Wrap Technologies, Inc. — FY 2017 Form 10-K
Reporting period: Year ended December 31, 2017. The prior comparison is the period from inception on March 2, 2016 through December 31, 2016, not a full-year period. The financial statements were audited; the auditor issued an unqualified opinion on the statements.
Business context
Wrap is an early-stage security technology company developing the BolaWrap 100, a handheld remote-restraint device intended primarily for law enforcement and security personnel. Demonstrations began in November 2017; the company had no customers, orders, or revenue through year-end. Management expected product sales to begin in mid-2018, subject to customer evaluations and any needed product changes.
Key financial metrics
| Metric | FY 2017 / December 31, 2017 | Prior period / December 31, 2016 |
|---|---|---|
| Revenue | $0 | $0 |
| Operating expenses | $833,545 | $234,356 |
| Net loss | $833,545 | $234,356 |
| Basic and diluted loss per share | $0.04 | $0.03 |
| Cash and cash equivalents | $3,083,976 | $255,072 |
| Current assets | $3,226,614 | $283,371 |
| Current liabilities | $192,479 | $84,965 |
| Total assets | $3,264,794 | $293,109 |
| Stockholders’ equity | $3,072,315 | $208,144 |
Gross profit and margins are not applicable because the company reported no revenue or product costs. Operating cash outflow was $833,709; investing cash outflow was $35,103; financing provided $3,697,716 net of offering costs. The company reported no debt in the provided financial statements. Current liabilities included $96,000 of deferred and accrued officer compensation. Working capital was approximately $3.03 million, calculated from reported current assets less current liabilities.
Changes versus the prior period
- Operating expenses and net loss increased as the company expanded activity; selling, general and administrative expense rose to $522,210 from $17,112, while research and development expense was $311,335 versus $217,244. The comparison is affected by the shorter 2016 period.
- Cash increased following the December 2017 self-underwritten offering, which raised $3,492,800 gross through the sale of 2,328,533 shares at $1.50 each. Offering expenses were approximately $70,000.
- Inventory reached $131,192 at year-end, primarily raw materials, as the company prepared for production.
Outlook, risks and unusual items
- Management said year-end cash was expected to be sufficient for the next 12 months, but noted that future capital needs were uncertain and additional financing might be required. Further financing may be unavailable or dilute shareholders.
- Plans for 2018 included customer demonstrations and testing, product adaptation and cost reduction, and building production, sales, marketing, distribution and service capabilities. Management expected operating costs to rise as these functions expanded.
- Commercialization depends on product performance, agency acceptance, regulatory compliance, manufacturing capacity and government purchasing cycles. The filing describes sales cycles ranging from weeks to a year or more, and acknowledges that evaluations or budget and political constraints may delay purchases.
- The BolaWrap 100 is classified as a firearm by the ATF and is subject to firearms-related rules; exports generally require licenses. Product-liability claims, warranty costs, supplier interruptions, competition and pending patent applications with no issued product patents are additional risks.
- A related-party license with Syzygy Licensing, owned and controlled by officers, requires a 4% royalty on applicable product revenue up to $1 million or September 30, 2026, whichever comes first. Deferred officer compensation and the royalty arrangement are also related-party matters.
- Management reported a material weakness in internal control over financial reporting due to insufficient segregation of duties, and concluded disclosure controls were not effective at the reasonable-assurance level. The auditor did not express an opinion on internal controls.
- The company had no established public trading market at the filing date. Directors and executive officers beneficially owned 70.6% of shares as of March 1, 2018.
Important facts for investors to verify
- Whether customer evaluations resulted in orders, repeat purchases, and revenue after the filing date, and whether the expected mid-2018 sales launch occurred.
- Actual cash use, subsequent financing, and the company’s liquidity runway against its stated 12-month expectation.
- Product test results, safety and effectiveness evidence, required regulatory approvals, and the status of firearm and export compliance.
- Production capacity, supplier arrangements, unit economics, warranty exposure, and the effect of the 4% related-party royalty on potential margins.
- Progress in addressing the disclosed material weakness and any subsequent changes in management, ownership, or share count.