Wrap Technologies, Inc. — Q2 2018 Form 10-Q
Reporting period: Three and six months ended June 30, 2018. Interim financial statements are unaudited. Wrap develops security products for law enforcement and security personnel; its first product is the BolaWrap 100 remote restraint device.
Financial performance and position
| Metric | Q2 2018 | Q2 2017 | Six months 2018 | Six months 2017 |
|---|---|---|---|---|
| Revenue | $0 | $0 | $0 | $0 |
| Operating expenses | $775,204 | $170,230 | $1,210,356 | $371,985 |
| Net loss | $775,542 | $170,230 | $1,210,920 | $371,985 |
| Basic and diluted loss per share | $0.03 | $0.01 | $0.05 | $0.02 |
With no revenue, gross margin and other revenue-based margins are not meaningful. Q2 selling, general and administrative expense was $581,575 and research and development expense was $193,629. Six-month amounts were $920,742 and $289,614, respectively. The six-month results included $172,973 of non-cash stock-based compensation.
Cash flow: Operating activities used $1,060,758 in the first half of 2018, versus $261,334 in the comparable 2017 period. Investing activities used $8,015; financing activities provided no cash. Cash declined from $3,083,976 at December 31, 2017 to $2,015,203 at June 30, 2018.
Balance sheet and liquidity: At June 30, cash was $2,015,203, total current assets were $2,198,768, and total assets were $2,240,117. Current liabilities were $205,749, including a $20,010 note payable; total stockholders’ equity was $2,034,368. The short-term insurance-financing note bears 7.15% interest and was scheduled for monthly payments through November 2018. There was no material long-term debt reported.
Changes, business developments, and outlook
- Losses increased substantially year over year as the company expanded staffing and began sales, marketing, and product demonstration activities following its December 2017 public offering. The offering raised approximately $3.49 million gross.
- A small number of law-enforcement agencies were testing or evaluating BolaWrap 100, but the company reported no orders or customers and expected no revenue until prospective customers tested and evaluated the product.
- The company reported that its first three U.S. patents on BolaWrap technology were granted during June and July 2018. Its shares began quotation on the OTCQB under ticker WRTC in May 2018.
- Management believed available resources could fund operations for at least the next 12 months, but gave no assurance. The company anticipated continued operating losses and said future financing might be required; equity financing could dilute existing holders.
- Management identified no material legal proceedings and no off-balance-sheet arrangements. The filing states that management owns 74% of common stock at June 30, 2018.
Risks, contingencies, and unusual items
- Commercialization and funding: The business had no revenue, relied on a single early-stage product, and faced uncertain market acceptance, long government sales cycles, and budget or political delays. Failure to generate sales or obtain financing could materially harm operations.
- Product and regulatory exposure: The filing cites possible product-liability, warranty, and misuse claims. It also describes federal and state regulation, including firearm classification and export controls, as risks to sales and commercialization.
- Controls: Disclosure controls were deemed ineffective at June 30, 2018 because limited staffing left the CFO with conflicting transaction, asset-custody, accounting, reconciliation, and reporting responsibilities. The company identified this lack of segregation of duties as a material weakness and offered no assurance of timely remediation.
- Related parties and commitments: A related-party technology license calls for royalties of 4% of applicable future revenue, up to $1 million or until September 30, 2026, whichever occurs first. The company also reported $84,000 payable to Syzygy and $12,000 in deferred officer compensation, with no payment schedule established.
- Equity compensation: May 2018 option grants covered 1,847,500 shares at $1.50 per share; 225,000 were vested and exercisable at June 30. Unvested compensation cost was estimated at $846,771.
- Product-cost disclosure: The notes report $59,271 of first-half demonstration product costs, while MD&A reports $56,542 for the same six-month period. MD&A separately reports $52,017 for Q2.
Important facts for investors to verify
- Whether product evaluations converted into orders, revenue, and repeatable commercial demand after the reporting date.
- The difference between the $59,271 product-cost figure in the notes and the $56,542 figure in MD&A.
- Actual cash burn, financing needs, and whether management’s stated 12-month liquidity expectation was achieved.
- Progress in remediating the disclosed material weakness in internal controls.
- Current regulatory status, product-liability coverage, patent protection, and the potential dilution from outstanding options or future financing.