effect on our
operations.
We face significant challenges in establishing, operating and
growing our 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 expense, and
related disclosure of contingent assets and liabilities. We
evaluate our estimates, on an on-going basis, including those
estimates related to recognition and measurement of contingencies
and accrued costs. We base our estimates on historical experience
and on various other assumptions we believe to be reasonable under
the circumstances. Actual results may differ from these estimates
under different assumptions or conditions.
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.
Some of
our accounting policies require higher degrees of judgment than
others in their application. These include share-based compensation
and contingencies and, going forward, areas such as revenue
recognition, warranty liabilities, impairments and valuation of
intangible assets. Historically, our assumptions, judgments and
estimates relative to our critical accounting policies have not
differed materially from actual results. There were no significant
changes or modification of our critical accounting policies and
estimates involving management valuation adjustments affecting our
results for the nine months ended September 30, 2018.
Operating Expense
Our
operating expense has 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 September 30, 2018 Compared to Three Months
Ended September 30, 2017
We had
minimal revenues from the delivery to one customer during the three
months ended September 30, 2018. While prospective customers have
been testing our product we have not actively pursued orders at
this time as our objective is to focus our marketing and selling
efforts on the latest generation product with our green line laser.
Product costs of $82,259 for the three months ended September 30,
2018 related to demonstration products and accessories delivered to
law enforcement agencies were expensed as marketing
costs.
Selling, General and Administrative Expense. Selling,
general and administrative expense for the three-month period ended
September 30, 2018 was $665,910 compared to $105,210 for the
three-month period ended September 30, 2017. The most recent period
included non-cash stock-based compensation expense of $125,467 and
compensation and sales consulting costs of $242,981. There were no
non-cash stock-based compensation costs for the comparable period
in 2017, and compensation and sales consulting costs for the 2017
period were $48,597. The increase in compensation and sales
consulting costs is attributable to the increase in staffing from
hiring of executives, sales employees and consultants as we
commenced the introduction of our first product to market and made
product demonstrations to law enforcement agencies across the
United States.
Travel
and entertainment costs increased from $12,222 to $85,944 for the
three months ended September 30, 2017 to September 30, 2018,
respectively, primarily as a result of product demonstration
activities provided to law enforcement agencies across the nation
during the 2018 period. Product promotion, trade show and other
marketing costs were $110,670 for the three months ended September
30, 2018 compared to $13,425 for the three months ended September
30, 2017. The period over period increase is attributable to the
commencement of direct sales activities with agencies and
demonstration products provided at no cost during the 2018
period.
Other
general and administrative costs of $100,848 during the three
months ended September 30, 2018 included legal, audit and
professional fees of $29,051, chairman and director fees of
$40,500, public company costs of $16,714 and occupancy and office
costs of $14,577. In the prior comparable three-month period, our
activities were just beginning as we focused on research and
development, with other general and administrative costs
aggregating $30,966.
Research and Development Expense. Research and development
expense for the three months ended September 30, 2018 was $168,432,
which included $24,371 of non-cash stock-based compensation
expense, $90,136 of compensation and consulting costs, contract
research costs of $15,362 and prototype costs of $25,817. This was
an increase from $46,344 of research and development expense for
the comparable three-month prior period ended September 30, 2017,
which included $24,791 of compensation and consulting costs and
patent costs of $14,645. During the 2018 period we increased
staffing for internal research and contract labor focused primarily
on the Company’s new patent-pending green line laser
accessory. 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
September 30, 2018 was $833,884 compared to a net loss of $151,544
for the three-month period ended September 30, 2017, with the
increase in net loss resulting from costs associated with increased
staffing and activity after our December 2017 IPO, as well as the
commencement of sales and marketing activities related to the
BolaWrap 100 product.
Nine Months Ended September 30, 2018 Compared to Nine Months Ended
September 30, 2017
We had
minimal revenues from the delivery to one customer for the nine
months ended September 30, 2018. We have not actively pursued
orders at this time as our objective is to focus our marketing and
selling efforts on selling the latest generation product with our
green line laser. Product costs of $138,801 for the nine months
ended September 30, 2018 related to demonstration products and
accessories delivered to law enforcement agencies, and were
expensed as marketing costs.
Selling, General and Administrative Expense. Selling,
general and administrative expense for the nine-month period ended
September 30, 2018 was $1,586,652 compared to $270,854 for the
nine-month period ended September 30, 2017. The most recent period
included non-cash stock-based compensation expense of $251,345 and
compensation and sales consulting costs of $645,579. There were no
non-cash stock-based compensation costs for the prior year’s
first nine months, and compensation and sales consulting costs were
$107,139. The increase in compensation and sales consulting costs
was due to the increase in staffing following the December 2017 IPO
funding and the hiring of employees and sales
consultants.
Travel
and entertainment costs increased from $22,800 to $152,620 for the
nine months ended September 30, 2017 and 2018, respectively. The
period over period increase is attributable to product
demonstration activities provided to law enforcement agencies
across the nation during the 2018 period. Product promotion, trade
show and other marketing costs were $189,144 for the nine months
ended September 30, 2018 compared to $30,442 for the nine months
ended September 30, 2017, which increase is attributable to the
commencement of direct activities with agencies and demonstration
products provided at no cost during the 2018 period.
Other
general and administrative costs of $347,964 during the nine months
ended September 30, 2018 included legal, audit and professional
fees of $117,095, chairman and director fees of $118,000, public
company costs of $70,016 and occupancy and office costs of $42,853.
In the prior comparable nine-month period, our activities were just
beginning as we focused on research and development, with other
general and administrative costs aggregating $110,473, including
$67,732 of professional fees primarily associated with audit and
Merger costs.
Research and Development Expense. Research and development
expense for the nine months ended September 30, 2018 was $458,046,
which included $71,466 of non-cash stock-based compensation
expense, $234,116 of compensation and consulting costs, contract
research costs of $37,362, prototype costs of $53,219, patent costs
of $24,831, travel and entertainment of $20,851 and occupancy costs
of $12,755. This was an increase from $252,675 for the comparable
nine-month prior period ended September 30, 2017, which included
$68,955 of compensation and consulting costs, contract research
costs of $125,144, prototype costs of $11,060, patent costs of
$38,926 and travel and entertainment of $5,155. During the 2018
period, we increased staffing for internal research and conducted
less contract research. 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 nine-month period ended
September 30, 2018 was $2,044,804 compared to a net loss of
$523,529 for the prior period ended September 30, 2017, with the
increase in net loss resulting from costs associated with increased
staffing and activity 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 share of our 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, par value $0.0001 per share,
at the public offering price of $1.50 per share. We had $1,365,495
cash on hand at September 30, 2018.
In
January 2018, the Company financed $39,435 of insurance obligations
pursuant to a short-term note agreement, which accrues interest at
a rate of 7.15%, and which is payable in ten monthly principal and
interest payments of $4,074 due through November 2018.
Subsequent to the quarter ended September 30, 2018, in October 2018
we received approximately $12,140,000 in net cash proceeds from the
private sale of equity securities to certain accredited
investors.
We cannot currently estimate our future liquidity requirements or
future capital needs, which will depend on, amongst other things,
on capital required to introduce our new product and the staffing
and support requirements, as well as the timing and amount of
future revenue and product costs. We anticipate that demands for
operating and working capital could grow based on decisions
regarding staffing, development, production, marketing and other
functions and based on other factors outside of our control. We
believe we have sufficient capital to sustain our operations for
the next twelve months, although no assurances can be given.
Additionally, no assurances can be provided that any future debt or
equity capital will be available to us under favorable terms, if at
all. Failure to quickly produce and sell 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,
some of which 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 Arrangements
We have no off-balance sheet arrangements.
Cash Flow
Operating Activities. During
the nine months ended September 30, 2018, net cash used in
operating activities was $1,630,881. The net loss of $2,044,804 was decreased by
non-cash expense of $322,811 for stock-based compensation and
$8,073 for depreciation. Other major component changes reducing
operating cash used included $5,903 reduction in inventories, a
reduction of $32,227 in prepaid expense and other current assets
and an increase of $44,909 in accounts payable and accrued
liabilities.
During the prior period ended September 30, 2017, net cash used in
operating activities was $532,769.
Investing Activities. We used
$8,015 and $33,595 of cash for the purchase of property and
equipment during the nine months ended September 30, 2018 and 2017,
respectively. As patents have now been granted we began
capitalizing patent costs and invested $48,226 in patents for the
nine months ended September 30, 2018.
Financing Activities. We did
not obtain any cash from financing activities in the nine-month
period ended September 30, 2018. We obtained $335,000 of cash from
our shareholders from the subscription and sale of common stock
during the nine-month period ended September 30, 2017. Subsequent
to the quarter ended September 30, 2018, in October 2018, we
received approximately $12,140,000 in net proceeds from an equity
financing.
Contractual Obligations
We are obligated to pay to Syzygy Licensing, LLC
(“Syzygy”) a 4% royalty fee on future product sales
up to an aggregate amount of $1.0 million in royalties or
until September 30, 2026, whichever occurs earlier.
Other than payments under our facility lease, amounting to
approximately $18,600 per year, and our short-term note payable, we
currently have no other contractual obligations.
Effects of Inflation
We do
not believe that inflation has had a material impact on our
business, revenue or operating results during the periods
presented.
Recent Accounting Pronouncements
Other
than our adoption of ASC 2018-07 for
stock-based transactions with non-employees which eliminates the
requirement to revalue non-employee options each period,
there have been no recent accounting pronouncements or
changes in accounting pronouncements during the period ended
September 30, 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 September 30, 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, as amended. 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 September 30, 2018 we had limited administrative 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 September 30, 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 September 30, 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.
PART II. OTHER
INFORMATION
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
commence delivering our new product line and until we achieve
revenue 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 nine months ended September 30,
2018 was $2,044,804. Our ability to achieve future profitability is
dependent on a variety of factors, many of which are outside of our
control. Failure to achieve profitability or sustain profitability,
if achieved, may require us to 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.
Although
we believe we have adequate financial resources to fund our
operating expense for at least the next twelve months, and that we
may be able to generate funds from product sales during that time,
existing working capital may not be sufficient to achieve
profitable operations due to product introduction costs, operating
losses and other factors. Principal factors affecting the
availability of internally generated funds include:
●
failure
of product sales to meet planned projections;
●
working
capital requirements to support business growth;
●
our
ability to control spending; and
●
acceptance
of our product in planned markets.
In the
event we are required to raise additional capital through the
issuance of equity or convertible debt securities, the percentage
ownership of our shareholders could be diluted significantly, and
such 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, if at all.
We are a development stage technology company with no current
revenue 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 have generated minimal revenue, and we have not yet 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 been introduced for testing into the
marketplace and remains under development as we make improvements
based on ongoing customer trials. Although we are producing small
numbers of commercial products, no assurance can be provided that
we can successfully scale to 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 revenue will be adversely affected and we may not
be able to expand into other markets, or otherwise continue as a
going concern.
A
substantial number of law enforcement agencies may not purchase our
remote restraint product. In addition, if our product is not widely
accepted by the law enforcement market, we may not be able to
expand sales of our product into other markets. Law enforcement
agencies may be influenced by claims or perceptions that our
product is not effective or may be used in an abusive manner. Sales
of our product to these agencies may be delayed or limited by such
claims or perceptions.
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, marketing and training programs and our
manufacturing capability. Rapid expansion may strain our
managerial, financial and other resources. If we are unable to
manage our growth, our business, operating results and financial
condition could be adversely affected. Our systems, procedures,
controls and management resources also may not be adequate to
support our future operations. We will need to continually improve
our operational, financial and other internal systems to manage our
growth effectively, and any failure to do so may lead to
inefficiencies and redundancies, and result in reduced growth
prospects and profitability.
We may face personal injury and other liability claims that harm
our reputation and adversely affect our sales and financial
condition.
Our
product is intended to be used in confrontations that could result
in injury to those involved, whether or not involving our product.
Our product may cause or be associated with such injuries. A person
injured in a confrontation or otherwise in connection with the use
of our product may bring legal action against us to recover damages
on the basis of theories including personal injury, wrongful death,
negligent design, dangerous product or inadequate warning. We may
also be subject to lawsuits involving allegations of misuse of our
product. If successful, personal injury, misuse and other claims
could have a material adverse effect on our operating results and
financial condition. Although we carry product liability insurance,
significant litigation could also result in a diversion of
management’s attention and resources, negative publicity and
an award of monetary damages in excess of our insurance
coverage.
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 revenue, cash
flow and operating results.
We expect to expend significant resources to generate sales due to
our lengthy sales cycle, and such efforts may not result in sales
or revenue.
Generally,
law enforcement agencies consider a wide range of issues before
committing to purchase a product, including product benefits,
training costs, the cost to use our product in addition to, or in
place of, other use of force products, product reliability and
budget constraints. The length of our sales cycle may range from
30 days to a year or more. We may incur substantial selling
costs and expend significant effort in connection with the
evaluation of our product by potential customers before they place
an order. If 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 limited issued
patents or other intellectual property protection. If we are unable
to protect our intellectual property, we may lose a competitive
advantage or incur substantial litigation costs to protect our
rights.
Our
future success depends in part upon our proprietary technology. We
currently own four issued patents related to the BolaWrap 100 and
have eight patents pending. Our protective measures taken thus far,
including our issued patents, 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 expense 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 that our BolaWrap 100 product will be the sole
source of all of any future revenue in the foreseeable future.
Revenue, if any, is 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 products;
●
budgetary
cycles and order delays by customers or production delays by us or
our suppliers;
●
regulatory
changes affecting the marketability of our products;
●
general
economic conditions that could affect the timing of customer orders
and capital spending and result in order cancellations or
rescheduling; and
●
general
political conditions in this country and in various other parts of
the world that could affect spending for the products that we
intend to offer.
Some or
all of these factors could adversely affect demand for our products
and, therefore, adversely affect our future operating results. As a
result of these and other factors, we believe that period-to-period
comparisons of our operating results may not be meaningful in the
near term, and accordingly you should not rely upon our performance
in a particular period as indicative of our performance in any
future period.
Our expense may vary from period to period, which could affect
quarterly results and our stock price.
If we
incur additional expense in a quarter in which we do not experience
increased revenue, our results of operations will be adversely
affected and we may incur larger losses than anticipated for that
quarter. Factors that could cause our expense to fluctuate from
period to period include:
●
the
timing and extent of our research and development
efforts;
●
investments
and costs of maintaining or protecting our intellectual
property;
●
the
extent of marketing and sales efforts to promote our products and
technologies; and
●
the
timing of personnel and consultant hiring.
Our dependence on third-party suppliers for key components of our
product could delay shipment of our products and reduce our
sales.
We
depend on certain domestic and foreign suppliers for the delivery
of components used in the assembly of our product. Our reliance on
third-party suppliers creates risks related to our potential
inability to obtain an adequate supply of components or
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 revenue,
profitability and financial condition.
Foreign currency fluctuations may reduce our competitiveness and
sales in foreign markets.
The
relative change in currency values creates fluctuations in product
pricing for future potential international customers. These changes
in foreign end-user costs may result in lost orders and reduce the
competitiveness of our products in certain foreign markets. These
changes may also negatively affect the financial condition of some
foreign customers and reduce or eliminate their future orders of
our products.
Loss of key management and other personnel could impact our
business.
Our
business is substantially dependent on our officers and other key
personnel. The loss of an officer or any key personnel could
materially adversely affect our business, financial condition,
results of operations and cash flows. In addition, competition for
skilled and non-skilled employees among companies like ours is
intense, and the future loss of skilled or non-skilled employees or
an inability to attract, retain and motivate additional skilled and
non-skilled employees required for the operation and expansion of
our business could hinder our ability to conduct research
activities successfully, develop new products, attract customers
and meet customer shipments.
Inadequate internal controls and accounting practices could lead to
errors, which could negatively impact our business, financial
condition, results of operations and cash flows.
We will
need to 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 a limited public market for our common stock,
and there can be no assurances that any established public market
will ever develop. Our common stock has been, and is expected to
be, subject to significant price fluctuations.
Our
common stock was quoted on the OTCQB Venture Market commencing in
late May 2018 and there is a limited public market for our
securities. There can be no assurances that an established public
market for our common stock will develop 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. Since initial
quotation, shares of our common stock have traded sporadically and
are expected to continue to be subject to significant price
fluctuations. 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 the above factors could adversely affect the liquidity and
trading price of our common stock. Until an orderly market develops
in our common stock, if ever, the price at which it trades is
likely to fluctuate significantly. Prices for our common stock will
be determined in the marketplace and may be influenced by many
factors, including the depth and liquidity of the market for shares
of our common stock, developments affecting our business, including
the impact of the factors referred to elsewhere in these Risk
Factors, investor perception of BolaWrap 100 and
general economic and market conditions. No assurances can be
given that an orderly or liquid market will ever develop for the
shares of our common stock.
Our common stock is subject to
“penny stock” rules.
Our
common stock is currently 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, are eligible for immediate
resale in the public market. Substantial selling of our common
stock could adversely affect the market price of our common
stock.
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
owned approximately 74% of our common stock at September 30, 2018.
As a result, our management, acting individually or as a group, has
the potential ability to exert influence on the outcome of issues
requiring approval by 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 shares of common stock in the future. The
issuance of additional shares of common stock may reduce the value
of your common stock.
We may
issue additional shares of common stock without further action by
our 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 upon 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. In May 2018, we granted options to purchase 1,847,500
shares of our common stock. In October 2018, we issued warrants to
purchase 456,107 shares of our common stock to certain accredited
investors in a private placement transaction. The issuance of
shares of common stock issuable upon the exercise of options or
warrants 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.
We have
never declared dividends on our common stock, and currently do not
anticipate that we will do so in the foreseeable future. The
declaration and amount of future dividends, if any, will be
determined by our Board of Directors and will depend on our
financial condition, earnings, capital requirements, financial
covenants, regulatory constraints, industry practice and other
factors our Board of Directors deems relevant.
Item 2. Unregistered Sales
of Equity Securities and Use of Proceeds
No
unregistered securities were issued during the three months ended
September 30, 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
|
Form
of Investor Warrant, dated October 30, 2018. Incorporated by
reference to Exhibit 4.1 to the Current Report on Form 8-K, filed
on November 5, 2018.
|
|
|
Form
of Placement Agent Warrant, dated October 30, 2018. Incorporated by
reference to Exhibit 4.2 to the Current Report on Form 8-K, filed
on November 5, 2018.
|
|
|
Form
of Placement Agent Agreement, dated October 30, 2018. Incorporated
by reference to Exhibit 10.1 to the Current Report on Form 8-K,
filed on November 5, 2018.
|
|
|
Form
of Registration Rights Agreement, dated October 30, 2018.
Incorporated by reference to Exhibit 10.2 to the Current Report on
Form 8-K, filed on November 5, 2018.
|
|
|
Code of Business Conduct and Ethics. *
|
|
|
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.*
|
|
|
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.*
|
|
|
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.*
|
|
|
Extensible
Business Reporting Language (XBRL) Exhibits*
|
|
101.INS
|
XBRL
Instance Document*
|
|
101.SCH
|
XBRL
Taxonomy Extension Schema Document*
|
|
101.CAL
|
XBRL
Taxonomy Extension Calculation Linkbase Document*
|
|
101.DEF
|
XBRL
Taxonomy Extension Definition Linkbase Document*
|
|
101.LAB
|
XBRL
Taxonomy Extension Labels Linkbase Document*
|
|
101.PRE
|
XBRL
Taxonomy Extension Presentation Linkbase Document*
|
* Filed
concurrently herewith
SIGNATURES
Pursuant
to the requirements of the Securities Exchange Act of 1934, as
amended, the registrant has duly caused this report to be signed on
its behalf by the undersigned thereunto duly
authorized.
|
|
WRAP TECHNOLOGIES,
INC.
By:
/s/ JAMES A
BARNES
James A
Barnes
Chief Financial
Officer, Secretary and Treasurer
(Principal
Accounting Officer)
|
Date:
November 9,
2018
-25-