Wrap Technologies, Inc. — Q1 2018 Form 10-Q
Reporting period: Three months ended March 31, 2018. Wrap is an early-stage security technology company developing the BolaWrap 100 remote restraint device for law enforcement and security personnel. The filing reports no revenue in Q1 2018 or the comparable 2017 quarter.
Financial results and position
| Metric | Q1 2018 | Q1 2017 / comparison |
|---|---|---|
| Revenue and product costs | None | None |
| Operating expenses | $435,152 | $201,755 |
| Net loss | $435,378 | $201,755 |
| Basic and diluted loss per share | $0.02 | $0.01 |
| Cash used in operating activities | $526,355 | $131,347 |
| Cash at period end | $2,551,149 | $344,629 at March 31, 2017 |
Selling, general and administrative expense increased to $339,167 from $75,792, primarily reflecting compensation and sales consulting, marketing, travel, public-company, legal and audit costs. Research and development expense declined to $95,985 from $125,963. The company attributed the higher net loss to increased staffing and the start of sales and marketing activities.
At March 31, 2018, total assets were $2,820,410, including $176,395 of inventory; current liabilities were $183,473; and stockholders’ equity was $2,636,937. Working capital was approximately $2.59 million. The company had a $31,734 short-term note payable, related to insurance financing at 7.15%, and $96,000 in deferred and accrued officer compensation. No cash dividends or off-balance-sheet arrangements were reported. Gross margin is not applicable because there were no sales.
Changes, outlook and key risks
- Cash declined by $532,827 during the quarter. Operating cash use was $526,355, investing cash use was $6,472, and there was no financing cash inflow. Inventory increased by $45,203 during the quarter.
- The company said a small number of law-enforcement agencies were testing and evaluating BolaWrap 100, but it had no product orders or customers as of the filing. It did not provide revenue or earnings guidance and could not predict the timing or amount of future sales.
- Management believed available capital could sustain operations for the next 12 months, but cautioned that additional financing may be needed and might not be available on acceptable terms. The company expected continued operating losses for the foreseeable future.
- Key risks include uncertain product acceptance and commercialization, limited personnel and resources, long and unpredictable government sales cycles, regulatory and export controls, dependence on suppliers, product liability and warranty exposure, and limited intellectual-property protection. The filing states the device is classified as a firearm regulated by the Bureau of Alcohol, Tobacco and Firearms and that export controls apply.
- Disclosure controls were deemed ineffective at the reasonable-assurance level because a material weakness existed: the CFO handled transaction initiation, asset custody, recording, reconciliation and quarterly reporting without sufficient segregation of duties. Management planned to address the weakness but gave no assurance of timely remediation.
- Related-party matters include $84,000 payable to Syzygy Licensing LLC and $12,000 of deferred officer compensation, both without interest and with no established payment schedule. Syzygy is owned and controlled by company officers/stockholders; the license agreement requires royalties of 4% of qualifying product revenue, capped at $1 million or ending September 30, 2026, whichever occurs first.
- No material legal proceedings were pending. The filing also notes that management owned 74% of common stock as of March 31, 2018 and that no established public trading market then existed.
Important facts for investors to verify
- Whether customer evaluations convert into orders, and the timetable and economics of commercial production and sales.
- Cash burn, remaining runway, and whether additional capital will be required and on what terms.
- Progress remediating the disclosed material weakness in internal controls.
- Applicable firearm, state and export requirements, and the status and scope of intellectual-property protection.
- The filing’s risk-factor discussion gives Q1 net loss as $435,278, while the financial statements report $435,378; verify the correct figure.
- Related-party balances and royalty obligations, and any future changes to ownership or share count.