Wrap Technologies, Inc. — FY 2018 Form 10-K
Reporting period: Fiscal year ended December 31, 2018; filed March 7, 2019. Wrap is an early-stage security technology company focused primarily on law enforcement. Its lead product, the BolaWrap 100 remote restraint device, was in early commercialization and production scale-up.
Financial performance and position
| Metric | FY 2018 | FY 2017 |
|---|---|---|
| Revenue | $23,150 | $0 |
| Gross profit / margin | $4,539 / approximately 19.6% | Not applicable |
| Operating expenses | $3,342,173 | $833,545 |
| Operating loss | $3,337,634 | $833,545 |
| Net loss | $3,336,435 | $833,545 |
| Net loss per share | $0.14 | $0.04 |
| Cash used in operating activities | $2,692,136 | $833,709 |
- Cash was $12,358,896 at year-end, up from $3,083,976. Working capital was $12,239,054; total current liabilities were $397,368.
- The company reported no material debt at year-end. A $39,435 short-term insurance financing note was repaid in November 2018.
- October 2018 private placement generated $13.68 million gross and approximately $12.14 million net proceeds. Financing cash flow was $12,101,351.
- Total assets were $12,787,022 and stockholders’ equity was $12,389,654. The filing reports no off-balance-sheet arrangements.
Material changes versus 2017
- Revenue began in 2018 but remained minimal; product sales were $18,830 and other revenue was $4,320. The company reported approximately $53,000 of backlog at year-end, filled in January 2019.
- Net loss increased to $3.34 million from $0.83 million, primarily reflecting higher staffing, sales demonstrations, marketing and public-company costs. SG&A rose to $2.61 million from $0.52 million; R&D rose to $0.73 million from $0.31 million.
- Operating cash use increased to $2.69 million, although the October financing substantially strengthened year-end cash.
- The company listed on Nasdaq in December 2018, received its first four U.S. patents during 2018, and reported six additional U.S. patent applications pending.
Outlook, commentary and risks
- Management planned to expand production, sales, marketing, training and service in 2019. Deliveries of the enhanced BolaWrap 100 with green-line laser were scheduled to begin in Q2 2019; management said it expected to accelerate orders, but provided no quantified revenue or earnings guidance and cautioned that sales timing and volume were uncertain.
- More than 40 agencies received devices during 2018, including over 200 devices provided at no cost for evaluation. The company reported training at 43 U.S. police departments and more than 170 certified instructors. These indicators do not establish recurring commercial demand.
- Management believed available cash could fund operations for at least 12 months, while warning that additional financing might be needed and was not assured. The company had a history of losses and anticipated continued losses.
- At December 31, 2018, the company had approximately $1.46 million of component purchase commitments. Some components came from single suppliers; production depended on developing reliable volume manufacturing.
- The BolaWrap is classified as a firearm by ATF, and exports require U.S. Department of Commerce licenses. Other risks include lengthy government sales cycles and budget constraints, product liability and reputational exposure, market acceptance, competition, and patent or other IP disputes.
- A related-party license with Syzygy, owned and controlled by company officers/stockholders, requires royalties of 4% of relevant product revenue, capped at $1 million or ending September 30, 2026. The company also disclosed $96,000 of deferred and accrued officer compensation.
- Management concluded disclosure controls were effective. It said additional accounting staff and CEO review procedures remediated a previously identified material weakness involving segregation of duties. No auditor attestation on internal controls was required or provided.
Important facts for investors to verify
- Whether post-year-end shipments, backlog conversion and paid orders demonstrate sustained demand, and whether Q2 2019 product deliveries occurred as planned.
- Actual production capacity, product quality and warranty experience, supplier availability, and the status and flexibility of the $1.46 million component commitments.
- Cash burn and runway relative to management’s 12-month estimate, especially as sales, production and staffing expand.
- Potential dilution: 7,084,681 shares were issuable under outstanding options and warrants at year-end, in addition to any future financing; management owned approximately 61% of common stock as of March 6, 2019.
- Regulatory and export-license requirements, related-party royalty obligations, and any product-liability or intellectual-property claims.