Wrap Technologies, Inc. — Q3 2018 Form 10-Q
Business context and reporting period. This unaudited report covers the quarter and nine months ended September 30, 2018. Wrap develops security products for law enforcement; its first product is the BolaWrap 100 remote restraint device. The company was in early commercialization, with agencies evaluating demonstration units and management focusing on an enhanced version with a green line-laser accessory.
Financial results and liquidity
| Metric | Three months ended September 30, 2018 | Nine months ended September 30, 2018 | Comparable 2017 period |
|---|---|---|---|
| Revenue | $1,890 | $1,890 | $0 |
| Gross profit | $283 | $283 | $0 |
| Operating expenses | $834,342 | $2,044,698 | $151,544 / $523,529 |
| Net loss | $833,884 | $2,044,804 | $151,544 / $523,529 |
| Operating cash used | Not presented quarterly | $1,630,881 | $532,769 |
Gross margin was approximately 15% on the very small amount of recorded sales. Nine-month SG&A rose to $1.59 million from $270,854, and research and development increased to $458,046 from $252,675. The company attributed higher costs mainly to staffing, stock-based compensation, product demonstrations, travel and marketing. Nine-month stock-based compensation was $322,811.
At September 30, cash was $1,365,495, working capital was approximately $1.26 million, total assets were $1,595,786, and current liabilities were $245,464. The balance sheet showed an $8,076 note payable; the note originated from insurance financing at 7.15%, payable through November 2018. Cash declined by $1,718,481 during the first nine months. There was no financing cash inflow in that period.
After quarter-end, an October 30 offering of 4,561,074 units at $3 per unit raised approximately $13.68 million gross and $12.14 million net. Each unit included a common share and a two-year warrant exercisable at $5; placement-agent warrants covered another 456,107 shares. The company reported $13.2 million cash as of October 31 and said the financing addressed substantial doubt about its ability to continue as a going concern and was expected to fund operations beyond the next 12 months.
Changes, outlook and material risks
- Revenue remained minimal: the company reported delivery to one customer and said it had not actively pursued orders while prioritizing the laser-enhanced product. It also provided more than 200 devices to agencies at no cost for evaluation; demonstration costs were expensed as promotion or marketing.
- Management expected to pursue orders for the enhanced product late in Q4 2018, with deliveries targeted for early 2019, and believed orders could accelerate in 2019. These are expectations, not assured results; no quantified revenue guidance was provided.
- During 2018, the company received four U.S. patents, had eight U.S. patent applications pending, and began filing foreign applications. It had demonstrated the product to more than 60 agencies; over 30 agencies took delivery of devices during 2018.
- The company expects continuing operating losses and may require additional capital. Commercial success depends on product acceptance, effective sales and distribution, manufacturing scale-up, and government customer budgets and purchasing cycles. Management cited significant execution uncertainty and limited personnel and operating infrastructure.
- Key risks include product liability and warranty claims, regulatory treatment as a firearm and export controls, competition, supplier dependence, intellectual-property challenges, and possible future dilution. The company applied to list on Nasdaq but cautioned that an uplisting was not assured.
- Disclosure controls were deemed ineffective at September 30 because of a material weakness: the CFO performed incompatible transaction, asset-custody, recordkeeping, reconciliation and reporting duties without sufficient segregation. Management planned remediation but gave no assurance it could do so timely.
- Related-party matters include $96,000 in deferred and accrued officer compensation owed to Syzygy-related parties, with no payment schedule, and a 4% royalty on qualifying product revenue payable to Syzygy up to $1 million or through September 30, 2026, whichever occurs first. No material legal proceedings were pending.
Important facts for investors to verify
- Whether the laser-enhanced BolaWrap obtains purchase orders and converts evaluations into recurring sales, and the timing and economics of deliveries.
- Cash burn and operating costs relative to the October offering proceeds, including actual liquidity after offering costs and any additional financing needs.
- Potential dilution from the October common shares and warrants, placement-agent warrants, and outstanding employee options; compare with the 22,803,533 shares outstanding at September 30 and 27,364,607 reported as outstanding November 8.
- Progress in remediating the disclosed material weakness and establishing effective financial reporting controls.
- Regulatory and export requirements, product liability and warranty exposure, patent protection, and related-party royalty and compensation obligations.