PROSPECTUS SUPPLEMENT NO. 1
(TO PROSPECTUS DATED DECEMBER 11, 2018)
Filed pursuant to Rule 424(b)(3)
Registration No. 333-228579
Wrap Technologies, Inc.
9,578,255 SHARES
COMMON STOCK
This prospectus supplement supplements and amends
the prospectus dated December 11, 2018 related to the sale from
time to time of up to 9,578,255 shares of common stock,
par value $0.0001 per share, of Wrap Technologies, Inc. (the
“Company,” “we,” “us” or “our”) by the selling stockholders identified in
such prospectus.
This
prospectus supplement should be read in conjunction with the
prospectus dated December 11, 2018 which is to be delivered with
this prospectus supplement. This prospectus supplement is qualified
by reference to the prospectus except to the extent that the
information in this prospectus supplement supersedes the
information contained in the prospectus. This prospectus supplement
is not complete without, and may not be delivered or utilized
except in connection with, the prospectus, including any amendments
or supplements to it.
Our
common stock is quoted on the Nasdaq Capital Market under the
symbol “WRTC.” The last reported sale price of our
commons stock on March 8, 2019 was $5.95 per share.
This
prospectus supplement incorporates into our prospectus the
information contained in our Annual Report on Form 10-K for the
year ended December 31, 2018 filed with the Securities and Exchange
Commission on March 7, 2019, which is attached
hereto.
Investing in our common stock involves risks. See “Risk
Factors” beginning on page 4 of the prospectus.
Neither the Securities and Exchange Commission nor any state
securities commission has approved or disapproved of these
securities or determined if this prospectus supplement or the
prospectus to which it relates are truthful or complete. Any
representation to the contrary is a criminal offense.
The date of this prospectus supplement is March 11, 2019.
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2018
Commission File Number: 000-55838
Wrap
Technologies, Inc.
(Exact name of registrant as specified in its charter)
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Delaware
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98-0551945
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(State or other jurisdiction of incorporation or
organization)
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(I.R.S. Employer Identification Number)
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4620 Arville Street, Ste E
Las Vegas, Nevada 89103
(Address of principal executive offices) (Zip
Code)
(800) 583-2652
(Registrant’s Telephone Number, Including Area
Code)
Securities registered pursuant to Section 12(b) of the Act:
None
Securities registered pursuant to Section 12(g) of the
Act:
Common Stock, par value $.0001
(Title of class)
Indicate by check mark if the registrant is a well-known seasoned
issuer, as defined in Rule 405 of the Securities Act. Yes
[ ] No [X]
Indicate by check mark if the registrant is not required to file
reports pursuant to Section 13 or Section 15(d) of the Exchange
Act. Yes [ ] No [X]
Indicate by check mark whether the registrant (1) has filed all
reports required to be filed by Section 13 or 15(d) of the
Securities Exchange Act of 1934 during the preceding 12 months (or
for such shorter period that the registrant was required to file
such reports), and (2) has been subject to such filing requirements
for the past 90 days. Yes [X] No [ ]
Indicate by check mark whether the registrant has submitted
electronically every Interactive Data File required to be submitted
pursuant to Rule 405 of Regulation S-T (§232.405 of this
chapter) during the preceding 12 months (or for such shorter period
that the registrant was required to submit such
files).
[X]
Yes [ ] No
Indicate by check mark if disclosure of delinquent filers pursuant
to Item 405 of Regulation S-K is not contained herein, and will not
be contained, to the best of registrant’s knowledge, in
definitive proxy or information statements incorporated by
reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ ]
Indicate by check mark whether the registrant is a large
accelerated filer, an accelerated filer, a non-accelerated filer,
smaller reporting company, or an emerging growth company. See the
definitions of “accelerated filer,” “large
accelerated filer,” “smaller reporting company,”
and “emerging growth company” in Rule 12b-2 of the
Exchange Act.
|
Large Accelerated Filer [ ]
|
Accelerated filer [ ]
|
|
Non-accelerated filer [X]
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Smaller reporting company [X]
Emerging growth company [X]
|
If an emerging growth company, indicate by check mark if the
registrant has elected not to use the extended transition
period for complying with any new or
revised financial accounting standards provided pursuant to Section
13(a) of the Exchange Act. [
]
Indicate by check mark whether the registrant is a shell company
(as defined in Rule 12b-2 of the Act). Yes [ ] No
[X]
The aggregate market value of the registrant’s common stock
held by non-affiliates of the registrant on June 29, 2018 (the last
business day of the registrant’s most recently completed
second fiscal quarter) was $22,087,352 based on the closing
price as reported on the OTCQB
operated by the OTC Markets. Shares of the
registrant’s common stock held by each officer and director
and each person known to the registrant to own 10% or more of the
outstanding voting power of the registrant have been excluded in
that such persons may be deemed to be affiliates. This
determination of affiliate status is not a determination for other
purposes.
Indicate
the number of shares outstanding of each of the registrant’s
classes of common stock, as of the latest practicable
date: 27,364,607
shares
of common stock, par value $0.0001 per share, as of
March
6, 2019.
Documents Incorporated by
Reference
The registrant incorporates information required by Part III (Items
10, 11, 12, 13, and 14) of this report by reference to portions of
the registrant’s definitive proxy statement with respect to
its 2019 Annual Meeting of Shareholders to be filed with the
Securities and Exchange Commission within 120 days after the close
of the fiscal year ended December 31, 2018, pursuant to Regulation
14A.
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F-1
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FORWARD-LOOKING STATEMENTS
IN ADDITION TO HISTORICAL INFORMATION, THIS ANNUAL REPORT ON FORM
10-K (THE “ANNUAL
REPORT”) CONTAINS
FORWARD-LOOKING STATEMENTS WITHIN THE MEANING OF THE PRIVATE
SECURITIES LITIGATION REFORM ACT OF 1995 AND THE COMPANY DESIRES TO
TAKE ADVANTAGE OF THE “SAFE HARBOR” PROVISIONS THEREOF.
THEREFORE, THE COMPANY IS INCLUDING THIS STATEMENT FOR THE EXPRESS
PURPOSE OF AVAILING ITSELF OF THE PROTECTIONS OF SUCH SAFE HARBOR
WITH RESPECT TO ALL OF SUCH FORWARD-LOOKING STATEMENTS. THE
FORWARD-LOOKING STATEMENTS IN THIS REPORT REFLECT THE
COMPANY’S CURRENT VIEWS WITH RESPECT TO FUTURE EVENTS AND
FINANCIAL PERFORMANCE. THESE FORWARD-LOOKING STATEMENTS ARE SUBJECT
TO CERTAIN RISKS AND UNCERTAINTIES, INCLUDING THOSE DISCUSSED
HEREIN, THAT COULD CAUSE ACTUAL RESULTS TO DIFFER MATERIALLY FROM
HISTORICAL RESULTS OR THOSE ANTICIPATED. IN THIS REPORT, THE WORDS
“ANTICIPATES,” “BELIEVES,”
“EXPECTS,” “INTENDS,” “FUTURE”
AND SIMILAR EXPRESSIONS IDENTIFY FORWARD-LOOKING STATEMENTS.
READERS ARE CAUTIONED TO CONSIDER THE SPECIFIC RISK FACTORS
DESCRIBED BELOW AND NOT TO PLACE UNDUE RELIANCE ON THE
FORWARD-LOOKING STATEMENTS CONTAINED HEREIN, WHICH SPEAK ONLY AS OF
THE DATE HEREOF. THE COMPANY UNDERTAKES NO OBLIGATION TO PUBLICLY
REVISE THESE FORWARD-LOOKING STATEMENTS TO REFLECT EVENTS OR
CIRCUMSTANCES THAT MAY ARISE AFTER THE DATE
HEREOF.
TRADEMARKS, TRADE NAMES AND SERVICE MARKS
BolaWrap and our other common law trademarks, service marks or
trade names appearing in this Annual Report are the property of
Wrap Technologies, Inc. Other trademarks, service marks or trade
names appearing in this Annual Report are the property of their
owners. We do not intend our use or display of other
companies’ trade names or trademarks to imply a relationship
with, or endorsement or sponsorship of us by, any other companies.
We have omitted the ® and ™ designations, as applicable, for the
trademarks used in this Annual Report.
ITEM 1. BUSINESS
Overview
We are a security technology company organized in March 2016
focused on delivering modern policing solutions to customers,
primarily consisting of law enforcement and security personnel. We
began demonstrations of our first product, the BolaWrap 100 remote
restraint device, in November 2017. The immediate addressable
domestic market consists of approximately 701,000 full-time sworn
law enforcement officers in the U.S. 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 40 law enforcement
agencies took delivery of the 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 and
have just started filling small orders as we establish production.
We have made improvements to our product as a result of law agency
input and we are now taking orders for an enhanced version of the
BolaWrap 100 with a new green line laser accessory scheduled to
commence deliveries in the second quarter of 2019. There can be no
assurance regarding the timing or amount of future revenue from
this product or future products, if any.
The BolaWrap 100 is a hand-held remote restraint device that
discharges an eight-foot bola style Kevlar tether to entangle an
individual at a range of 10-25 feet. Inspired by law enforcement
professionals, the small but powerful the BolaWrap 100 assists law
enforcement to safely and effectively control encounters.
Currently, law enforcement agencies authorize a continuum of force
options:
●
physical
control – soft techniques of grabs and holds progressing to
hard techniques such as punches and kicks;
●
less-lethal weapons – batons, pepper spray,
impact munitions and conducted electrical weapons
(“CEWs”); and
●
lethal
force – deadly weapons such as firearms.
The BolaWrap 100 offers law enforcement a new tool to remotely and
temporarily control an individual or impede flight or movement by
targeting and wrapping an individual’s legs or
arms.
The small, light, but rugged BolaWrap 100 is designed for weak hand
operation to provide remote restraint while other use of force
continuum options remain open. The design offers wide latitude of
accuracy to engage and restrain targeted legs or arms of a subject.
Quick eject and rapid reload of bola cartridges allows one device
to be reused in a single encounter or in multiple
encounters.
There are limited effective options for remote engagement, so when
verbal commands go unheeded, law enforcement is faced with either
hands on engagement or other potentially injurious less-lethal or
lethal force. We believe our new tool is essential to meet modern
policing requirements with individuals frequently not responding to
verbal commands and to assuage public demands for less-lethal
policing, especially in encounters with subjects experiencing a
mental crisis. We believe our device minimizes the need to employ
other uses of force including combat and less-lethal weapons. Many
less-lethal weapons rely on “pain compliance,” often
escalating encounters with potential for injury.
Primary use cases fall into the three broad categories routinely
encountered by law enforcement and security personnel:
●
remotely
restrain and limit the mobility of an individual that may be
experiencing a mental crisis and incapable of responding to law
enforcement’s verbal commands but that presents a danger to
law enforcement, the public or themselves if not
restrained;
●
remotely
restrain and limit the mobility of an individual attempting to
evade arrest or questioning, as well as individuals increasingly
ignoring verbal commands from law enforcement; and
●
assist
in subduing individuals actively resisting arrest by limiting
mobility, possibly making other engagement options less risky to
officers and less injurious to individuals.
Our commercialization strategy is to focus on the immediate
addressable domestic market of approximately 701,000 full-time
sworn officers in 15,300 federal,
state and local law enforcement agencies (as reported in the
August 2018 U.S. Department of
Justice, Statistical Brief, Full-Time Employees in Law Enforcement
Agencies, 1997-2016), while also exploring other markets,
including military, border patrol and international markets. We
have estimated an addressable international market of over 12.1
million police officers in the 100 largest police forces gathered
from individual country statistics. According to Stratistics
MRC, we participate in a segment of the non-lethal products market
expected to grow to $11.85 billion by 2023.
Law
enforcement encounters with the mentally ill or those suffering a
mental crisis present a difficult challenge, often generating public controversy and costly
consequences. According to the Treatment Advocacy Center: Office of
Research & Public Affairs in a 2015 report on The Role of
Mental Illness in Fatal Law Enforcement Encounters, one in ten
police encounters involve the mentally ill and a minimum of one in
four fatal police encounters involve the mentally
ill.
We are unable to predict the market acceptance of our new product
or the level of future sales, if any. We believe the enhanced
version of our product with the green line laser accessory will
meet customer requirements and we are seeking orders for
delivery scheduled in the second quarter of 2019. We believe we can
accelerate orders during the balance of 2019. However, there can be
no assurance of the timing or quantity of orders or sales in future
periods. See the section entitled
“Risk
Factors” included in this
Annual Report for additional information regarding risks and
uncertainties associated with our business.
History
We were organized as Wrap Technologies, LLC, a Delaware limited
liability company (“Wrap LLC”), on March 2, 2016 by our founders Elwood
G. Norris, Scot Cohen and James A. Barnes. We are headquartered in
Las Vegas, Nevada. Our formation followed several months of
research into ensnarement techniques by our Chief Technology
Officer and primary inventor, Mr. Norris. Mr. Norris has been
granted over 80 U.S. patents, and with Mr. Barnes, founded LRAD
Corporation (Nasdaq:LRAD), a company engaged in directed sound
technologies including non-lethal acoustic hailing and warning
devices sold worldwide for law enforcement, military, government
and security markets.
On March 31, 2017 Wrap LLC merged with and into a wholly-owned
subsidiary MegaWest Energy Montana Corp.
(“MegaWest”).
Wrap LLC ceased separate existence, and MegaWest continued as the
surviving entity after changing its name to Wrap Technologies, Inc.
Prior to the merger, on March 22, 2017, Wrap LLC acquired privately
held MegaWest from Petro River Oil Corp.
(“Petro
River”), a related party
as a result of Scot Cohen, our Executive Chairman, also being a
significant stockholder and the Executive Chairman of Petro River.
MegaWest had no assets or liabilities at the date of acquisition
and was not an operating business.
In December 2017, we completed a self-underwritten public offering,
raising gross proceeds of approximately $3.49 million from the sale
of 2,328,533 shares of our common stock, par value $0.0001 per
share (“Common Stock”), at a public offering price of $1.50 per
share. Three officers of the Company purchased an aggregate of
40,000 shares of Common Stock during the offering for an aggregate
of $60,000.
On
October 30, 2018, we completed a private placement, resulting in
gross cash proceeds to the Company of $13.68 million and net cash
proceeds of approximately $12.14 million from the sale of 4,561,074
units of Company securities (“Units”) for $3.00 per Unit. Each
Unit consisted of one share of Common Stock and one detachable
two-year warrant to purchase one share of Common Stock at an
exercise price of $5.00 per share. We issued 4,561,074 shares of
Common Stock and detachable warrants to certain accredited
investors in the private placement. We also issued two-year
warrants to purchase 456,107 shares of Common Stock at an exercise
price of $3.00 per share to our placement agents and their
designees. Members of our management and our existing stockholders
purchased over 25% of the securities sold in the private placement,
including $1.0 million invested by our Chief Technology Officer,
Elwood G. Norris. In connection with the private placement, the
Company agreed to file a registration statement with the Securities
and Exchange Commission (“SEC”) to register the shares of
Common Stock and shares of Common Stock issuable upon exercise of
the warrants issued in the offering, which registration statement
was declared effective on December 10, 2018.
Plan of Operation
Our plan of operation for 2019 includes growing research,
production, marketing, sales, training, distribution and service
functions. We expect to focus significant efforts on domestic and
international sales, training and developing volume
production.
Our research and development activities for 2019 will focus on
enhancing the BolaWrap 100 product and cost reduction activities.
Our research plans also include focusing on creating new models of
our restraining device and developing other security related
products. We will also evaluate other related products for
acquisition or distribution.
We currently have no plans for material acquisition of plant or
equipment.
Industry Background
The market for use of force related products and devices includes
law enforcement agencies, correctional facilities, military
agencies, private security guard companies and retail consumers. We
believe law enforcement officials are the opinion leaders regarding
market acceptance of new security products. We therefore intend to
focus on the law enforcement agency segment of the market for the
BolaWrap 100.
According to the Department of Justice (“Police Use of
Nonfatal Force, 2002-2011,” Special Report NCJ 249216,
Published November 2015 by the U.S. Department of Justice Office of
Justice Programs, Bureau of Justice Statistics), from 2002 to 2011
an annual average of 44 million U.S. residents age 16 or older,
approximately 19% of all persons of this age, had at least one
face-to-face contact with a police officer. About 1.6% or 715,500
involved threats of or use of force. Additionally, about 1.3
million were handcuffed during their encounter with police. Nearly
all local police departments and all federal law enforcement
agencies have a use-of-force policy that dictates the level of
force its officers may use to respond to various situations. In
January 2017, a collaborative effort among 11 significant law
enforcement leadership and labor organizations in the United States
resulted in the publication of a National Consensus Policy on Use
of Force (collaborative publication of 11 contributing law
enforcement agencies organized by the International Association of
Chiefs of Police and published in January 2017). This policy
states, among other information:
●
officers
shall use only the force that is objectively reasonable to
effectively bring an incident under control, while protecting the
safety of the officer and others;
●
officers
shall use force only when no reasonably effective alternative
appears to exist and shall use only the level of force which a
reasonably prudent officer would use under the same or similar
circumstances;
●
an
officer shall use de-escalation techniques and other alternatives
to higher levels of force consistent with his or her training
whenever possible and appropriate before resorting to force and to
reduce the need for force; and
●
when
de-escalation techniques are not effective or appropriate, an
officer may consider the use of less-lethal force to control a
non-compliant or actively resistant individual. An officer is
authorized to use agency-approved, less-lethal force techniques and
issued equipment:
o
to
protect the officer or others from immediate physical
harm;
o
to
restrain or subdue an individual who is actively resisting or
evading arrest; or
o
to
bring an unlawful situation safely and effectively under
control.
A police officer is trained to use only the minimum force necessary
to overcome the threat of injury or violence posed by a suspect.
For example, under most policies, an officer may not use lethal
force unless a subject poses a threat of significant bodily injury
or fatality to the officer or other persons.
Studies have concluded that most police officers never deploy
lethal force in the course of their careers. Although the vast
majority of law enforcement officers around the world are armed
with firearms, only a small percentage will actually ever use them.
Officers, however, use less-lethal force on a regular basis.
Traditional tactics such as using a control hold, baton, club, or
combat to control a suspect may result not only in a risk of injury
to the suspect, but also a risk that the officer will be injured.
Other force options including chemical spray, impact munitions and
CEWs not only risk injury, but are often controversial. Each weapon
available to law enforcement has distinct advantages and
disadvantages, and we believe law enforcement agencies require
different tools for different situations.
We believe a new remote restraining device is necessary to meet
modern policing requirements with individuals frequently not
responding to verbal commands and public demands for less-lethal
policing. This is more apparent in police interactions with the
mentally ill. According to a report by The State of Mental Health
in America, 2018; Mental Health America an estimated 40 million
adults in the U.S. suffer from mental health issues. And, in a 2015
report on The Role of Mental Illness in Fatal Law Enforcement
Encounters, the Treatment Advocacy Center: Office of Research &
Public Affairs indicated that 7.9 million individuals have severe
mental illness that disorders their thinking. Amounting to somewhat fewer than 4 in every 100
adults in America, individuals with severe mental illness generate
no less than 1 in 10 calls for police service and occupy at least 1
in 5 prison and jail beds in the U.S. An estimated 1 in 3
individuals transported to hospital emergency rooms in psychiatric
crisis are taken there by police.
A tool to restrain individuals at a distance may offer reduced
frequency of deployment of other control techniques, including
CEWs, especially in encounters with the mentally ill. We believe
that the following characteristics for our new restraining product
are the most important to law enforcement and security
agencies:
●
effectiveness:
remote restraint of individuals while keeping all other use of
force options available;
●
range: variable distance over which the device is
effective;
●
safety: minimal risk of injury or
death;
●
ease of use: simple operation and low
maintenance;
●
dependability:
reliability in many environments, product
durability;
●
accountability:
tracking to reduce misuse of the weapon; and
●
cost: low cost per use and possible reduction of
insurance and litigation expense.
The BolaWrap 100
Solution
The BolaWrap 100 is designed to perform well with respect to all of
the above characteristics. We believe the BolaWrap 100 is a unique
new device to restrain subjects safely and without eliminating any
other use of force options necessary for the protection of law
enforcement and the public. Although no use of force technique or
device is 100% effective, in our opinion, unique performance could
make the BolaWrap 100 a tool of choice in a range of encounters for
law enforcement agencies and other security services.
Effectiveness
Without an effective remote restraint device to assist controlling
an encounter, law enforcement often defaults to less-lethal weapons
that rely upon a pain response or electrical induced incapacitation
for effect. These methods, along with lethal force, may be
necessary for the most dangerous and aggressive suspects. However,
there are many encounters where remote restraint may be an option
in lieu of or before physical contact with an individual to reduce
possibility for flight or the possibility for injury to the
individual and the officer. In volunteer testing, the BolaWrap 100
has shown to be effective in restraining individuals, hindering the
flight ability and crippling the ability to fight, allowing
effective further officer action.
Range
Batons and chemical sprays can only be used from close distances,
usually less than five feet. Rubber bullets, beanbag rounds, and
similar less-lethal impact weapons must be used at distances
greater than 30 feet to minimize suspects’ injuries. Combat,
come along and wrist locks require intimate contact with suspects.
The BolaWrap 100 is designed to engage a suspect at 10 to 25 feet
operable by the weak hand, allowing other force options to remain
available. The design of the device makes it ineffective at close
distances, and it is not recommended for use at less than ten
feet.
Safety
The BolaWrap 100 is not intended to be a weapon. It does not rely
on pain or electrical induced incapacitation for effectiveness. The
wrapping effect is intended to impede flight while not inducing
uncontrolled falls or injury. There is no issue of recovery time,
as is the case with CEW, impact munitions or chemical
devices.
Ease of Use
The BolaWrap 100 is small, light and rugged. It is simple to use,
activate and deploy. It can be reloaded and deployed again as
quickly as a spent cartridge can be removed and a replacement bola
cartridge inserted, typically in less than five seconds. Further,
the weapon requires no maintenance, and there are no electronic
components in the base device. The BolaWrap 100 also does not leave
contaminating residues, unlike chemical sprays that may contaminate
buildings, vehicles or other closed facilities or officer
uniforms.
Dependability
The BolaWrap 100 as a mechanical device is designed to operate
effectively under a variety of unfavorable conditions, such as wind
and rain, and is rugged and durable.
Accountability
The BolaWrap 100 is designed for professional use and not consumer
use. Each device and each bola cartridge is identified with a
serial number for recordkeeping purposes.
Cost
The single use, but recyclable, bola cartridge is priced at a per
cartridge price to allow use in both training and active
deployment. Although we do not believe that there is currently a
directly competitive remote restraint device, our cartridge prices
are competitive with CEWs, impact munitions and most other
specialized less-lethal weapons, with the exception of the least
expensive chemical sprays. However, the indirect costs of
decontaminating buildings, vehicles, and uniforms resulting from
the use of chemical sprays can place these sprays at an overall
cost disadvantage per use.
In addition, litigation and insurance costs involving use of force
for law enforcement agencies can be significant, with settlements
in the millions of dollars for many departments. Reducing the
frequency of need for other use of force tools and the number of
injuries and fatalities caused by law enforcement officers may
reduce the number of suits filed against agencies for excessive use
of force, wrongful death and injury.
We believe the addition of a new remote restraint device may have
the benefit of increasing goodwill between law enforcement agencies
and their communities. Community relations considerations can be
particularly important at a time when almost any interaction with
police can be recorded and scrutinized by the media and the
public.
Product
The BolaWrap 100 is a hand-held remote restraint device that
discharges an eight-foot bola style Kevlar® tether to entangle
an individual at a range of 10-25 feet. The BolaWrap 100 offers law
enforcement a new tool to remotely engage and temporarily control
individuals.
The small, light, but rugged BolaWrap 100 is designed to provide
remote restraint while other use of force continuum options remain
open. The design offers wide latitude of accuracy to engage and
restrain targeted legs or arms of a subject. Quick eject and rapid
reload of bola cartridges allows one device to be reused in a
single encounter or in multiple encounters.
The bola cartridge contains two sockets that discharge two small
pellets at a thirty to forty-degree angle. The pellets are linked
by the eight-foot Kevlar tether such that the tether first engages
an individual’s legs or arms then the force of the pellets
causes the tether to wrap. Small barbs on each pellet engage
clothing to retard the unwinding of the bola tether wrap. The bola
cartridge contains a 9 mm fractional charge blank cartridge (as
used in prop guns) to discharge the tether.
The durable body of the BolaWrap 100 contains a receptacle for the
bola cartridge along with the activation, deployment and safety
mechanisms. Bola cartridges are quickly ejected allowing rapid
reloading, activation and deployment.
We demonstrated our first prototype device in December 2016, and
developed pre-manufacturing demonstration prototypes in April 2017.
We assembled first production units in November 2017, and commenced
demonstrations and trial deployments with a small number of law
enforcement agencies. In 2018, we delivered over 200 devices at no
cost to selected law enforcement agencies for evaluation and
feedback as a result of these initial inquiries, and have just
started filling small orders as we establish production. In October
2018, we demonstrated our new BolaWrap green line laser accessory,
and we are taking orders for this enhanced version of the BolaWrap
100. See the section entitled “Risk
Factors” included in this
Annual Report for additional information regarding risks and
uncertainties associated with our business.
Markets
We
participate in the global non-lethal market that, according to a
June 2017 report by Global Market Outlook, was estimated to be
$6.32 billion in 2016 and is expected to grow to $11.85 billion in
2023. The following segments are our target markets.
Law Enforcement and Corrections
Federal, state and local law enforcement agencies in the United
States currently represent the primary target market for the
BolaWrap 100. According to United States Department of Justice
statistics (“U.S. Department of Justice, Statistical Brief,
Full-Time Employees in Law Enforcement Agencies, 1997-2016: August
2018,” U.S. Department of Justice, Bureau of Justice
Statistics, published July 2011), there were nearly 18,000 of these
agencies in the United States in 2016 that employed approximately
701,000 full-time, sworn law enforcement officers. In 2005, the
United States Bureau of Justice statistics (“Census of State
and Federal Correctional Facilities, 2005,” U.S. Department
of Justice, Bureau of Justice Statistics, published October 2008)
estimated that there were 295,000 correctional officers in over
1,800 federal and state correctional facilities in the United
States.
Additionally, we have estimated an addressable international market
of over 12.1 million police officers in the 100 largest police
forces gathered from individual country statistics. We delivered
our first foreign order in 2018, accepted an additional order, and
are currently fielding inquiries from countries in Asia, South
America, Europe and the Middle East.
United States Border Patrol (“USBP”)
With over 21,000 agents (“Border Patrol Overview,” U.S.
Customs and Border Protection, January 27, 2015, Web. 25, September
2017,
https://www.cbp.gov/border-security/along-us-borders/overview), the
USBP is one of the largest law enforcement agencies in the United
States with a large number of encounters with individuals requiring
soft engagement techniques. We believe the BolaWrap 100 can be an
effective tool to safely assist in detention of individuals subject
to the agency’s jurisdiction. The BolaWrap 100 offers an
additional tool for frontline agents to de-escalate encounters
while effecting agent responsibilities.
Private Security Firms and Guard Services
According to 2016 Bureau of Labor Statistics estimates
(“Occupational Employment Statistics,” United States
Department of Labor, March 31, 2017, Web. 25 September 2017), there
were approximately 1.1 million privately employed security guards
in the United States. They represent a broad range of individuals,
including those employed by investigation and security services,
hospitals, schools, local government, and others. We believe that
some security personnel armed with the BolaWrap 100 could be
effective to de-escalate some encounters without eliminating other
tools available today. Providing guards with the BolaWrap 100 may
reduce the potential liability of private security companies and
personnel in such encounters.
Although there are use cases in correctional facilities and by
certain military policing personnel, we are initially targeting the
BolaWrap 100 for law enforcement and security personnel markets. We
do not currently plan a consumer version of the
device.
Selling and Marketing
Law enforcement agencies represent our primary target market. In
this market, we expect that the decision to purchase the BolaWrap
100 will normally be made by a group of people including the agency
head, his training staff, and use of force and weapons experts. The
decision sometimes involves political decision-makers, such as city
council members. Although we expect the decision-making process for
a remote restraint device will be less controversial than that for
less-lethal products such as CEWs, we still expect the process to
take as little as a few weeks or as long as a year or more
partially due to budgeting reasons.
Although initial sales will be made by our executive and sales
employees, we may determine to utilize existing networks of
independent regional police equipment distributors compensated on a
commission and incentive basis in the future.
Most law enforcement and corrections agencies will not purchase new
use of force devices until a training program is in place to
certify officers in their proper use. We have developed and offer
training and class materials that certify law enforcement trainers
as instructors in the use and limitations of the BolaWrap 100.
Since launching our ‘Train the Trainer’ program in
October 2018, 43
U.S. police departments have received
formal training; over 170 of
their trainers are now certified BolaWrap 100 instructors qualified
to train line officers. We require training prior to use of the
BolaWrap 100 by individual departments.
We participate in a variety of trade shows and plan to participate
in conferences. We expect our marketing efforts will also benefit
from significant free media coverage. Other marketing
communications may include video e-mails, press releases, and
conventional print advertising in law enforcement trade
publications. Our website contains marketing information and we are
engaged in social media outreach and communications.
Our Strategy
Our goal is to realize the potential of a new remote restraint
device targeting law enforcement and security personnel. We aim to
produce a product line starting with the BolaWrap 100 to meet the
requirements of these customers. The key elements of our strategy
include:
●
produce
a product line meeting customer requirements as a new tool to aid
in the retention of individuals to make encounters more effective
and less dangerous to members of law enforcement and the
public;
●
develop
a robust production and supply system to support our
customers;
●
rapidly
expand our training to support proper use of the product,
and
●
develop
relationships with customers requiring large numbers of products,
mainly larger city police departments and larger
agencies.
We also plan to actively engage international markets and plan to
develop products for use by security and related
personnel.
Related Party License and Royalties
We are obligated to pay royalties pursuant to an exclusive Amended
and Restated Intellectual Property License Agreement, dated as of
September 30, 2016, with Syzygy Licensing, LLC
(“Syzygy”), a private technology invention,
consulting and licensing company owned and controlled by Elwood G.
Norris and James A. Barnes, both officers and stockholders of the
Company. Syzygy has no ongoing operations, and does not engage in
any manufacturing, production or other related
activities.
The agreement provides for the payment of royalties of 4% of
revenue from products employing the licensed device technology up
to the earlier to occur of (i) the payment by the Company of an
aggregate of $1.0 million in royalties, or (ii) September 30, 2026.
All development and patent costs have been paid by us and patent
applications and the technology related to the BolaWrap 100 have
been assigned to the Company, subject to the royalty
obligation.
Manufacturing and Suppliers
We completed our first generation design, and completed an initial
small volume production of the BolaWrap 100 and related cartridges
to support our demonstrations. We have also completed design of our
second generation product incorporating our green line laser and
other improvements resulting from customer feedback. We are
commencing volume production with initial deliveries scheduled for
the second quarter of 2019. We source components from a variety of
suppliers with final assembly, testing and shipping occurring in
our facility in Las Vegas, Nevada. We believe arranging and
maintaining quality volume manufacturing capacity will be essential
to the performance of our products and the growth of our
business.
Warranties
We expect to warranty our products to be free from defects in
materials and workmanship for a period up to one year from the date
of purchase. The warranty will be generally a limited warranty, and
in some instances impose certain shipping costs on the customer. We
expect in most cases it will be more economical and effective to
replace the defective device rather than repair.
Competition
Although we are targeting the BolaWrap 100 as a new solution for
law enforcement and not as a replacement for other tools currently
in use, we will still compete with other use of force products for
budgets. Law enforcement agencies may also determine that we are an
alternative to other solutions in spite of such
positioning.
Other use of force devices, including CEWs sold by Axon
Enterprises, Inc. (formerly Taser International, Inc.), and pepper
spray, batons, impact weapons sold by companies such as Defense
Technology will compete with the BolaWrap 100 indirectly. Many law
enforcement and corrections personnel consider such less-lethal
weapons to be distinct tools, each best-suited to a particular set
of circumstances. Consistent with this tool kit approach,
purchasing any given tool does not preclude the purchase of one or
several more. In other cases, budgetary considerations and limited
space on officers’ belts dictate that only a limited number
of devices will be purchased and carried. We believe the BolaWrap
100’s unique remote restraint use, effectiveness, and low
possibility of injury will enable it to compete effectively against
other alternatives.
Many of our present and potential future competitors have, or may
have, substantially greater resources to devote to compete in the
law enforcement market and to further technological and new product
developments. Also, these competitors or others may introduce
products with features and performance competitive to our
product.
Seasonality
We do not expect to experience any significant seasonality trends.
However, seasonality trends may occur in the future.
Government Regulation
The BolaWrap 100 is classified as a “firearm” by the
U.S. Bureau of Alcohol, Tobacco, Firearms and Explosives
(“ATF”), and is subject to federal
firearms-related regulations. We hold a Federal Firearms
Manufacturing License that expires in 2020. Many states also have
regulations restricting the sale and use of certain firearms and
may determine their own classification and restrictions
irrespective of ATF regulation. In most cases, the law enforcement
and corrections market is subject to different ATF and state
regulations or exemptions than the private citizen market, and we
do not expect additional state restrictions or approvals for sales
to law enforcement. Where different regulations exist, we expect
that the regulations affecting the private citizen market may also
apply to the private security markets, except as the applicable
regulations otherwise specifically provide.
The BolaWrap 100 is also considered a crime control product by the
U.S. government. Accordingly, the export of our devices is
regulated under export administration regulations. As a result, we
must obtain export licenses from the Department of Commerce for all
shipments to foreign countries. We do not expect the need to obtain
these licenses will cause a material delay in any future foreign
shipments. Export regulations also prohibit the further shipment of
our products from foreign markets in which we hold a valid export
license to foreign markets in which we do not hold an export
license for our products.
Foreign regulations, which may affect our device, and sale thereof,
are numerous and often unclear. We expect to work with an agent,
distributor or advisor who is familiar with the applicable import
regulations in each of any targeted foreign markets.
Intellectual Property
We
intend to protect our intellectual property assets including issued
patents, pending patents, trademarks, trade craft and trade secrets
such as know-how. In addition, we use confidentiality agreements
with employees and some suppliers to ensure the safety of our trade
secrets. We currently have four issued U.S. patents related to the
BolaWrap 100, and have six additional U.S. patents pending. In
September 2018, we commenced filing our first foreign patent
applications targeting the European Union (17 countries) and 17
other countries, all of which are currently pending. We have
reserved rights to file additional foreign patents. We have also
been granted trade name protection for “BolaWrap,” and
expect to employ a combination of registered and common law trade
names, trademarks and service marks in our business. We expect to
rely on a variety of intellectual property protections for our
products and technologies, including contractual obligations, and
we intend to pursue a policy of vigorously enforcing such
rights.
We have an ongoing policy of filing patent applications to seek
protection for novel features of our products and technologies.
Prior to the filing and granting of patents, our policy is to
disclose key features to patent counsel and maintain these features
as trade secrets prior to product introduction. Patent applications
may not result in issued patents covering all important claims and
could be denied in their entirety.
The use of force product industry is characterized by frequent
litigation regarding patent and other intellectual property rights.
Others, including academic institutions and competitors, hold
numerous patents in less-lethal and related technologies. Although
we are not aware of any existing patents that would materially
inhibit our ability to commercialize our technology, others may
assert claims in the future. Such claims, with or without merit,
may have a material adverse effect on our financial condition,
results of operations or cash flows.
The failure to obtain patent protection or the loss of patent
protection on our existing and future technologies or the
circumvention of our patents by competitors could have a material
adverse effect on our ability to compete successfully.
Our policy is to enter into nondisclosure agreements with each
employee and consultant or third party to whom any of our
proprietary information is disclosed. These agreements prohibit the
disclosure of confidential information to others, both during and
subsequent to employment or the duration of the working
relationship. These agreements may not prevent disclosure of
confidential information or provide adequate remedies for any
breach.
Research and Development
Our research and development initiatives are led by our internal
personnel and make use of specialized consultants when necessary.
These initiatives include basic research, mechanical engineering
design and testing. Future development projects will focus on new
versions of the BolaWrap technology and new security
technologies.
Employees and Executive Officers
We currently have four executive officers. We have thirteen other
employees, with five engaged in sales, marketing and training, four
in production, two in research and development and two in
administration. We employ consultants from time to time to provide
additional sales, marketing, training and research and development
services.
We believe we offer competitive compensation and other benefits and
that our employee relations are good.
Available Information
As a public company, we are required to file our annual reports on
Form 10-K, quarterly reports on Form 10-Q, current reports on Form
8-K, proxy statements on Schedule 14A and other information
(including any amendments) with the Securities and Exchange
Commission (the “SEC”). The SEC maintains an Internet site that
contains reports, proxy and information statements, and other
information regarding issuers that file electronically with the
SEC. You can find our SEC filings at the SEC’s website
at http://www.sec.gov.
Our Internet address is www.wraptechnologies.com.
Information contained on our website is not part of this Annual
Report. Our SEC filings (including any amendments) will be made
available free of charge on www.wraptechnologies.com,
as soon as reasonably practicable after we electronically file such
material with, or furnish it to, the SEC.
An investment in our Company involves a high degree of risk. In
addition to the other information included in this Annual Report,
you should carefully consider the following risk factors in
evaluating an investment in our Company. You should consider these
matters in conjunction with the other information included or
incorporated by reference in this Annual Report.
If any of the following risks actually
occurs, our business, reputation, financial condition, results of
operations, revenue, and future prospects could be negatively
impacted. In that event, the market price of our Common Stock could
decline, and you could lose part or all of your
investment.
Risk Factors Relating to Our Business
We have a history of operating losses, expect additional losses and
may not achieve or sustain profitability.
We have
a history of operating losses and expect to incur additional losses
as we commence delivering our new generation product and until we
achieve sufficient revenue and resulting margins to offset our
operating costs. Our net loss for the years ended December 31,
2018 and 2017 was $3,336,435 and $833,545, respectively. Our
ability to achieve future profitability is dependent on a variety
of factors, many of which are outside of our control. Failure to
achieve profitability or sustain profitability, if achieved, may
require us to raise additional financing, which could have a
material negative impact on the market value of our Common
Stock.
We may need additional capital to execute our business plan, and
raising additional capital, if possible, by issuing additional
equity securities may cause dilution to existing stockholders. In
addition, raising additional capital by issuing additional debt
instruments may restrict our operations.
Although
we believe we have adequate financial resources to fund our
operating expense for at least the next twelve months, and that we
may be able to generate funds from product sales during that time,
existing working capital may not be sufficient to achieve
profitable operations due to product introduction costs, operating
losses and other factors. Principal factors affecting the
availability of internally generated funds include:
●
failure
of product sales to meet planned projections;
●
working
capital requirements to support business growth;
●
our
ability to control spending; and
●
acceptance
of our product in planned markets.
In the
event we are required to raise additional capital through the
issuance of equity or convertible debt securities, the percentage
ownership of our stockholders could be diluted significantly, and
such newly issued securities may have rights, preferences or
privileges senior to those of our existing stockholders. In
addition, the issuance of any equity securities could be at a
discount to the market price.
If we
incur debt financing, the payment of principal and interest on such
indebtedness may limit funds available for our business activities,
and we could be subject to covenants that restrict our ability to
operate our business and make distributions to our
stockholders. These restrictive covenants may include
limitations on additional borrowing and specific restrictions on
the use of our assets, as well as prohibitions on our ability to
create liens, pay dividends, redeem stock or make investments.
There is no assurance that any equity or debt financing transaction
will be available on acceptable terms, if at all.
We are a development stage technology company with minimal 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
the BolaWrap 100, our first product, which makes it difficult to
assess our future viability.
We are
a development stage technology company. Although we are
commercializing our first product, the BolaWrap 100, we have
generated minimal revenue to date, and we have not yet demonstrated
an ability to overcome many of the fundamental risks and
uncertainties frequently encountered by 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 the BolaWrap 100, and develop additional future
products for commercialization;
●
develop,
obtain and maintain required regulatory approvals for
commercialization of products we produce;
●
establish
an intellectual property portfolio for the BolaWrap 100 and other
future products;
●
establish
and maintain sales, distribution and marketing capabilities, and/or
enter into strategic partnering arrangements to access such
capabilities;
●
gain
market acceptance for the BolaWrap 100 and/or other future
products; and
●
obtain
adequate capital resources and manage our spending as costs and
expenses increase due to research, production, development,
regulatory approval and commercialization of the BolaWrap 100
and/or other future products.
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 into the marketplace for
testing 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 not 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 for the
foreseeable future, and if this product is not widely accepted, our
growth prospects will be diminished.
We
expect to depend on sales of the BolaWrap 100 and related
cartridges for the foreseeable future. A lack of demand for this
product, or its failure to achieve broad market acceptance, would
significantly harm our growth prospects, operating results and
financial condition.
Our international operations could be harmed by factors including
political instability, natural disasters, fluctuations in currency
exchange rates, and changes in regulations that govern
international transactions.
We
expect to sell our products worldwide and have commenced export
activities for multiple countries. We expect exports to become a
significant part of our future business. The risks inherent in
international trade may reduce our international sales and harm our
business and the businesses of our customers and our suppliers.
These risks include, among other things:
●
changes in tariff
regulations;
●
political
instability, war, terrorism and other political risks;
●
foreign currency
exchange rate fluctuations;
●
establishing and
maintaining relationships with local distributors, agents and
dealers;
●
lengthy shipping
times and accounts receivable payment cycles;
●
import and export
control and licensing requirements;
●
compliance with a
variety of U.S. laws, including the Foreign Corrupt Practices Act,
by us or key subcontractors;
●
compliance with a
variety of foreign laws and regulations, including unexpected
changes in taxation and regulatory requirements;
●
greater difficulty
in safeguarding intellectual property abroad than in the U.S.;
and
●
difficulty in
staffing and managing geographically diverse
operations.
These
and other risks may preclude or curtail international sales or
increase the relative price of our products compared to those
manufactured in other countries, reducing the demand for our
products. Failure to comply with U.S. and foreign governmental laws
and regulations applicable to international business, such as the
Foreign Corrupt Practices Act or U.S. export control regulations,
could have an adverse impact on our business with the U.S. and
foreign governments.
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 would also make it more difficult to predict our revenue,
cash flow and operating results.
We expect to expend significant resources to generate sales due to
our lengthy sales cycle, and such efforts may not result in sales
or revenue.
Generally,
law enforcement agencies consider a wide range of issues before
committing to purchase a product, including product benefits,
training costs, the cost to use our product in addition to, or in
place of, other use of force products, product reliability and
budget constraints. The length of our sales cycle may range from
30 days to a year or more. We may incur substantial selling
costs and expend significant effort in connection with the
evaluation of our product by potential customers before they place
an order, if they place an order at all. If these potential
customers do not purchase our product, we will have expended
significant resources without corresponding revenue.
Most of our intended end-users are subject to budgetary and
political constraints that may delay or prevent sales.
Most of
our intended end-user customers are government agencies. These
agencies often do not set their own budgets and therefore have
little control over the amount of money they can spend. In
addition, these agencies experience political pressure that may
dictate the manner in which they spend money. As a result, even if
an agency wants to acquire our product, it may be unable to
purchase our product due to budgetary or political constraints.
Some government agency orders may also be canceled or substantially
delayed due to budgetary, political or other scheduling delays,
which frequently occur in connection with the acquisition of
products by such agencies.
Government regulation of our products may adversely affect
sales.
Our
device is classified as a firearm regulated by the Bureau of
Alcohol, Tobacco and Firearms involving substantial regulatory
compliance. Our device may also face state restrictions, especially
regarding sales to security agencies. Our product sales may be
significantly affected by federal, state and local regulation.
Failure to comply with regulations could also result in the
imposition of fines, penalties and other actions that could
adversely impact our financial position, cash flows and operating
results.
Our
product is also controlled by the United States Department of
Commerce (“DOC”) for exports directly from
the United States. Consequently, we need to obtain export licenses
from the DOC for the export of our products from the United States.
Compliance with or changes in U.S. export regulations could
significantly and adversely affect any future international
sales.
Certain
foreign jurisdictions may restrict the importation or sale of our
products, limiting our international sales
opportunities.
Our products, including the BolaWrap 100, have limited issued
patents or other intellectual property protection. If we are unable
to protect our intellectual property, we may lose a competitive
advantage or incur substantial litigation costs to protect our
rights.
Our
future success depends in part upon our proprietary technology. We
currently own four issued U.S. patents related to the BolaWrap 100
and have six U.S. patents pending. We have filed foreign patent
applications in the European Union (17 countries) and 17 other
countries, and reserved our rights to file additional foreign
patents. Our protective measures taken thus far, including our
issued patents, pending patents, 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 made against us, with or
without merit, could be costly and time-consuming to defend and
divert our management’s attention from our business. In the
event of a successful claim of infringement against us and our
failure or inability to license the infringed technology, our
business and operating results could be adversely affected. Any
litigation or claims, whether or not valid, could result in
substantial costs and diversion of our resources. An adverse result
from intellectual property litigation could force us to do one or
more of the following:
●
cease
selling, incorporating or using products or services that
incorporate the challenged intellectual property;
●
obtain
a license from the holder of the infringed intellectual property
right, which license may not be available on reasonable terms, if
at all; and
●
redesign
products or services that incorporate the disputed
technology.
If we
are forced to take any of the foregoing actions, we could face
substantial costs and shipment delays and our business could be
seriously harmed. Although we carry general liability insurance,
our insurance may not cover potential claims of this type or be
adequate to indemnify us for all liability that may be
imposed.
In
addition, it is possible that our 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 the BolaWrap 100 will be the sole source of
our revenue in the foreseeable future. We expect our revenue, if
any, to vary significantly due to a number of factors. Many of
these factors are beyond our control. Any one or more of these
factors, including those listed below, could cause us to fail to
achieve our revenue expectations. These factors include, among
others:
●
our
ability to develop and supply product to customers;
●
market
acceptance of, and changes in demand for, our
products;
●
gains
or losses of significant customers, distributors or strategic
relationships;
●
unpredictable
volume and timing of customer orders;
●
the
availability, pricing and timeliness of delivery of components for
our products;
●
fluctuations
in the availability of manufacturing capacity or manufacturing
yields and related manufacturing costs;
●
timing
of new technological advances, product announcements or
introductions by us and by our competitors;
●
unpredictable
warranty costs associated with our products;
●
budgetary
cycles and order delays by customers or production delays by us or
our suppliers;
●
regulatory
changes affecting the marketability of our products;
●
general
economic conditions that could affect the timing of customer orders
and capital spending and result in order cancellations or
rescheduling; and
●
general
political conditions in this country and in various other parts of
the world that could affect spending for the products that we
intend to offer.
Some or
all of these factors could adversely affect demand for our products
and, therefore, adversely affect our future operating results. As a
result of these and other factors, we believe that period-to-period
comparisons of our operating results may not be meaningful in the
near term, and accordingly you should not rely upon our performance
in a particular period as indicative of our performance in any
future period.
Our expense may vary from period to period, which could affect
quarterly results and our stock price.
If we
incur additional expense in a quarter in which we do not experience
increased revenue, our results of operations will be adversely
affected and we may incur larger losses than anticipated for that
quarter. Factors that could cause our expense to fluctuate from
period to period include:
●
the
timing and extent of our research and development
efforts;
●
investments
and costs of maintaining or protecting our intellectual
property;
●
the
extent of marketing and sales efforts to promote our products and
technologies; and
●
the
timing of personnel and consultant hiring.
Our dependence on third-party suppliers for key components of our
product could delay shipment of our products and reduce our
sales.
We
depend on certain domestic and foreign suppliers for the delivery
of components used in the assembly of our product. Our reliance on
third-party suppliers creates risks related to our potential
inability to obtain an adequate supply of components or
sub-assemblies and reduced control over pricing and timing of
delivery of components and subassemblies. Specifically, we will
depend on suppliers of sub-assemblies, machined parts, injection
molded plastic parts, and other miscellaneous custom parts for our
product. We do not have any long-term supply agreements with any
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 improve internal controls and management oversight systems.
Our small size and limited personnel and consulting resources make
doing so more challenging than for more established entities. We
may not be able to prevent or detect misstatements in our reported
financial statements due to limited segregation of duties, system
errors, the potential for human error, unauthorized actions of
employees or contractors, inadequacy of controls, temporary lapses
in controls due to shortfalls in transition planning and oversight
resource contracts and other factors. In addition, due to their
inherent limitations, such controls may not prevent or detect
misstatements in our reported financial results as required under
SEC rules, which could increase our operating costs or impair our
ability to operate our business. Controls may also become
inadequate due to changes in circumstances. It will be necessary to
replace, upgrade or modify our internal information systems from
time to time. If we are unable to implement these changes in a
timely and cost-effective manner, our ability to capture and
process financial transactions and support our customers as
required may be materially adversely impacted, which could harm our
business, financial condition, results of operations and cash
flows.
Risk Factors Relating to Our Common Stock
Our stock price may be volatile or may decline regardless of our
operating performance, resulting in substantial losses for
investors.
Our Common Stock
was quoted on the OTCQB Venture Market commencing in late May 2018
and uplisted to the Nasdaq Capital Market in December 2018.
The
market price of our Common Stock may be highly volatile and may
fluctuate substantially as a result of a variety of factors, some
of which are related in complex ways. Since shares of our Common
Stock were sold in our initial public offering,
(“IPO”),
in December 2017 at a price of $1.50 per share, our stock price has
ranged from a low of $2.10 to a
high of $9.00 through
March
6, 2019.
The market price of our Common Stock may fluctuate significantly in
response to numerous factors, many of which are beyond our control,
including the factors listed below and other factors described in
this “Risk Factors” section:
●
actual or
anticipated fluctuations in our operating
results;
●
failure of
securities analysts to initiate or maintain coverage of our
Company, changes in financial estimates by any securities analysts
who follow our Company, or our failure to meet these estimates or
the expectations of investors;
●
ratings changes by
any securities analysts who follow our Company;
●
changes in the
availability of federal funding to support local law enforcement
efforts, or local budgets;
●
announcements by us
of significant technical innovations, acquisitions, strategic
partnerships, joint ventures or capital commitments;
●
changes
in operating performance and stock market valuations of other
security product companies generally;
●
price
and volume fluctuations in the overall stock market, including as a
result of trends in the economy as a whole;
●
changes
in our board of directors or management;
●
sales
of large blocks of our Common Stock, including sales by our
executive officers, directors and significant
stockholders;
●
lawsuits
threatened or filed against us;
●
short
sales, hedging and other derivative transactions involving our
capital stock;
●
general
economic conditions in the United States and abroad;
and
●
other
events or factors, including those resulting from war, incidents of
terrorism or responses to these events.
In addition, stock markets have experienced extreme price and
volume fluctuations that have affected and continue to affect the
market prices of equity securities of many security and technology
companies. Stock prices of many security and technology companies
have fluctuated in a manner unrelated or disproportionate to the
operating performance of those companies. In the past, stockholders
have instituted securities action litigation against certain
companies following periods of market volatility. If we were to
become involved in securities litigation, it could subject us to
substantial costs, divert resources and the attention of management
from our business and adversely affect our business, operating
results, financial condition and cash flows.
Sales of a substantial number of shares of our Common Stock may
adversely affect the market price of our Common Stock.
Sales
or distributions of a substantial number of shares of our Common
Stock in the public market, or the perception that such sales could
occur, could adversely affect the market price of our Common Stock.
Many of the outstanding shares of our Common Stock, other than the
shares held by executive officers and directors, are eligible for
immediate resale in the public market. Substantial selling of our
Common Stock could adversely affect the market price of our Common
Stock.
Our officers and directors are among our largest stockholders, and
may have certain personal interests that may affect the
Company.
Management owned
approximately 61% of our Common Stock at March 6, 2019. As a
result, our management, acting individually or as a group, has the
potential ability to exert influence on the outcome of issues
requiring approval by our stockholders. This concentration of
ownership may have effects such as delaying or preventing a change
in control of the Company that may be favored by other stockholders
or preventing transactions in which stockholders might otherwise
recover a premium for their shares over current market
prices.
We may issue additional shares of Common Stock in the future. The
issuance of additional shares of Common Stock may reduce the value
of your Common Stock.
We may
issue additional shares of Common Stock without further action by
our stockholders. Moreover, the economic and voting interests of
each stockholder will be diluted as a result of any such issuances.
Although the number of shares of Common Stock that stockholders
presently own will not decrease, such shares will represent a
smaller percentage of the total shares that will be outstanding
after the issuance of additional shares. The issuance of
additional shares of Common Stock may cause the market price of our
Common Stock to decline.
Sales of shares of Common Stock issuable upon the exercise of any
future options or warrants may lower the price of our Common
Stock.
During
2018, we granted options to purchase 2,067,500 shares of our Common
Stock. In October 2018, we issued warrants to purchase 5,017,181
shares of our Common Stock to certain accredited investors and
placement agents in connection with a private placement. The
issuance of shares of Common Stock issuable upon the exercise of
options or warrants could cause substantial dilution to existing
holders of our Common Stock, and the sale of those shares in the
market could cause the market price of our Common Stock to decline.
The potential dilution from the issuance of these shares could
negatively affect the terms on which we are able to obtain equity
financing.
We may issue preferred stock in the future, and the terms of the
preferred stock may reduce the value of your Common
Stock.
We are
authorized to issue up to 5,000,000 shares of preferred stock in
one or more series. Our Board of Directors may determine the terms
of future preferred stock offerings without further action by our
stockholders. If we issue preferred stock, it could affect your
rights or reduce the value of your Common Stock. In particular,
specific rights granted to future holders of preferred stock could
be used to restrict our ability to merge with or sell our assets to
a third party. Preferred stock terms may include voting rights,
preferences as to dividends and liquidation, conversion and
redemption rights and sinking fund provisions.
We incur substantial costs as a result of being a public
company.
As a public company, we are incurring significant levels of legal,
accounting, insurance and other expenses that we did not incur as a
private company. We are subject to the reporting requirements of
the Securities Exchange Act of 1934, as amended (the
“Exchange
Act”), the Sarbanes-Oxley
Act of 2002 (the “Sarbanes-Oxley
Act”), the Dodd-Frank
Act, the listing requirements of the Nasdaq Capital Market and
other applicable securities rules and regulations. Compliance with
these rules and regulations increases our legal and financial
compliance costs, makes some activities more difficult,
time-consuming or costly and increases demand on our systems and
resources as compared to when we operated as a private company. The
Exchange Act requires, among other things, that we file annual,
quarterly and current reports with respect to our business and
operating results. The Sarbanes-Oxley Act requires, among other
things, that we maintain effective disclosure controls and
procedures and internal control over financial reporting. In order
to maintain and, if required, improve our disclosure controls and
procedures and internal control over financial reporting to meet
this standard, significant resources and management oversight may
be required. As a result, management’s attention may be
diverted from other business concerns, which could adversely affect
our business and operating results. We may need to hire more
corporate employees in the future or engage outside consultants to
comply with these requirements, which would increase our costs and
expenses.
In addition, changing laws, regulations and standards relating to
corporate governance and public disclosure are creating uncertainty
for public companies, increasing legal and financial compliance
costs and making some activities more time-consuming. These laws,
regulations and standards are subject to varying interpretations,
in many cases due to their lack of specificity, and, as a result,
their application in practice may evolve over time as new guidance
is provided by regulatory and governing bodies. This could result
in continuing uncertainty regarding compliance matters and higher
costs necessitated by ongoing revisions to disclosure and
governance practices. We intend to invest resources to comply with
evolving laws, regulations and standards, and this investment may
result in increased general and administrative expenses and a
diversion of management’s time and attention from
revenue-generating activities to compliance activities. If our
efforts to comply with new laws, regulations and standards differ
from the activities intended by regulatory or governing bodies due
to ambiguities related to their application and practice,
regulatory authorities may initiate legal proceedings against us
and our business may be adversely affected.
As a result of disclosure of information in this report and in the
filings that we are required to make as a public company, our
business, operating results and financial condition have become
more visible, which has resulted in, and may in the future result
in threatened or actual litigation, including by competitors and
other third parties. If any such claims are successful, our
business, operating results and financial condition could be
adversely affected, and even if the claims do not result in
litigation or are resolved in our favor, these claims, and the time
and resources necessary to resolve them, could divert the resources
of our management and adversely affect our business, operating
results and financial condition.
The payment of dividends will be at the discretion of our Board of
Directors.
We have
never declared dividends on our Common Stock, and currently do not
anticipate that we will do so in the foreseeable future. The
declaration and amount of future dividends, if any, will be
determined by our Board of Directors and will depend on our
financial condition, earnings, capital requirements, financial
covenants, regulatory constraints, industry practice and other
factors our Board of Directors deems relevant.
ITEM 1B. UNRESOLVED STAFF
COMMENTS
None.
We lease approximately 1,987 square feet of office, assembly and
warehousing space located at 4620 Arville Street, Suite E, Las
Vegas, Nevada 89103, pursuant to a three-year lease expiring
December 2019 at a current monthly rate of $1,588. In January 2019,
we extended this lease for an additional twelve months commencing
January 2020 and ending December 2020 at a rate of $2,100 per month
for the extension period. In February 2019, we entered into a
two-year lease for 1906 square feet of office, assembly and
warehousing space located at 20331 Lake Forest Drive, Suite C-11, Lake Forest,
California 92630 at a monthly
rate of $2,723. We expect that these properties will be sufficient
to meet our needs for at least the next 12
months.
Beginning in October 2017 we commenced reimbursing officer Mr.
Elwood Norris $1,500 per month on a month to month basis for
laboratory facility costs. In November, 2018 we commenced paying
$5,000 on a month to month basis for a 50% share of 1,000 square
feet at 55 Fifth Ave, Suite 1702, New York, NY 10003. We from time
to time rent executive space on a month to month basis for remotely
located employees.
ITEM 3. LEGAL PROCEEDINGS
We may at times, be involved in litigation in the ordinary course
of business. We will also, from time to time, when appropriate in
management’s estimation, record adequate reserves in our
financial statements for pending litigation.
ITEM 4. MINE SAFETY
DISCLOSURES
Not applicable.
ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
AND ISSUER PURCHASES OF EQUITY SECURITIES
Our Common Stock is listed on the Nasdaq Capital Market under the
symbol “WRTC.”
Holders
At
March
6, 2019 there
were 27,364,607 shares of Common Stock outstanding and
approximately 76
stockholders of
record.
Equity Compensation Plan Information
Our 2017 Stock Incentive Plan (the “2017
Plan”) was adopted by
our Board of Directors on March 31, 2017, and approved by a
majority of our stockholders on March 31, 2017. The 2017 Plan
reserves for issuance 2.0 million shares of our Common Stock for
issuance as one of four types of equity incentive awards: (i) stock
options, (ii) shares of Common Stock, (iii) restricted stock
awards, and (iv) restricted stock units. The 2017 Plan permits the
qualification of awards under the plan as “performance-based
compensation” within the meaning of
Section 162(m) of the Internal Revenue
Code.
The following table sets forth information as of December 31, 2018,
with respect to compensation plans (including individual
compensation arrangements) under which our equity securities are
authorized for issuance, aggregated as follows:
|
Plan Category
|
Number of securities to be
issued
upon exercise of
outstanding
options,
warrants
and rights
(a)
|
Weighted-average exercise
price
of outstanding
options,
warrants and
rights
(b)
|
Number of securities
remaining available for
future
issuance under
equity compensation plans
(excluding
securities
reflected
in column (a))
(c)
|
|
Equity
compensation plans approved by security holders
|
1,967,500
|
$1.62
|
32,.500
|
|
Equity
compensation plans not approved by security holders
|
100,000
|
$3.00
|
-
|
|
Total
|
2,067,500
|
$1.68
|
32,500
|
Recent Sales of Unregistered Securities
No unregistered securities were issued during the fiscal year that
were not previously reported in a Quarterly Report on Form
10-Q or Current Report on Form 8-K.
Transfer Agent
Our
Transfer Agent and Registrar for our Common Stock is Colonial Stock
Transfer, located at 66 Exchange Place, Suite 100, Salt Lake City,
Utah 84111.
Issuer Purchases of Equity Securities
Not applicable.
ITEM 6. SELECTED
FINANCIAL DATA
Information requested by this Item is not included, as we are
electing to take advantage of scaled disclosure requirements
available to Smaller Reporting Companies.
ITEM 7. MANAGEMENT'S
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
The discussion and analysis set forth below should be read in
conjunction with the information presented in other sections of
this Annual Report, including “Item 1. Business,”
“Item 1A. Risk Factors,” and “Item 8. Financial
Statements and Supplementary Data.” The following discussion
may contain forward-looking statements that reflect our plans,
estimates and beliefs. Words such as “expects,”
“anticipates,” “intends,”
“plans,” “believes,” “seeks,”
“estimates” and similar expressions or variations of
such words are intended to identify forward-looking statements, but
are not the only means of identifying forward-looking statements.
Our actual results could differ materially from those discussed in
these forward-looking statements.
Overview
We are a security technology company organized in March 2016
focused on delivering modern policing solutions to customers,
primarily consisting of law enforcement and security personnel. We
began demonstrations of our first product, the BolaWrap 100 remote
restraint device, in November 2017. The immediate addressable
domestic market consists of approximately 701,000 full-time sworn
law enforcement officers in the U.S. 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 40 law enforcement agencies took
delivery of the 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 and have just
started filling small orders as we establish production. We have
made improvements to our product as a result of law agency input
and we are now taking orders for an enhanced version of the
BolaWrap 100 with a new green line laser accessory scheduled to
commence deliveries in the second quarter of 2019. 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 LLC with
and into our wholly-owned subsidiary 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 Common Stock 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 commenced under the WRTC ticker symbol on the OTCQB Venture
Market for early stage and developing U.S. and international
companies. On December 4, 2018, our stock trading was uplisted to
the Nasdaq Capital Market also under the symbol “WRTC.”
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 six 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, the BolaWrap 100, 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 40 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.
We believe the enhanced version of our product with the laser
accessory will meet customer requirements and we are taking
orders for delivery in the second quarter of 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 to the Company of
approximately $12,140,000. We expect to grow business functions,
including production, marketing, sales, distribution, service and
administration. Until we generate additional 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 with
respect to 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.
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.
We sell
our products to customers primarily law enforcement agencies and
foreign dealers and revenue from such transactions is recognized in
the periods that products are shipped (free on board
(“FOB”)
shipping point) or received by customers (FOB destination), when
the fee is fixed or determinable and when collection of resulting
receivables is reasonably assured. We identify customer performance
obligations, determine the transaction price, allocate the
transaction price to the performance obligations and recognize
revenue as we satisfy the performance obligations. Our primary
performance obligations are products/accessories and training. Our
customers do not have the right to return product unless the
product is found to be defective.
Historically,
our assumptions, judgments and estimates relative to our critical
accounting policies have not differed materially from actual
results. There were no significant changes or modification of our
critical accounting policies and estimates involving management
valuation adjustments affecting our results for the year ended
December 31, 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, marketing and
customer training, the use of outside resources, public company and
regulatory costs, and other factors, some of which are outside of
our control. Our operating costs could increase rapidly as we
introduce our product and expand our research and development,
production, distribution, training, 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
Year Ended December 31, 2018 Compared to Year Ended December 31,
2017
We had
minimal revenue of $23,150 from deliveries to customers for the
year ended December 31, 2018. At December 31, 2018 we had a backlog
of approximately $53,000, that was filled in January
2019.
We did
not actively pursue orders in 2018, as our objective was to
introduce our new product to law enforcement and obtain feedback to
improve the product prior to mass production. Recently, our
marketing and selling efforts have focused on creating demand for
our improved generation product with our green line laser. Initial
deliveries are anticipated in the second quarter of 2019. We
incurred promotional costs of $192,484 for the year ended December
31, 2018 related primarily to the cost of demonstration products
and accessories delivered to law enforcement agencies, and were
expensed as marketing costs.
We had
no revenue or product costs for the year ended December 31,
2017.
Selling, General and Administrative Expense
Selling,
general and administrative expense for the year ended December 31,
2018 was $2,607,397 compared to $522,210 for the year ended
December 31, 2017. The most recent period included non-cash
stock-based compensation expense of $417,151 and compensation and
sales consulting costs of $950,460. There were no non-cash
stock-based compensation costs for the prior year, and compensation
and sales consulting costs were $263,046 for the year ended
December 31, 2017. The increase in compensation and sales
consulting costs was due to the increase in staffing following our
December 2017 IPO and the hiring of employees and sales consultants
to introduce and demonstrate the BolaWrap 100 broadly across the
nation.
Travel
and entertainment costs increased from $55,356 in 2017 to $267,894
for the year ended December 31, 2018. This increase is attributable
to product demonstration activities provided to law enforcement
agencies during 2018. Product promotion, trade show and other
marketing costs were $263,817 for the year ended December 31, 2018
compared to $58,533 for the prior year, 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 $708,073 during the year ended
December 31, 2018 included legal, audit and professional fees of
$253,412, chairman and director fees of $169,500, public company
costs of $210,769 and occupancy and office costs of $74,392. In the
prior year, our activities were just beginning as we focused on
research and development, with other general and administrative
costs aggregating $144,633, including occupancy costs of $40,880,
public company costs of $18,692 and $85,061 of professional
fees.
Research and Development Expense
Research
and development expense for the year ended December 31, 2018 was
$734,776, which included $95,837 of non-cash stock-based
compensation expense, $323,650 of compensation and consulting
costs, contract research costs of $119,431, prototype costs of
$93,581, patent costs of $30,470, travel and entertainment costs of
$35,136 and occupancy costs of $15,872. This was an increase from
$311,335 for the prior year, which included $65,185 of compensation
and consulting costs, contract research costs of $122,433,
prototype costs of $29,998, patent costs of $46,580 and travel and
entertainment costs of $9,953. During 2018, we increased staffing
for internal research and production development activities. 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 year ended December 31, 2018 was $3,336,435 compared
to a net loss of $833,545 for the prior year, 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.
Liquidity and Capital Resources
Overview
We have experienced net losses and negative cash flows from
operations since our inception. As of December 31, 2018, we had
cash of $12,358,896, positive working capital of $12,239,054, and
had sustained cumulative losses attributable to common stockholders
of $4,404,336. We believe that our cash on hand will sustain our
operations for at least the next twelve months.
Our sole source of liquidity to date has been funding from our
stockholders and the sale of debt and equity securities. We expect
our primary source of future liquidity will be from the sale of
products, if any, and if required from future equity or debt
financings.
Capital Requirements
In December 2017, we completed our IPO, raising gross proceeds of
approximately $3.49 million from the sale of 2,328,533 shares of
Common Stock at the public offering price of $1.50 per
share.
In
January 2018, the Company financed $39,435 of insurance obligations
pursuant to a short-term note agreement, which accrued interest at
a rate of 7.15%, and which was payable in ten monthly principal and
interest payments of $4,074 due through November 2018. The note was paid in November
2018.
In October 2018 we received approximately $12.14 million 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, among other things,
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 will grow as we are increasing staffing,
development, production, marketing, training and other functions
and based on other factors outside of our control. We believe we
have sufficient capital to sustain our operations for the next
twelve months, although no assurances can be given. Additionally,
no assurances can be provided that any future debt or equity
capital will be available to us under favorable terms, if at all.
Failure to quickly produce and sell products and timely obtain any
required additional capital in the future 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, among 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 year ended December 31, 2018, net cash used in operating
activities was $2,692,136. The net loss of $3,336,435 was decreased by
non-cash expense of $512,988 for stock-based compensation and
$21,875 for depreciation and amortization. Other major component
changes using operating cash included a $27,075 increase in
inventories, an increase of $63,982 in prepaid expense and other
current assets and an increase of $4,396 in accounts receivable. An
increase of $204,889 in accounts payable and accrued liabilities
reduced cash used in operating activities.
During the year ended December 31, 2017, net cash used in operating
activities was $833,709. The net loss of $833,545 was reduced by a $16,853
decrease in prepaid expense, $26,000 of deferred and accrued
officer compensation and an $81,514 increase of accounts payable
and accruals. A total of $131,192 was invested in inventories for
production.
Investing Activities.
We used $14,225 and $35,103 of cash for the purchase of property
and equipment during the years ended December 31, 2018 and 2017,
respectively. As patents have now been granted, we began
capitalizing patent costs during 2018 and invested $120,070 in
patents during the year ended December 31, 2018.
Financing Activities.
During 2018 we received $12,140,786 in net proceeds from our
private equity financing and repaid a short-term insurance
financing note in the amount of $39,435. We obtained $3,697,716 of cash from our
stockholders, net of offering costs associated with our IPO during
the year ended December 31, 2017.
Contractual Obligations and Commitments
We are obligated to pay to Syzygy Licensing, LLC
(“Syzygy”) a 4% royalty fee on future product sales
up to an aggregate amount of $1.0 million in royalties or
until September 30, 2026, whichever occurs earlier.
In January 2019 we extended our Las Vegas, Nevada corporate and
production facility lease through December 31, 2020. In February
2019 we entered into a two-year lease for an office and warehouse
space in Forest Lake, California. We are committed to aggregate
lease payments on these leases of $46,281 in 2019, $58,636 in 2020
and $5,598 in 2021.
At
December 31, 2018 we were committed to approximately $1.46 million
of purchase commitments for product components. These purchase
commitments are generally subject to modification as to timing,
quantities and scheduling and in certain instances may be
cancelable without penalty.
Effects of Inflation
We do
not believe that inflation has had a material impact on our
business, revenue or operating results during the periods
presented.
Recent Accounting Pronouncements
Other
than our adoption of 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 year ended December 31, 2018, or subsequently thereto,
that we believe are of potential significance to our financial
statements.
Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure
There
have been no disagreements with our independent registered public
accounting firm in regards to accounting and financial
disclosure.
ITEM 7A. QUANTITATIVE
AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Not applicable.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The Financial Statements of the Company required to be included in
this Item 8 are set forth in a separate section of this report
following Item 15 and the Signature Page commencing on Page
F-1.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE
There have been no disagreements or any reportable events requiring
disclosure under Item 304(b) of Regulation S-K.
ITEM 9A. CONTROLS AND PROCEDURES.
We are required to maintain disclosure controls and procedures
designed to ensure that material information related to us, is
recorded, processed, summarized and reported within the time
periods specified in the SEC rules and forms.
Evaluation of Disclosure Controls and Procedures
We maintain disclosure controls and procedures (as defined in Rules
13a-15(e) and 15d-15(e) under the Exchange Act) that are designed
to ensure that information required to be disclosed in our Exchange
Act reports is recorded, processed, summarized and reported within
the time periods specified in the SEC’s rules and forms. Our
disclosure controls and procedures are also designed to ensure that
information required to be disclosed in our Exchange Act reports is
accumulated and communicated to management, including our Chief
Executive Officer and Chief Financial Officer, to allow timely
decisions regarding required disclosures. In designing and
evaluating the disclosure controls and procedures, management
recognizes that any controls and procedures, no matter how well
designed and operated, can provide only reasonable assurance of
achieving the desired control objectives, and management is
required to apply its judgment in evaluating the cost-benefit
relationship of possible controls and procedures.
Our management, with the participation of our Chief Executive
Officer and Chief Financial Officer, evaluated the effectiveness of
our disclosure controls and procedures as of December 31, 2018 and,
based on this evaluation, our Chief Executive Officer and Chief
Financial Officer concluded that, as of the end of the period
covered by this report, our disclosure controls and
procedures were effective at
the reasonable assurance level.
Management’s Report on Internal Control Over Financial
Reporting
This Annual Report does not include a report of management's
assessment regarding internal control over financial reporting or
an attestation report of the Company’s registered public
accounting firm because the Company is an “emerging growth
company” under the JOBS Act. An attestation report of the
Company’s independent registered public accounting firm
regarding internal control over financial reporting is also not
required for smaller reporting companies.
Changes in Internal Controls
Our
Chief Financial Officer has authority to initiate transactions, has
custody of assets, and records and reconciles transactions and
prepares our period end financial reports. In prior periods,
without the sufficient segregation of conflicting duties or
adequate controls normally required for effective internal control
this was considered a material weakness in our internal control
over financial reporting. During the quarter ended December 31,
2018, we instituted additional internal controls consisting of
adding accounting staff and instituting review procedures by our
Chief Executive Officer, which we believe remediates the previously
identified material weakness.
Other
than described in the preceding paragraph, there have been no
changes in our internal control over financial reporting during our
fiscal quarter ended December 31, 2018 that have materially
affected, or are reasonably likely to materially affect, our
internal control over financial reporting. Our process for
evaluating controls and procedures is continuous and encompasses
constant improvement of the design and effectiveness of established
controls and procedures and the remediation of any deficiencies
that may be identified during this process.
ITEM 9B. OTHER
INFORMATION
None.
Certain
information required by this Part III is omitted from this report
and is incorporated by reference to our Definitive Proxy Statement
to be filed with the SEC in connection with the Annual Meeting of
Stockholders to be held in 2019 (the “Proxy Statement”), which must be
filed no later than 120 days after the
close of the fiscal year ended December 31, 2018, pursuant to
Regulation 14A.
ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE
GOVERNANCE.
The information required by this item will be incorporated by
reference from the Company’s definitive proxy statement, to
be filed with the SEC on or before April 30, 2019.
ITEM 11. EXECUTIVE COMPENSATION.
The information required by this item will be incorporated by
reference from the Company’s definitive proxy statement, to
be filed with the SEC on or before April 30, 2019.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT AND RELATED STOCKHOLDER MATTERS.
The information required by this item will be incorporated by
reference from the Company’s definitive proxy statement, to
be filed with the Securities and Exchange Commission on or before
April 30, 2019.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS AND
DIRECTOR INDEPENDENCE.
The information required by this item will be incorporated by
reference from the Company’s definitive proxy statement, to
be filed with the SEC on or before April 30, 2019.
ITEM 14. PRINCIPAL
ACCOUNTING FEES AND
SERVICES.
The information required by this item will be incorporated by
reference from the Company’s definitive proxy statement, to
be filed with the SEC on or before April 30, 2019.
ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
|
(a) List of documents filed as a part of this
report:
|
|
|
|
(1) Index to
Financial Statements
|
|
|
|
Report
of Independent Registered Public Accounting Firm
|
|
F-2
|
|
Balance
Sheets as of December 31, 2018 and 2017
|
|
F-3
|
|
Statements
of Operations for the Years Ended December 31, 2018 and
2017
|
|
F-4
|
|
Statements
of Stockholders’ Equity for the Years Ended December 31, 2018
and 2017
|
|
F-5
|
|
Statements
of Cash Flows for the Years Ended December 31, 2018 and
2017
|
|
F-6
|
|
Notes
to Financial Statements
|
|
F-7
|
|
|
|
|
|
(2) Financial
Statement Schedules
|
|
|
|
All
schedules have been omitted because the information is not
applicable, is not material or because the information required is
included in the financial statements or the notes
thereto.
|
|
(3) Index to
Exhibits
|
|
|
|
The
exhibits listed on the accompanying index to exhibits immediately
following the financial statements are filed as part of, or hereby
incorporated by reference into, this Form 10-K.
|
|
Exhibit
Number
|
Description
|
|
|
Stock
Purchase Agreement, dated March 22, 2017, by and between Wrap
Technologies, LLC, Petro River Oil Corp., and Megawest Energy
Montana Corp. Incorporated by reference to Exhibit 2.1 to the
Registration Statement on Form S-1, filed on April 17,
2017.
|
|
|
Merger
Agreement between Wrap Technologies, LLC and Megawest Energy
Montana Corp., dated March 30, 2017. Incorporated by reference to
Exhibit 2.2 to the Registration Statement on Form S-1, filed on
April 17, 2017.
|
|
|
Amended
and Restated Certificate of Incorporation of the Registrant.
Incorporated by reference to Exhibit 3.1 to the Registration
Statement on Form S-1, filed on April 17, 2017.
|
|
|
Bylaws
of the Registrant. Incorporated by reference to Exhibit 3.2 to the
Registration Statement on Form S-1, filed on April 17,
2017.
|
|
|
Form of
Common Stock Certificate. Incorporated by reference to Exhibit 4.1
to Amendment No. 1 to the Registration Statement on Form S-1, filed
on May 30, 2017.
|
|
|
Form of
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.
|
|
|
Amended
and Restated Intellectual Property License Agreement, dated
September 30, 2016, by and between Wrap Technologies, LLC and
Syzygy Licensing LLC. Incorporated by reference to Exhibit 10.1 to
the Registration Statement on Form S-1, filed on April 17,
2017.
|
|
|
2017
Equity Compensation Plan. Incorporated by reference to Exhibit 10.2
to the Registration Statement on Form S-1, filed on April 17,
2017.
|
|
|
Form of Placement Agent Agreement, dated October 30, 2018.
Incorporated by reference to Exhibit 10.1 to the Current Report on
Form 8-K, filed on November 5, 2018.
|
|
|
Form of Registration Rights Agreement, dated October 30, 2018.
Incorporated by reference to Exhibit 10.2 to the Current Report on
Form 8-K, filed on November 5, 2018.
|
|
|
Code of
Ethics of the Registrant Applicable to Directors, Officers And
Employees. Incorporated by reference to Exhibit 14.1 to the
Quarterly Report on Form 10-Q, filed on November 9,
2018.
|
|
|
Consent
of Independent Registered Public Accounting Firm - Rosenberg Rich Baker
Berman, P.A. *
|
|
|
Certification
of David Norris pursuant to Rule 13a-14(a) under the Securities
Exchange Act of 1934 *
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|
|
Certification
of James A. Barnes pursuant to Rule 13a-14(a) under the Securities
Exchange Act of 1934 *
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|
|
Certifications
pursuant to 18 U.S.C. Section 1350. This certification is being
furnished solely to accompany this Annual Report on Form 10-K and
is not being filed for purposes of Section 18 of the Securities
Exchange Act of 1934, as amended, and is not to be incorporated by
reference into any filing of the Company.*
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|
|
Extensible
Business Reporting Language (XBRL) Exhibits*
|
|
101.INS
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XBRL Instance Document.
|
|
101.SCH
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XBRL Taxonomy Extension Schema.
|
|
101.CAL
|
XBRL Taxonomy Extension Calculation Linkbase.
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|
101.DEF
|
XBRL Taxonomy Extension Definition Linkbase.
|
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101.LAB
|
XBRL Taxonomy Extension Labels Linkbase.
|
|
101.PRE
|
XBRL Taxonomy Extension Presentation Linkbase.
|
*
Filed herewith.
+
Management contract or compensatory plan or
arrangement.
Pursuant to the requirements of Section 13 or 15(d) of the
Securities Exchange Act of 1934, the Registrant has duly caused
this report to be signed on its behalf by the undersigned,
thereunto duly authorized, in the City of Las Vegas, State of
Nevada, on the 7th day of March, 2019.
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|
Wrap Technologies, Inc.
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|
|
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|
|
By:
|
/s/ DAVID
NORRIS
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|
|
|
|
Chief Executive Officer
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|
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|
|
|
Date: March 7,
2019
In
accordance with the Exchange Act, this report has been signed below
by the following persons on behalf of the registrant and in the
capacities and on the dates indicated.
|
Name
|
|
Position
|
|
Date
|
|
|
|
|
|
|
|
/s/ DAVID NORRIS
|
|
Chief Executive Officer and Director
|
|
March 7, 2019
|
|
David Norris
|
|
(Principal Executive Officer)
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|
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/s/ JAMES A. BARNES
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Chief Financial Officer, Secretary and
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|
March 7, 2019
|
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James A. Barnes
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Treasurer
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(Principal Accounting Officer)
|
|
|
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|
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/s/ SCOT COHEN
|
|
Executive Chairman of Board
|
|
March 7, 2019
|
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Scot Cohen
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/s/MICHAEL PARRIS
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Director
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March 7, 2019
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Michael Parris
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|
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/s/WAYNE R. WALKER
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|
Director
|
|
March 7, 2019
|
|
Wayne R. Walker
|
|
|
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|
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/s/PATRICK KINSELLA
|
|
Director
|
|
March 7, 2019
|
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Patrick Kinsella
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|
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INDEX TO FINANCIAL STATEMENTS
|
Audited Financial Statements:
|
|
|
|
|
|
|
|
Report of Independent Registered Public Accounting
Firm
|
|
F-2
|
|
|
|
|
|
Balance Sheets as of December 31, 2018 and 2017
|
|
F-3
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|
|
|
|
|
Statements of Operations for the Years Ended December 31, 2018 and
2017
|
F-4
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|
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Statements of Stockholders’ Equity for Years Ended December
31, 2018 and 2017
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F-5
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|
|
|
|
|
Statements of Cash Flows for the Years Ended December 31, 2018 and
2017
|
|
F-6
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|
|
|
|
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Notes to Financial Statements
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F-7
|
REPORT
OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the
Board of Directors and
Stockholders
of Wrap Technologies, Inc.
Opinion on the Financial Statements
We have
audited the accompanying balance sheets of Wrap Technologies, Inc.
(the Company) as of December 31, 2018 and 2017, and the related
statements of operations, stockholders’ equity, and cash
flows for each of the years in the two years ended December 31,
2018, and the related notes (collectively referred to as the
financial statements). In our opinion, the financial statements
present fairly, in all material respects, the financial position of
the Company as of December 31, 2018 and 2017, and the results of
its operations and its cash flows for each of the years in the two
years ended December 31, 2018, in conformity with accounting
principles generally accepted in the United States of
America.
Basis for Opinion
These
financial statements are the responsibility of the Company’s
management. Our responsibility is to express an opinion on the
Company’s financial statements based on our audits. We are a
public accounting firm registered with the Public Company
Accounting Oversight Board (United States) (PCAOB) and are required
to be independent with respect to the Company in accordance with
the U.S. federal securities laws and the applicable rules and
regulations of the Securities and Exchange Commission and the
PCAOB.
We
conducted our audits in accordance with the standards of the PCAOB.
Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements
are free of material misstatement, whether due to error or fraud.
The Company is not required to have, nor were we engaged to
perform, an audit of its internal control over financial reporting.
As part of our audits, we are required to obtain an understanding
of internal control over financial reporting, but not for the
purpose of expressing an opinion on the effectiveness of the
Company’s internal control over financial reporting.
Accordingly, we express no such opinion.
Our
audits included performing procedures to assess the risks of
material misstatement of the financial statements, whether due to
error or fraud, and performing procedures that respond to those
risks. Such procedures included examining, on a test basis,
evidence regarding the amounts and disclosures in the financial
statements. Our audits also included evaluating the accounting
principles used and significant estimates made by management, as
well as evaluating the overall presentation of the financial
statements. We believe that our audits provide a reasonable basis
for our opinion.
/s/ Rosenberg Rich
Baker Berman, P.A.
We have
served as the Company’s auditor since 2016.
Somerset,
New Jersey
March
7, 2019
Wrap Technologies, Inc.
Balance Sheets
|
|
|
|
|
|
|
|
ASSETS
|
|
|
|
Current assets:
|
|
|
|
Cash
|
$12,358,896
|
$3,083,976
|
|
Accounts
receivable
|
4,396
|
-
|
|
Inventories
|
158,267
|
131,192
|
|
Prepaid
expenses and other current assets
|
114,863
|
11,446
|
|
Total current assets
|
12,636,422
|
3,226,614
|
|
Property and equipment, net
|
30,373
|
36,668
|
|
Intangible assets, net
|
118,715
|
-
|
|
Other assets
|
1,512
|
1,512
|
|
Total assets
|
$12,787,022
|
$3,264,794
|
|
|
|
|
|
LIABILITIES AND STOCKHOLDERS' EQUITY
|
|
|
|
Current liabilities:
|
|
|
|
Accounts
payable
|
$232,915
|
$36,165
|
|
Accrued
liabilities
|
68,453
|
60,314
|
|
Deferred
and accrued officer compensation
|
96,000
|
96,000
|
|
Total current liabilities
|
397,368
|
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;
27,364,607 and 22,803,533 shares issued and outstanding,
respectively
|
2,736
|
2,280
|
|
Additional
paid-in capital
|
16,791,254
|
4,137,936
|
|
Accumulated
deficit
|
(4,404,336)
|
(1,067,901)
|
|
Total stockholders' equity
|
12,389,654
|
3,072,315
|
|
Total liabilities and stockholders' equity
|
$12,787,022
|
$3,264,794
|
See
accompanying notes to financial statements.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues:
|
|
|
|
Product
sales
|
$18,830
|
$-
|
|
Other
revenue
|
4,320
|
-
|
|
Total
revenues
|
23,150
|
-
|
|
Cost
of revenues
|
18,611
|
-
|
|
Gross profit
|
4,539
|
-
|
|
|
|
|
|
Operating expenses:
|
|
|
|
Selling,
general and administrative
|
2,607,397
|
522,210
|
|
Research
and development
|
734,776
|
311,335
|
|
Total
operating expenses
|
3,342,173
|
833,545
|
|
Loss
from operations
|
(3,337,634)
|
(833,545)
|
|
|
|
|
|
Other income (expense):
|
|
|
|
Interest
income
|
2,912
|
|
|
Interest
expense
|
(1,304)
|
-
|
|
Other
|
(409)
|
-
|
|
|
1,199
|
-
|
|
Net loss
|
$(3,336,435)
|
$(833,545)
|
|
|
|
|
|
Net
loss per basic and diluted common share
|
$(0.14)
|
$(0.04)
|
|
Weighted
average common shares used to compute net loss per basic and
diluted common share
|
23,578,291
|
20,194,560
|
See
accompanying notes to financial statements.
Wrap Technologies, Inc.
Statements of Stockholders' Equity
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 2016
|
17,445,408
|
$1,745
|
$440,755
|
$(234,356)
|
$208,144
|
|
Sale
of common stock in January 2017 at $0.10447 per share
|
2,153,754
|
215
|
224,785
|
-
|
225,000
|
|
Shares
issued to acquire merger subsidiary to effect reverse
recapitalization
|
400,838
|
40
|
(40)
|
-
|
-
|
|
Sale
of common stock in July 2017 at $0.10447 per share
|
475,000
|
47
|
49,953
|
-
|
50,000
|
|
Sale
of common stock in public offering at $1.50 per share in fourth
quarter of 2017, net of issuance costs
|
2,328,533
|
233
|
3,422,483
|
-
|
3,422,716
|
|
Net
loss for the period
|
-
|
-
|
-
|
(833,545)
|
(833,545)
|
|
Balance at December 31, 2017
|
22,803,533
|
$2,280
|
$4,137,936
|
$(1,067,901)
|
$3,072,315
|
|
Sale
of common stock and warrants at $3.00 per share and placement agent
warrants in private offering, net of issuance costs
|
4,561,074
|
$456
|
12,140,330
|
|
12,140,786
|
Share-based compensation expense
|
|
512,988
|
|
512,988
|
|
Net
loss for the period
|
-
|
-
|
-
|
(3,336,435)
|
(3,336,435)
|
|
Balance at December 31, 2018
|
27,364,607
|
$2,736
|
$16,791,254
|
$(4,404,336)
|
$12,389,654
|
See
accompanying notes to financial statements.
Wrap Technologies, Inc.
Statements of Cash Flows
|
|
|
|
|
|
|
|
|
|
|
|
Cash Flows From Operating Activities:
|
|
|
|
Net
loss
|
$(3,336,435)
|
$(833,545)
|
|
Adjustments
to reconcile net loss to net cash
|
|
|
|
used
in operating activities:
|
|
|
|
Depreciation
and amortization
|
21,875
|
6,661
|
|
Share-based
compensation
|
512,988
|
-
|
|
Changes
in assets and liabilities:
|
|
|
|
Accounts
receivable
|
(4,396)
|
|
|
Inventories
|
(27,075)
|
(131,192)
|
|
Prepaid
expenses and other current assets
|
(63,982)
|
16,853
|
|
Accounts
payable
|
196,750
|
24,100
|
|
Deferred
and accrued officer compensation
|
-
|
26,000
|
|
Accrued
liabilities and other
|
8,139
|
57,414
|
|
Net
cash used in operating activities
|
(2,692,136)
|
(833,709)
|
|
|
|
|
|
Cash Flows From Investing Activities:
|
|
|
|
Capital
expenditures for property and equipment
|
(14,225)
|
(35,103)
|
|
Investment
in patents and trademarks
|
(120,070)
|
-
|
|
Net
cash used in investing activities
|
(134,295)
|
(35,103)
|
|
|
|
|
|
Cash Flows From Financing Activities:
|
|
|
|
Sale
of common stock and warrants
|
13,683,222
|
3,767,800
|
|
Offering
costs paid
|
(1,542,436)
|
(70,084)
|
|
Payment
of notes payable
|
(39,435)
|
-
|
|
Net
cash provided by financing activities
|
12,101,351
|
3,697,716
|
|
|
|
|
|
Net increase in cash and cash equivalents
|
9,274,920
|
2,828,904
|
|
Cash, beginning of period
|
3,083,976
|
255,072
|
|
Cash, end of period
|
$12,358,896
|
$3,083,976
|
|
|
|
|
|
Supplemental Disclosure of Non-Cash Investing
|
|
|
|
and Financing Activities:
|
|
|
|
Interest
paid
|
$1,304
|
$-
|
|
Non-cash
investing and financing activities:
|
|
|
|
Prepaid
insurance financed with note payable
|
$39,435
|
$-
|
|
Issuance
costs relating to warrants issued to private offering selling
agent
|
$664,427
|
$-
|
See
accompanying notes to financial statements.
Wrap Technologies, Inc.
Notes to Financial Statements
|
1.
|
ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING
POLICIES
|
Organization and Business Description
Wrap Technologies, Inc., a Delaware corporation
(the “Company”), is a 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 accompanying financial statements have been
prepared in conformity with accounting principles generally
accepted in the United States of America
(“U.S.
GAAP”). The preparation
of financial statements in conformity with accounting principles
generally accepted in the United States of America requires
management to make estimates and assumptions (e.g., recognition and
measurement of contingencies and accrued costs) that affect the
reported amounts of assets and liabilities, and disclosure of
contingent assets and liabilities at the date of the financial
statements and affect the reported amounts of revenues and expenses
during the reporting period. Actual results could materially differ
from those estimates.
Public and Private Offerings
In December 2017, the Company completed a self-underwritten public
offering raising gross proceeds of approximately $3.49 million from
the sale of 2,328,533 shares of common stock at $1.50 per share.
Three officers of the Company purchased an aggregate of 40,000
shares of the offering for an aggregate of
$60,000.
On October 30, 2018, the Company obtained gross cash proceeds of
$13.68 million and net cash proceeds of approximately $12.14
million from the sale of 4,561,074 units
(“Units”)
for $3.00 per Unit in a private offering. Each Unit consisted of
one share of common stock and one detachable two-year warrant to
purchase one share of common stock at an exercise price of $5.00
per share.
Wrap Technologies, Inc.
Notes to Financial Statements
|
1.
|
ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(continued)
|
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 year ended December 31, 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.
Loss per Share
Basic
loss per common share is computed by dividing net loss for the
period by the weighted-average number of shares of common stock
outstanding during the period. Diluted net loss per common share
reflects the potential dilution of securities that could share in
the earnings of an entity. The Company’s losses for the
periods presented cause the inclusion of potential common stock
instruments outstanding to be antidilutive. Stock options and
warrants exercisable into a total of 7,084,681 shares of common
stock were outstanding at December 31, 2018. These securities are
not included in the computation of diluted net loss per common
share for the periods presented as their inclusion would be
antidilutive due to losses incurred by the Company.
Fair Value of Financial Instruments
The
carrying amounts of cash, accounts payable and accrued liabilities
approximate fair values due to the short nature of these
instruments.
Concentrations of Credit Risk
Financial
instruments, which potentially subject the Company to
concentrations of credit risk, consist primarily of cash. Due to
the relative short nature of such instrument, the carrying amount
approximates fair value. The Company places its cash in a demand
deposit account at one bank and such balances may at times be in
excess of amounts insured by federal agencies, which is $250,000 as
of December 31, 2018. The Company does not believe that it is
subject to any unusual financial risk beyond the normal risk
associated with commercial banking relationships. The Company
performs periodic evaluations of the relative credit standing of
these financial institutions. The Company has not experienced any
significant losses on its cash.
Accounts Receivable and Allowance for Doubtful
Accounts
The Company’s policy is to evaluate the
collectability of accounts receivable based on an assessment of the
collectability of specific customer accounts and then record an
allowance for doubtful accounts to reduce the receivables to an
amount that management reasonably estimates will be
collected. The following factors are considered when
determining if collection of a receivable is reasonably assured:
customer credit-worthiness, past transaction history with the
customer, current economic industry trends and changes in customer
payment terms. There was no allowance
for doubtful accounts recorded at December 31, 2018. Accounts that
are deemed uncollectible will be written off against the allowance
for doubtful accounts after all reasonable collection efforts have
been exhausted. If a major customer’s creditworthiness
deteriorates, or actual defaults exceed our historical experience,
such estimates could change and impact our future reported
financial results.
Inventories
Inventories are valued at the lower of cost or net
realizable value. The cost of substantially all of the
Company’s inventory is determined by the weighted
average cost method. Inventory is comprised of raw materials,
assemblies and finished products intended for sale to
customers. The Company
evaluates the need for reserves for excess and obsolete inventories
determined primarily based upon estimates of future demand for the
Company’s products. At
December 31, 2018 the Company had no reserve for
obsolescence.
Property, Equipment and Depreciation
Property
and equipment is stated at cost. Depreciation on property and
equipment is computed over the estimated useful lives of three
years using the straight-line method. The Company intends, on any
retirement or disposition of property and equipment, that the
related cost and accumulated depreciation or amortization will be
removed and a gain or loss recorded.
Wrap Technologies, Inc.
Notes to Financial Statements
|
1.
|
ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(continued)
|
Intangible Assets
Intangible
assets consisted of capitalized legal fees and filing costs related
to obtaining patents and trademarks. Intangible assets are carried
at cost, less accumulated amortization. Amortization for patents is
computed on a straight-line basis over the estimated remaining
lives of issued patents, which is 20 years from the initial
filing. Trademarks are amortized on a straight-line basis over
ten years, the estimated useful life of the assets.
Impairment of Long-Lived Assets
Long-lived
assets and identifiable intangibles held for use are reviewed for
impairment whenever events or changes in circumstances indicate
that the carrying amount may not be recoverable. If the sum of
undiscounted expected future cash flows is less than the carrying
amount of the asset or if changes in facts and circumstances
indicate, an impairment loss is recognized and measured using the
asset’s fair value. The Company did not recognize any
impairment loss during the periods ended December 31, 2017 and
2018.
Classification and Valuation of Warrants
The
Company accounts for warrants as either equity or liabilities based
upon the characteristics and provisions of each particular
instrument. Warrants valued and classified as equity are recorded
as additional paid-in capital based on the issue date fair value
and no further adjustment to valuation is made. As of December 31,
2018, the Company had no warrants or other derivative financial
instruments that require separate accounting as liabilities and
periodic revaluation.
Advertising and Promotion Costs
The
Company expenses advertising costs in the period in which they are
incurred. The Company incurred advertising costs of $27,218 and
$11,812 for the years ended December 31, 2018 and 2017,
respectively. The Company incurred product promotion costs for
demonstration products delivered to prospective customers of
$192,484 for the year ended December 31, 2018. Advertising and
promotion costs are included in selling, general and administrative
expenses in the accompanying statements of operations.
Research and Development Costs
Research
and development costs consist primarily of contract development
costs and experimental work materials and certain startup patent
costs. Research and development costs with no alternative use are
expensed as incurred.
Leases
Leases
entered into are classified as either capital or operating leases.
At the time a capital lease is entered into, an asset is recorded,
together with its related long-term obligation to reflect the
purchase and financing. At December 31, 2018 and 2017, the Company
had no capital lease obligations.
Revenue Recognition
In May 2014, the FASB issued ASU 2014-09, Revenue
from Contracts with Customers (“ASU 2014-09”) and ASC Subtopic 340-40, Other Assets and
Deferred Costs - Contracts with Customers
(“ASC
340-40”), (collectively,
“Topic 606”). On January 1, 2018, the Company adopted
Topic 606 and, as it had no prior revenue or contracts with
customers, there was no transition required nor any impact on prior
results. ASU 2014-09 requires entities to recognize revenue through
the application of a five-step model, which includes identification
of the contract, identification of the performance obligations,
determination of the transaction price, allocation of the
transaction price to the performance obligations and recognition of
revenue as the entity satisfies the performance obligations. See
Note 2 for additional information.
Shipping and Handling Costs
Shipping
and handling costs are included in cost of revenues. Shipping and
handling costs invoiced to customers are included in revenue.
Actual shipping and handling costs were $1,570 for the year ended
December 31, 2018. Actual revenues from shipping and handling were
$670 for the year ended December 31, 2018.
Wrap Technologies, Inc.
Notes to Financial Statements
|
1.
|
ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(continued)
|
Warranty Reserves
The
Company warrants its products and accessories to be free from
defects in materials and workmanship for a period of one year from
the date of purchase. The warranty is generally limited. The
Company currently provides direct warranty service. International
market warranties are generally similar to the U.S.
market.
The
Company establishes a warranty reserve based on anticipated
warranty claims at the time product revenues are recognized.
Factors affecting warranty reserve levels include the number of
units sold, anticipated cost of warranty repairs and anticipated
rates of warranty claims. The Company evaluates the adequacy of the
provision for warranty costs each reporting period. The warranty
reserve was $428 at December 31, 2018.
Segment Information
The
Company has one operating segment with one business activity,
providing restraint solutions. The Company’s chief operating
decision maker is its Chief Executive Officer, who manages
operations on a consolidated basis for purposes of allocating
resources.
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 December 31, 2018 due to losses incurred.
Deferred
tax assets and liabilities are determined based on temporary
differences between the bases of certain assets and liabilities for
income tax and financial reporting purposes.
The
Company maintains a valuation allowance with respect to deferred
tax assets. The Company establishes a valuation allowance based
upon the potential likelihood of realizing the deferred tax asset
and taking into consideration the Company’s financial
position and results of operations for the current period. Future
realization of the deferred tax benefit depends on the existence of
sufficient taxable income within the carry-forward period under the
Federal tax laws. Changes in circumstances, such as the Company
generating taxable income, could cause a change in judgment about
the realizability of the related deferred tax asset. Any change in
the valuation allowance will be included in income in the year of
the change in estimates.
Subsequent Events
Management
has evaluated events subsequent to December 31, 2018 through the
date the accompanying financial statements were filed with the
Securities and Exchange Commission and noted that there have been
no events or transactions which would affect the Company’s
financial statements for the year ended December 31,
2018.
Recent Issued Accounting Guidance
Recently Adopted Accounting Pronouncement:
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 adoption of this
ASU did not have any impact on the Company’s historical
financial statements and the Company was permitted and adopted
retrospectively to January 1, 2018 the standard for any equity
securities with down round features.
Wrap Technologies, Inc.
Notes to Financial Statements
|
1.
|
ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(continued)
|
As
discussed above under “Revenue Recognition”, the
Company adopted Topic 606 on January 1, 2018.
In February 2016, the FASB issued ASU 2016-02,
Leases (Topic 842), which is intended to increase transparency and
comparability among organizations by requiring the recognition of
right-of-use (“ROU”) assets and lease liabilities on the
balance sheet. In July 2018, the FASB issued additional guidance
which provided an additional transition method for adopting the
updated guidance. Under the additional transition method, entities
may elect to recognize a cumulative-effect adjustment to the
opening balance of retained earnings in the year of adoption. We
currently plan to adopt this standard using this modified
retrospective approach.
Effective the first quarter of 2019:
In
February 2016, the FASB issued ASU 2016-02, Leases (Topic 842),
which is intended to increase transparency and comparability among
organizations by requiring the recognition of right-of-use
(“ROU”) assets and lease liabilities on the balance
sheet. In July 2018, the FASB issued additional guidance which
provided an additional transition method for adopting the updated
guidance. Under the additional transition method, entities may
elect to recognize a cumulative-effect adjustment to the opening
balance of retained earnings in the year of adoption. We currently
plan to adopt this standard using this modified retrospective
approach.
Most
prominent among the changes in the standard is the requirement for
lessees to recognize ROU assets and lease liabilities for those
leases classified as operating leases under current U.S. GAAP. The
standard requires additional disclosures to enable users of
financial statements to assess the amount, timing, and certainty of
cash flows arising from leases. We intend to elect certain of the
available practical expedients upon adoption. We have evaluated our
existing lease portfolio and believe that our population of leases
is low in number. We have implemented key processes and controls to
enable the accurate assessment of leases and preparation of related
financial information.
We
expect adoption of the standard will result in the recognition of
an ROU asset and lease liability of approximately $12,900 for one
operating lease as of January 1, 2019, with no impact to retained
earnings. We had no capital leases at December 31,
2018.
Effective the first quarter of 2020:
In August 2018, the FASB issued ASU No. 2018-13,
Fair Value Measurement (“Topic 820”): Disclosure Framework - Changes to the
Disclosure Requirements for Fair Value Measurement. The ASU
modifies the disclosure requirements in Topic 820, Fair Value
Measurement, to improve the effectiveness of fair value measurement
disclosures by removing or modifying certain disclosure
requirements and adding other requirements. This ASU is effective
for public companies for annual reporting periods and interim
periods within those annual periods beginning after December 15,
2019. The Company is currently evaluating the effect, if any, that
ASU 2018-13 will have on its financial
statements.
Other pronouncements:
The
Company has reviewed other recently issued, but not yet effective,
accounting pronouncements and does not believe the future adoptions
of any such pronouncements will be expected to cause a material
impact on its financial condition or the results of
operations.
Wrap Technologies, Inc.
Notes to Financial Statements
|
2.
|
REVENUE AND PRODUCT COSTS
|
The
Company had no historical revenue prior to the year ended December
31, 2018, and accordingly all revenue has been 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.
The
Company enters into contracts that include various combinations of
products, accessories and services, such as training, each of which
are generally distinct and are accounted for as separate
performance obligations.
A performance obligation is a promise in a
contract to transfer a distinct good or service to a customer, and
is the unit of account in Topic 606. For contracts with a single
performance obligation, the entire transaction price is allocated
to the single performance obligation. For contracts with multiple
performance obligations, the Company allocates the contract
transaction price to each performance obligation using the
Company’s estimate of the standalone selling price
(“SSP”) of each distinct good or service in a
contract. The Company determines standalone selling prices based on
the price at which the performance obligation is sold separately.
If the standalone selling price is not observable through past
transactions, the Company estimates the standalone selling price
considering available information such as market conditions and
internally approved pricing guidelines related to the performance
obligations.
Performance
obligations to deliver products and accessories are generally
satisfied at the point in time the Company ships the product, as
this is when the customer obtains control of the asset under our
standard terms and conditions. The Company has elected to recognize
shipping costs as an expense in cost of 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.
The timing of revenue recognition
may differ from the timing of invoicing to customers. The Company
generally has an unconditional right to consideration when
customers are invoiced and a receivable is recorded. A contract
asset is recognized when revenue is recognized prior to invoicing,
or a contract liability (deferred revenue) when revenue will be
recognized subsequent to invoicing. At December 31, 2018 the Company had no contract
assets and no deferred revenue related to products or training for
product delivered during the year.
The
Company recognizes an asset if there are incremental costs of
obtaining a contract with a customer such as commissions. These
costs are ascribed to or allocated to the underlying performance
obligations in the contract and amortized consistent with the
recognition timing of the revenue for any such underlying
performance obligations. The Company had no such assets at December
31, 2018. The Company will apply the practical expedient to expense
any sales commissions related to performance obligations with an
amortization of one year or less when incurred within selling,
general and administrative expenses.
Estimated
costs for the Company’s standard one-year warranty are
charged to cost of products sold when revenue is recorded for the
related product. Royalties are also charged to cost of products
sold.
Inventory
is recorded at the lower of cost or net realizable value. The cost
of substantially all the Company’s inventory is determined by
the weighted average cost method. Inventories consisted of the
following:
|
|
|
|
|
|
|
|
Finished
goods
|
$82,313
|
$5,308
|
|
Work
in process
|
12,695
|
5,484
|
|
Raw
materials
|
63,259
|
120,400
|
|
|
$158,267
|
$131,192
|
Wrap Technologies, Inc.
Notes to Financial Statements
|
4.
|
PROPERTY
AND EQUIPMENT, NET
|
Property
and equipment consisted of the following:
|
|
|
|
|
|
|
|
Laboratory
equipment
|
$13,980
|
$12,730
|
|
Tooling
|
22,683
|
18,165
|
|
Computer
equipment
|
12,608
|
4,151
|
|
Furniture
and fixtures
|
9,595
|
9,595
|
|
|
58,866
|
44,641
|
|
|
(28,493)
|
(7,973)
|
|
|
$30,373
|
$36,668
|
Depreciation
expense was $20,520 and $6,661 for the years ended December 31,
2018 and 2017, respectively.
|
5.
|
INTANGIBLE ASSETS, NET
|
Intangible
assets at December 31, 2018 consisted of patent and trademark costs
of $120,070. 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. When a patent or trademark is issued
the cost is amortized using the straight-line method over the
estimated remaining lives. 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. Amortization expense
was $1,355 for the year ended December 31, 2018.
Accounts payable includes $871 due to related
party Syzygy Licensing, LLC (“Syzygy”). See note 9.
Accrued
liabilities consist of the following:
|
|
|
|
|
|
|
|
|
|
|
|
Patent
costs
|
$11,600
|
$900
|
|
Accrued
compensation
|
55,493
|
50,000
|
|
Warranty
costs
|
428
|
-
|
|
Other
|
932
|
9,414
|
|
|
$68,453
|
$60,314
|
In
January 2018, the Company financed $39,435 of insurance obligations
pursuant to a short-term note agreement, which note accrued
interest at a rate of 7.15% per annum, and which was payable in ten
monthly principal and interest payments of $4,074 due through
November 2018. The note was paid in 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. In March 2017, the
Company accrued and deferred $6,000 of compensation to each of the
two officers. The balance payable to Syzygy as of December 31, 2018
was $84,000 and
the accrued deferred compensation aggregated
$12,000. These balances accrue
without interest. No payment terms or schedule has been
established.
Wrap Technologies, Inc.
Notes to Financial Statements
|
8.
|
STOCKHOLDERS’
EQUITY AND SHARE-BASED COMPENSATION
|
The
Company’s authorized capital consists of 150,000,000 shares
of common stock, par value $0.0001, and 5,000,000 shares of
preferred stock, par value $0.0001. To reflect the recapitalization
(see Note 1) historical shares of common stock and additional
paid-in capital have been retroactively adjusted using the exchange
ratio of approximately 23,930.60 shares of common stock for each
member unit of Wrap LLC.
Public Offering
In
December 2017, the Company completed a self-underwritten public
offering raising gross proceeds of $3,492,800 from the sale of
2,328,533 shares of common stock at $1.50 per share. Net cash
proceeds to the Company were $3,422,716 after deduction of $70,084
of offering costs. Three officers of the Company purchased an
aggregate of 40,000 shares of the offering for an aggregate of
$60,000.
Wrap Technologies, Inc.
Notes to Financial Statements
Private Offering
On October 30, 2018 the Company consummated a
private offering, pursuant to which it sold 4,561,074 units
(“Units”) to certain accredited investors for $3.00
per Unit. Each Unit consisted of one share of common stock and one
detachable two-year warrant to purchase one share of common stock
at an exercise price of $5.00 per share. The offering resulted in
the Company’s receipt of gross cash proceeds of $13,683,222
and net cash proceeds of $12,140,786 after deduction of commissions
and offering costs. One officer, Elwood G. Norris, purchased
333,334 of the Units for cash of $1,000,000 on the same terms as
those applicable to all other investors.
In
connection with the offering, the Company also issued placement
agent warrants exercisable for 456,107 shares of common stock for
two years at an exercise price of $3.00 per share. The estimated
fair value of these warrants was $664,427, as determined using the
Black-Scholes methodology (assuming estimated volatility of 49%,
risk-free interest rate of 2.84%, and expected dividend yield of
0.0%). This amount was recorded as both an increase to additional
paid in capital and as a non-cash issuance cost of the
offering.
Stock Options
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, shares of common stock,
restricted stock awards 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.
In
October 2018 the Company granted a consultant options outside of
the Plan exercisable for 100,000 shares of common stock at an
exercise price of $3.00 per share with 50% vesting ratably over 18
months and the balance vesting based on performance.
The
following table summarizes stock option activity for the year ended
December 31, 2018:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding
January 1, 2018
|
-
|
-
|
-
|
$-
|
|
Granted
|
2,067,500
|
$1.68
|
4.44
|
-
|
|
Exercised
|
-
|
-
|
-
|
-
|
Forfeited,
cancelled, expired
|
-
|
-
|
-
|
-
|
|
Outstanding
December 31, 2018
|
2,067,500
|
$1.68
|
4.44
|
$3,063,375
|
|
Vested
and exercisable at December 31, 2018
|
225,000
|
$1.50
|
4.39
|
$371,250
|
Wrap Technologies, Inc.
Notes to Financial Statements
|
8.
|
STOCKHOLDERS’
EQUITY AND SHARE-BASED COMPENSATION (continued)
|
The
Company recorded stock-based compensation in its statements of
operations as follows:
|
|
|
|
|
|
|
|
|
|
|
Selling,
general and administrative
|
$417,151
|
$-
|
|
Research
and development
|
95,837
|
-
|
|
Total
stock-based expense
|
$512,988
|
$-
|
As
of December 31, 2018, total estimated compensation cost of stock
options granted but not yet vested was $970,576, which is expected
to be recognized over the weighted average period of 1.1
years.
Wrap Technologies, Inc.
Notes to Financial Statements
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:
|
|
|
|
|
|
|
|
|
|
|
|
|
Expected
stock price volatility
|
|
|
Risk-free
interest rate
|
|
|
Forfeiture
rate
|
0%
|
|
Expected
dividend yield
|
0%
|
|
Expected
life of options - years
|
2.75 - 5.00
|
Weighted-average
fair value of options granted
|
$0.72
|
Estimated
volatility is a measure of the amount by which the Company’s
stock price is expected to fluctuate each year during the expected
life of awards. The Company’s estimated volatility was based
on an average of the historical volatility of peer entities whose
stock prices were publicly available. The Company’s
calculation of estimated volatility is based on historical stock
prices of these peer entities over a period equal to the expected
life of the awards. The Company uses the historical volatility of
peer entities due to the lack of sufficient historical data of its
stock price, as it only recently commenced trading.
The risk-free
interest rate assumption is based upon observed interest rates on
zero coupon U.S. Treasury bonds whose maturity period is
appropriate for the term of the options. The dividend yield of zero
is based on the fact that the Company has never paid cash dividends
and has no present intention to pay cash dividends. The Company
calculates the expected life of the options using the Simplified
Method for the employee stock options as the Company does not have
sufficient historical data. The Company has elected to use the
contract life of the option for nonemployee stock
options.
The
following table summarizes information about stock options
outstanding at December 31, 2018:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$1.50
|
1,847,500
|
4.39
|
$1.50
|
225,000
|
$1.50
|
|
$3.00 - $3.61
|
220,000
|
4.82
|
$3.23
|
-
|
-
|
Wrap Technologies, Inc.
Notes to Financial Statements
|
8.
|
STOCKHOLDERS’
EQUITY AND SHARE-BASED COMPENSATION (continued)
|
Warrants
The
Company has outstanding common stock purchase warrants as of
December 31, 2018 as follows:
|
|
|
|
|
|
Description
|
|
|
|
|
Purchase
Warrants (1)
|
4,561,074
|
$5.00
|
October
30, 2020
|
|
Agent
Warrants
|
456,107
|
$3.00
|
October
30, 2020
|
(1)
333,334
warrants are held by a family trust of officer Elwood G.
Norris.
The
above warrants resulted from the private offering consummated in
October 2018. No warrants were exercised during the period from
issuance to December 31, 2018.
Wrap Technologies, Inc.
Notes to Financial Statements
|
9.
|
COMMITMENTS AND CONTINGENCIES
|
Facility Leases
Commencing
December 1, 2016, the Company 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 rent is currently $1,588,
subject to certain possible adjustments. In January 2019 the
Company entered into an amendment extending the lease to December
31, 2020 with a gross monthly rent of $2,100 per month for the year
2020.
Rent
expense for the year ended December 31, 2018 and 2017 was $18,157
and $18,120, respectively. The remaining future annual minimum
lease obligations under the foregoing facility lease, as amended at
December 31, 2018, are $19,051 and $25,200 for 2019 and 2020,
respectively.
In February 2019, the Company entered into a
two-year lease commencing March 1, 2019 for 1906 square feet of
office, assembly and warehousing space located in
Lake Forest, California
at an initial monthly rate of $2,723.
Minimum annual lease commitments are $27,230, $33,436 and $5,598
for 2019, 2020 and 2021, 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. The Company accrued $871 at
December 31, 2018 for royalties incurred in 2018.
Suppliers
The
Company has a number of components produced by outside suppliers,
some of which are sourced from a single supplier, which can magnify
the risk of shortages and decrease the Company’s ability to
negotiate with suppliers on the basis of price. If supplier
shortages occur, or quality problems arise, then production
schedules could be significantly delayed or costs significantly
increased, which could in turn have a material adverse effect on
the Company’s financial condition, results of operation and
cash flows.
At
December 31, 2018, the Company was committed for approximately $1.5
million for future component deliveries
that
are generally subject to modification or rescheduling in the normal
course of business.
Wrap Technologies, Inc.
Notes to Financial Statements
|
9.
|
COMMITMENTS AND CONTINGENCIES (continued)
|
Indemnifications and Guarantees
Our
officers and directors are indemnified as to personal liability as
provided by the Delaware law and the Company’s articles and
bylaws. The Company may also undertake indemnification obligations
in the ordinary course of business related to its operations. The
Company is unable to estimate with any reasonable accuracy the
liability that may be incurred pursuant to any such indemnification
obligations now or in the future. Because of the uncertainty
surrounding these circumstances, the Company’s current or
future indemnification obligations could range from immaterial to
having a material adverse impact on its financial position and its
ability to continue in the ordinary course of business. The Company
has no liabilities recorded for such indemnities.
Regulatory Agencies
The
Company may be subject to oversight from regulatory agencies
regarding firearms that arise in the ordinary course of its
business.
Until
its reverse recapitalization on March 31, 2017, the Company was
treated as a partnership for federal and state income tax purposes
and did not incur income taxes. The Company accounts for income
taxes under ASC 740. Deferred income tax assets and liabilities are
determined based upon differences between the financial reporting
and tax bases of assets and liabilities and are measured using the
enacted tax rates and laws that will be in effect when the
differences are expected to reverse. Accounting standards require
the consideration of a valuation allowance for deferred tax assets
if it is "more likely than not" that some component or all of the
benefits of deferred tax assets will not be realized.
The
Company did not provide any current or deferred U.S. federal income
tax provision or benefit for the periods presented because of
operating losses since inception. As of December 31, 2018, the
Company has net operating loss carryforwards of approximately
$3,591,000 to reduce future taxable income through 2038. Certain
changes in stock ownership can result in a limitation on the amount
of net operating loss and tax credit carryovers that can be
utilized each year. As of December 31, 2018, management has not
determined the extent of any such limitations, if any.
The
Company provided a full valuation allowance on the net deferred tax
asset, consisting of net operating loss carry forwards, because
management has determined that it is more likely than not that we
will not earn income sufficient to realize the deferred tax assets
during the carry forward period. As a result of the change in
future Federal statutory tax rates due to the passing of the Tax
Cuts and Jobs Act of 2017, management has determined that the
deferred tax assets and liabilities should not be valued at a
federal statutory rate of 34% but rather at the rate in which the
benefit of the deferred tax asset or liability will be realized by
the Company. As such, the Federal statutory rate used to value
the Company's deferred tax assets and liabilities is
21%.
The
Company has not taken a tax position that, if challenged, would
have a material effect on the financial statements for the period
ended December 31, 2018 applicable under FASB ASC 740. The Company
did not recognize any adjustment to the liability for uncertain tax
position and therefore did not record any adjustment to the
beginning balance of accumulated deficit on the balance sheet. All
tax returns for the Company remain open.
Wrap Technologies, Inc.
Notes to Financial Statements
|
10.
|
INCOME TAXES (continued)
|
The
provision for (benefit from) income taxes consists of the
following:
|
|
|
|
|
|
|
|
|
|
|
|
Current
tax benefit
|
$-
|
$-
|
|
Deferred
tax benefit
|
678,000
|
136,000
|
|
Change
in valuation allowance
|
(678,000)
|
(136,000)
|
|
Income
tax benefit (provision)
|
$-
|
$-
|
A
reconciliation of the provision for income taxes at the federal
statutory rate of 21% to the Company’s provision for income
tax is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
Income
taxes benefit computed at federal statutory rate
|
$701,000
|
$133,000
|
|
Research
tax credits
|
15,000
|
6,000
|
|
Permanent
differences and other
|
(38,000)
|
(3,000)
|
|
Change
in valuation allowance
|
(678,000)
|
(136,000)
|
|
Income
tax benefit (provision)
|
$-
|
$-
|
Deferred
income taxes reflect the net tax effects of temporary differences
between the carrying amounts of assets and liabilities for
financial reporting purposes and the amounts used for income tax
purposes. The following table presents the significant components
of the Company’s deferred tax assets and liabilities for the
periods presented:
|
|
|
|
|
|
|
|
Deferred
tax assets:
|
|
|
|
Net
operating losses
|
$756,000
|
$132,000
|
|
Research
tax credits
|
23,000
|
6,000
|
|
Deferred
compensation
|
20,000
|
20,000
|
|
Stock
compensation
|
76,000
|
-
|
|
Accruals
and other
|
-
|
13,000
|
|
|
875,000
|
171,000
|
|
Deferred
tax liabilities:
|
|
|
|
Depreciation
and other
|
29,000
|
3,000
|
|
|
29,000
|
3,000
|
|
Net
deferred tax assets
|
846,000
|
168,000
|
|
|
(846,000)
|
(168,000)
|
|
Net
deferred taxes after valuation allowance
|
$-
|
$-
|
|
11.
|
RELATED PARTY TRANSACTIONS
|
Commencing
in October 2017, the Company began reimbursing officer Mr. Elwood
Norris $1,500 per month on a month to month basis for laboratory
costs for an aggregate of $18,000 and $4,500 during the years ended
December 31, 2018 and 2017, respectively.
See
Notes 1, 6, 7, 8 and 9 for additional related party transactions
and information.
