Item 1A. Risk
Factors
You
should carefully consider the risks and uncertainties described
below, together with all the other information in this Quarterly
Report on Form 10-Q, including “
Management’s Discussion and Analysis of
Financial Condition and Results of Operations
” and the
condensed financial statements and the related notes. If any of the
following risks actually occurs, our business, reputation,
financial condition, results of operations, revenue, and future
prospects could be negatively impacted. In that event, the market
price of our common stock when and if it commences trading could
decline, and you could lose part or all of your
investment.
Risk Factors Relating to Our Business
We have a history of operating losses, expect additional losses and
may not achieve or sustain profitability.
We have
a history of operating losses and expect additional losses as we
introduce our new product line and until we achieve revenue and
resulting margins to offset our operating costs. Our net loss
for the year ended December 31, 2017 was $833,545 and our net loss
for the six months ended June 30, 2018 was $1,210,920. Our ability
to achieve future profitability is dependent on a variety of
factors, many of which are outside of our control. Failure to
achieve profitability or sustain profitability, if achieved, may
require us to continue to raise additional financing, which could
have a material negative impact on the market value of our common
stock.
We may need additional capital to execute our business plan, and
raising additional capital, if possible, by issuing additional
equity securities may cause dilution to existing shareholders. In
addition, raising additional capital by issuing additional debt
financing may restrict our operations.
While
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 some funds from product sales during that
time, existing working capital may not be sufficient to achieve
profitable operations due to product introduction costs, operating
losses and other factors. Principal factors affecting the
availability of internally generated funds include:
●
failure
of product sales to meet planned projections;
●
working
capital requirements to support business growth;
●
our
ability to control spending; and
●
acceptance
of our product in planned markets.
In the
event we are required to raise additional capital through the
issuance of equity or convertible debt securities, the percentage
ownership of our shareholders could be diluted significantly, and
these newly issued securities may have rights, preferences or
privileges senior to those of our existing shareholders. In
addition, the issuance of any equity securities could be at a
discount to the market price.
If we
incur debt financing, the payment of principal and interest on such
indebtedness may limit funds available for our business activities,
and we could be subject to covenants that restrict our ability to
operate our business and make distributions to our
shareholders. These restrictive covenants may include
limitations on additional borrowing and specific restrictions on
the use of our assets, as well as prohibitions on our ability to
create liens, pay dividends, redeem stock or make investments.
There is no assurance that any equity or debt financing transaction
will be available on acceptable terms, if at all.
We are a development stage technology company with no current
revenue and limited experience developing security technology for
law enforcement or other security personnel, as well as other areas
required for the successful development and commercialization of
BolaWrap™ 100, our first product, which makes it difficult to
assess our future viability.
We are
a development stage technology company. Although we are currently
in the process of commercializing our first product,
BolaWrap™ 100, we currently generate no revenue, and we have
not yet fully demonstrated an ability to overcome many of the
fundamental risks and uncertainties frequently encountered by
development stage companies in new and rapidly evolving fields of
technology. To execute our business plan successfully, we will need
to accomplish the following fundamental objectives, either on our
own or with strategic collaborators:
●
successfully
commercialize BolaWrap™ 100, and develop future products for
commercialization;
●
develop,
obtain and maintain required regulatory approvals for
commercialization of products we produce;
●
establish
an intellectual property portfolio for BolaWrap™ 100 and
other future products;
●
establish
and maintain sales, distribution and marketing capabilities, and/or
enter into strategic partnering arrangements to access such
capabilities;
●
gain
market acceptance for BolaWrap™ 100 and/or other future
products; and
●
obtain
adequate capital resources and manage our spending as costs and
expenses increase due to research, production, development,
regulatory approval and commercialization of BolaWrap™ 100
and/or other future products.
Our principal product remains under development, and has not yet
been produced in recurring commercial quantities. We may incur
significant and unpredictable warranty costs as our products are
introduced and produced.
Our
principal product has only recently been introduced for testing
into the marketplace and remains under development as we make
improvements based on ongoing customer trials. While we are
producing small numbers of commercial products, no assurance can be
provided that we can successfully produce higher volume commercial
quantities of our principal product or that additional development
will be required for a commercially viable product. We generally
expect to warrant our products to be free from defects in materials
and workmanship for a period of up to one year from the date of
purchase. We may incur substantial and unpredictable warranty costs
from post-production product or component failures. Future warranty
costs could further adversely affect our financial position,
results of operations and business prospects.
We are materially dependent on the acceptance of our product by the
law enforcement market. If law enforcement agencies do not purchase
our product, our revenue will be adversely affected and we may not
be able to expand into other markets, or otherwise continue as a
going concern.
A
substantial number of law enforcement agencies may not purchase our
remote restraint product. In addition, if our product is not widely
accepted by the law enforcement market, we may not be able to
expand sales of our product into other markets. Law enforcement
agencies may be influenced by claims or perceptions that our
product is not effective or may be used in an abusive manner. Sales
of our product to these agencies may be delayed or limited by such
claims or perceptions.
We will be dependent on sales of the BolaWrap™ 100 product,
and if this product is not widely accepted, our growth prospects
will be diminished.
We
expect to depend on sales of the BolaWrap™ 100 and related
cartridges for the foreseeable future. A lack of demand for this
product, or its failure to achieve broad market acceptance, would
significantly harm our growth prospects, operating results and
financial condition.
If we are unable to manage our projected growth, our growth
prospects may be limited and our future profitability may be
adversely affected.
We
intend to expand our sales and marketing programs and our
manufacturing capability. Rapid expansion may strain our
managerial, financial and other resources. If we are unable to
manage our growth, our business, operating results and financial
condition could be adversely affected. Our systems, procedures,
controls and management resources also may not be adequate to
support our future operations. We will need to continually improve
our operational, financial and other internal systems to manage our
growth effectively, and any failure to do so may lead to
inefficiencies and redundancies, and result in reduced growth
prospects and profitability.
We may face personal injury and other liability claims that harm
our reputation and adversely affect our sales and financial
condition.
Our
product is intended to be used in confrontations that could result
in injury to those involved, whether or not involving our product.
Our product may cause or be associated with such injuries. A person
injured in a confrontation or otherwise in connection with the use
of our product may bring legal action against us to recover damages
on the basis of theories including personal injury, wrongful death,
negligent design, dangerous product or inadequate warning. We may
also be subject to lawsuits involving allegations of misuse of our
product. If successful, personal injury, misuse and other claims
could have a material adverse effect on our operating results and
financial condition. Although we carry product liability insurance,
significant litigation could also result in a diversion of
management’s attention and resources, negative publicity and
an award of monetary damages in excess of our insurance
coverage.
Our future success is dependent on our ability to expand sales
through direct sales or distributors, and our inability to grow our
sales force or recruit new distributors would negatively affect our
sales.
Our
distribution strategy is to pursue sales through multiple channels
with an emphasis on direct sales and, in the future, independent
distributors. Our inability to recruit and retain sales personnel
and police equipment distributors who can successfully sell our
products could adversely affect our sales. If we do not
competitively price our products, meet the requirements of any
future distributors or end-users, provide adequate marketing
support, or comply with the terms of any distribution arrangements,
such distributors may fail to aggressively market our product or
may terminate their relationships with us. These developments would
likely have a material adverse effect on our sales. Should we
employ distributors, our reliance on the sales of our products by
others also makes it more difficult to predict our revenue, cash
flow and operating results.
We expect to expend significant resources to generate sales due to
our lengthy sales cycle, and such efforts may not result in sales
or revenue.
Generally,
law enforcement agencies consider a wide range of issues before
committing to purchase a product, including product benefits,
training costs, the cost to use our product in addition to, or in
place of, other use of force products, product reliability and
budget constraints. The length of our sales cycle may range from
30 days to a year or more. We may incur substantial selling
costs and expend significant effort in connection with the
evaluation of our product by potential customers before they place
an order. If these potential customers do not purchase our product,
we will have expended significant resources without corresponding
revenue.
Most of our intended end-users are subject to budgetary and
political constraints that may delay or prevent sales.
Most of
our intended end-user customers are government agencies. These
agencies often do not set their own budgets and therefore have
little control over the amount of money they can spend. In
addition, these agencies experience political pressure that may
dictate the manner in which they spend money. As a result, even if
an agency wants to acquire our product, it may be unable to
purchase due to budgetary or political constraints. Some government
agency orders may also be canceled or substantially delayed due to
budgetary, political or other scheduling delays, which frequently
occur in connection with the acquisition of products by such
agencies.
Government regulation of our products may adversely affect
sales.
Our
device is classified as a firearm regulated by the Bureau of
Alcohol, Tobacco and Firearms involving substantial regulatory
compliance. Our device may also face state restrictions, especially
regarding sales to security agencies. Our product sales may be
significantly affected by federal, state and local regulation.
Failure to comply with regulations could also result in the
imposition of fines, penalties and other actions that could
adversely impact our financial position, cash flows and operating
results.
Our
product is also be controlled by the United States Department of
Commerce (“
DOC
”) for exports directly from
the United States. Consequently, we need to maintain our export
license from the DOC for the export of our product from the United
States other than to Canada. Compliance with or changes in U.S.
export regulations could significantly and adversely affect any
future international sales.
Certain
foreign jurisdictions may restrict the sale of our device limiting
our international sales opportunities.
Our products, including BolaWrap™ 100, have limited issued
patents or other intellectual property protection. If we are unable
to protect our intellectual property, we may lose a competitive
advantage or incur substantial litigation costs to protect our
rights.
Our
future success depends in part upon our proprietary technology.
Aside from one issued patent related to the BolaWrap™ 100,
none of our products, including BolaWrap™, have any issued
patented or other intellectual property protection. Our protective
measures taken thus far, including our one issued patent, pending
patents, trademarks and trade secret laws, may prove inadequate to
protect our proprietary rights. There can be no assurance we will
be granted any patent rights from pending patents. The scope of any
possible patent rights may not prevent others from developing and
selling competing products. The validity and breadth of claims
covered in any possible patents involve complex legal and factual
questions, and the resolution of such claims may be highly
uncertain, lengthy, and expensive. In addition, any patents, if
granted, may be held invalid upon challenge, or others may claim
rights in or ownership of our patents.
Our competitive position will be seriously damaged if our products
are found to infringe on the intellectual property rights of
others.
Other
companies and our competitors may currently own or obtain patents
or other proprietary rights that might prevent, limit or interfere
with our ability to make, use or sell our products. Any
intellectual property infringement claims against us, with or
without merit, could be costly and time-consuming to defend and
divert our management’s attention from our business. In the
event of a successful claim of infringement against us and our
failure or inability to license the infringed technology, our
business and operating results could be adversely affected. Any
litigation or claims, whether or not valid, could result in
substantial costs and diversion of our resources. An adverse result
from intellectual property litigation could force us to do one or
more of the following:
●
cease
selling, incorporating or using products or services that
incorporate the challenged intellectual property;
●
obtain
a license from the holder of the infringed intellectual property
right, which license may not be available on reasonable terms, if
at all; and
●
redesign
products or services that incorporate the disputed
technology.
If we
are forced to take any of the foregoing actions, we could face
substantial costs and shipment delays and our business could be
seriously harmed. Although we carry general liability insurance,
our insurance may not cover potential claims of this type or be
adequate to indemnify us for all liability that may be
imposed.
In
addition, it is possible that our customers may seek indemnity from
us in the event that our products are found or alleged to infringe
the intellectual property rights of others. Any such claim for
indemnity could result in substantial expense to us that could harm
our operating results.
We have no experience developing law enforcement products. Our lack
of experience and competition in the law enforcement market could
reduce our sales and prevent us from achieving
profitability.
The law
enforcement market is highly competitive and our management team
has no experience developing law enforcement products. We face
competition from numerous larger, better capitalized, more
experienced and more widely known companies that make restraint
devices, less-lethal weapons and other law enforcement products.
Increased competition could result in greater pricing pressure,
lower gross margins and reduced sales, and prevent us from
achieving profitability.
We cannot predict our future operating results. Our quarterly and
annual results will likely be subject to fluctuations caused by
many factors, any of which could result in our failure to achieve
our expectations.
We
currently expect our BolaWrap™ 100 product will be the source
of all of any future revenue. Revenue, if any, is expected to vary
significantly due to a number of factors. Many of these factors are
beyond our control. Any one or more of these factors, including
those listed below, could cause us to fail to achieve our revenue
expectations. These factors include:
●
our
ability to develop and supply product to customers;
●
market
acceptance of, and changes in demand for, our
products;
●
gains
or losses of significant customers, distributors or strategic
relationships;
●
unpredictable
volume and timing of customer orders;
●
the
availability, pricing and timeliness of delivery of components for
our products;
●
fluctuations
in the availability of manufacturing capacity or manufacturing
yields and related manufacturing costs;
●
timing
of new technological advances, product announcements or
introductions by us and by our competitors;
●
unpredictable
warranty costs associated with our products;
●
budgetary
cycles and order delays by customers or production delays by us or
our suppliers;
●
regulatory
changes affecting the marketability of our products;
●
general
economic conditions that could affect the timing of customer orders
and capital spending and result in order cancellations or
rescheduling; and
●
general
political conditions in this country and in various other parts of
the world that could affect spending for the products that we
intend to offer.
Some or
all of these factors could adversely affect demand for our products
and, therefore, adversely affect our future operating results. As a
result of these and other factors, we believe that period-to-period
comparisons of our operating results may not be meaningful in the
near term, and accordingly you should not rely upon our performance
in a particular period as indicative of our performance in any
future period.
Our expense may vary from period to period, which could affect
quarterly results and our stock price.
If we
incur additional expense in a quarter in which we do not experience
increased revenue, our results of operations will be adversely
affected and we may incur larger losses than anticipated for that
quarter. Factors that could cause our expense to fluctuate from
period to period include:
●
the
timing and extent of our research and development
efforts;
●
investments
and costs of maintaining or protecting our intellectual
property;
●
the
extent of marketing and sales efforts to promote our products and
technologies; and
●
the
timing of personnel and consultant hiring.
Our dependence on third-party suppliers for key components of our
product could delay shipment of our products and reduce our
sales.
We
depend on certain domestic and foreign suppliers for the delivery
of components used in the assembly of our product. Our reliance on
third-party suppliers creates risks related to our potential
inability to obtain an adequate supply of components or
subassemblies and reduced control over pricing and timing of
delivery of components and subassemblies. Specifically, we will
depend on suppliers of sub-assemblies, machined parts, injection
molded plastic parts, and other miscellaneous custom parts for our
product. We do not have any long-term supply agreements with any
planned suppliers. Any interruption of supply for any material
components of our products could significantly delay the shipment
of our products and have a material adverse effect on our revenue,
profitability and financial condition.
Foreign currency fluctuations may reduce our competitiveness and
sales in foreign markets.
The
relative change in currency values creates fluctuations in product
pricing for future potential international customers. These changes
in foreign end-user costs may result in lost orders and reduce the
competitiveness of our products in certain foreign markets. These
changes may also negatively affect the financial condition of some
foreign customers and reduce or eliminate their future orders of
our products.
Loss of key management and other personnel could impact our
business.
Our
business is substantially dependent on our officers and other key
personnel. The loss of an officer or any key personnel could
materially adversely affect our business, financial condition,
results of operations and cash flows. In addition, competition for
skilled and non-skilled employees among companies like ours is
intense, and the future loss of skilled or non-skilled employees or
an inability to attract, retain and motivate additional skilled and
non-skilled employees required for the operation and expansion of
our business could hinder our ability to conduct research
activities successfully, develop new products, attract customers
and meet customer shipments.
Inadequate internal controls and accounting practices could lead to
errors, which could negatively impact our business, financial
condition, results of operations and cash flows.
We will
need to establish internal controls and management oversight
systems. Our small size and limited personnel and consulting
resources will make doing so more challenging than for more
established entities. We may not be able to prevent or detect
misstatements in our reported financial statements due to system
errors, the potential for human error, unauthorized actions of
employees or contractors, inadequacy of controls, temporary lapses
in controls due to shortfalls in transition planning and oversight
resource contracts and other factors. In addition, due to their
inherent limitations, such controls may not prevent or detect
misstatements in our reported financial results as required under
SEC rules, which could increase our operating costs or impair our
ability to operate our business. Controls may also become
inadequate due to changes in circumstances. It will be necessary to
replace, upgrade or modify our internal information systems from
time to time. If we are unable to implement these changes in a
timely and cost-effective manner, our ability to capture and
process financial transactions and support our customers as
required may be materially adversely impacted, which could harm our
business, financial condition, results of operations and cash
flows.
Risk Factors Relating to Our Common Stock
Currently, there is a limited public market for our common stock,
and there can be no assurances that any established public market
will ever develop. Our common stock has been, and is expected to
be, subject to significant price fluctuations.
Our
common stock was quoted commencing in late May 2018 and there is a
limited public market for our securities. There can be no
assurances that an established public market for our common stock
will develop or the extent to which investor interest in us
will lead to the development of an active, liquid trading
market. Active trading markets generally result in lower price
volatility and more efficient execution of buy and sell orders for
investors. Since initial quotation, shares of our common stock have
traded sporadically and are expected to continue to be subject to
significant price fluctuations. In addition, our common stock is
unlikely to be followed by any market analysts, and there may be
few institutions acting as market makers for our common
stock.
Either
of the above factors could adversely affect the liquidity and
trading price of our common stock. Until an orderly market develops
in our common stock, if ever, the price at which it trades is
likely to fluctuate significantly. Prices for our common stock will
be determined in the marketplace and may be influenced by many
factors, including the depth and liquidity of the market for shares
of our common stock, developments affecting our business, including
the impact of the factors referred to elsewhere in these Risk
Factors, investor perception of BolaWrap
100 and
general economic and market conditions. No assurances can be
given that an orderly or liquid market will ever develop for the
shares of our common stock.
Our common stock is subject to
“penny stock” rules
.
Our
common stock is currently defined as a “penny stock”
under Rule 3a51-1 promulgated under the Exchange Act. “Penny
stocks” are subject to Rules 15g-2 through 15g-7 and Rule
15g-9, which impose additional sales practice requirements on
broker-dealers that sell penny stocks to persons other than
established customers and institutional accredited investors. Among
other things, for transactions covered by these rules, a
broker-dealer must make a special suitability determination for the
purchaser and have received the purchaser’s written consent
to the transaction prior to sale. Consequently, these rules may
affect the ability of broker-dealers to sell our common stock and
affect the ability of holders to sell their shares of our common
stock in the secondary market. To the extent our common stock is
subject to the penny stock regulations, the market liquidity for
our shares will be adversely affected.
We cannot predict the price range or volatility of our common
stock, and sales of a substantial number of shares of our common
stock may adversely affect the market price of our common
stock.
From
time to time, the market price and volume of shares traded of
companies in the industry in which we operate experience periods of
significant volatility. Company-specific issues and developments
generally affecting our industries or the economy may cause this
volatility. The market price of our common stock may fluctuate in
response to a number of events and factors, including:
●
general
economic, market and political conditions;
●
quarterly
variations in results of operations or results of operations that
are below public market analyst and investor
expectations;
●
changes
in financial estimates and recommendations by securities
analysts;
●
operating
and market price performance of other companies that investors may
deem comparable;
●
press
releases or publicity relating to us or our competitors or relating
to trends in our markets; and
●
sales
of common stock or other securities by insiders.
In
addition, broad market and industry fluctuations, investor
perception and the depth and liquidity of the market for our common
stock may adversely affect the trading price of our common stock,
regardless of actual operating performance.
Sales
or distributions of a substantial number of shares of our common
stock in the public market, or the perception that such sales could
occur, could adversely affect the market price of our common stock.
Many of the shares of our common stock, other than the shares held
by executive officers and directors, are eligible for immediate
resale in the public market. Substantial selling of our common
stock could adversely affect the market price of our common
stock.
Until
our common stock is fully distributed and an orderly market
develops in our common stock, the price at which our common stock
trades may fluctuate significantly and may be lower or higher than
the price that would be expected for a fully distributed
issue.
Our officers and directors are among our largest shareholders, and
may have certain personal interests that may affect the
Company.
Management
owns 74% of our common stock at June 30, 2018. As a result, our
management, acting individually or as a group, has the potential
ability to exert influence on the outcome of issues requiring
approval by the Company’s shareholders. This concentration of
ownership may have effects such as delaying or preventing a change
in control of the Company that may be favored by other shareholders
or preventing transactions in which shareholders might otherwise
recover a premium for their shares over current market
prices.
We may issue additional shares of common stock in the future. The
issuance of additional shares of common stock may reduce the value
of your common stock.
We may
issue additional shares of common stock without further action by
our shareholders. Moreover, the economic and voting interests of
each stockholder will be diluted as a result of any such issuances.
Although the number of shares of common stock that shareholders
presently own will not decrease, such shares will represent a
smaller percentage of the total shares that will be outstanding
after the issuance of additional shares. The issuance of
additional shares of common stock may cause the market price of our
common stock to decline.
Sales of common stock issuable upon the exercise of any future
options or warrants may lower the price of our common
stock.
We
adopted a stock option plan on March 31, 2017, which authorizes the
grant of options or restricted stock awards to purchase up to 2.0
million shares of our common stock to our employees, directors and
consultants. In May 2018 we granted options on 1,847,500 shares.
The issuance of shares of common stock issuable upon the exercise
or conversion of options could cause substantial dilution to
existing holders of common stock, and the sale of those shares in
the market could cause the market price of our common stock to
decline. The potential dilution from the issuance of these shares
could negatively affect the terms on which we are able to obtain
equity financing.
We may issue preferred stock in the future, and the terms of the
preferred stock may reduce the value of your common
stock.
We are
authorized to issue up to 5,000,000 shares of preferred stock in
one or more series. Our Board of Directors may determine the terms
of future preferred stock offerings without further action by our
shareholders. If we issue preferred stock, it could affect your
rights or reduce the value of your common stock. In particular,
specific rights granted to future holders of preferred stock could
be used to restrict our ability to merge with or sell our assets to
a third party. Preferred stock terms may include voting rights,
preferences as to dividends and liquidation, conversion and
redemption rights and sinking fund provisions.
The payment of dividends will be at the discretion of our Board of
Directors.
The
declaration and amount of future dividends, if any, will be
determined by our Board of Directors and will depend on our
financial condition, earnings, capital requirements, financial
covenants, regulatory constraints, industry practice and other
factors our Board deems relevant.