Wrap Technologies, Inc. — Q2 2017 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2017; filed September 8, 2017. The company is a development-stage security technology business preparing to commercialize its BolaWrap 100 restraint device. The March 2017 merger was accounted for as a reverse recapitalization, with Wrap LLC treated as the accounting acquirer.
Financial results and position
| Metric | Q2 2017 | Comparable period | Six months 2017 |
|---|---|---|---|
| Revenue | $0 | $0 | $0 |
| Selling, general and administrative expense | $89,852 | $1,126 | $165,644 |
| Research and development expense | $80,378 | $28,288 | $206,341 |
| Operating loss and net loss | $170,230 | $29,414 | $371,985 |
| Basic and diluted loss per share | $0.01 | $0.01 | $0.02 |
The six-month 2016 comparison is from inception on March 2 through June 30, not a full six-month period. With no revenue, gross margin is not meaningful. No debt is reported.
- At June 30, cash was $185,144; total current assets were $220,682, current liabilities $200,425, total assets $261,584, and stockholders’ equity $61,159.
- Cash declined by $69,928 during the six months. Operating activities used $261,334, investing activities used $33,594, and financing provided $225,000 from stock sales.
- Accounts payable rose to $103,225 from $12,065 at year-end 2016; deferred and accrued officer compensation rose to $96,000 from $70,000.
- Cash used in operations and investing totaled $294,928 for the six months. The company had $27,461 of inventory at June 30, versus none at year-end 2016.
Material changes and unusual items
- Q2 operating expenses and net loss increased substantially versus Q2 2016 as the company expanded development and business activity. Q2 SG&A included $14,444 of legal, merger and audit costs and $27,508 of trade-show and marketing costs; R&D included $46,858 of consulting and contract research costs.
- Six-month R&D included $129,613 of consulting and contract research costs. The company spent $33,594 on property and equipment during the period.
- In July 2017, the company sold 475,000 shares for $50,000. Its self-underwritten offering of up to 2,666,666 shares at $1.50 per share became effective August 10; no shares had been sold in the offering as of the report date.
- A 2017 equity plan authorizes up to 2,000,000 shares for awards; no options or restricted stock awards were outstanding at June 30.
Outlook, risks and contingencies
- Management planned to introduce BolaWrap 100 during 2017 and did not expect revenue until production quantities were available. The company reported no product orders or customers and could not predict market acceptance or future sales.
- Management stated that substantial additional investment was needed and concluded there was substantial doubt about the company’s ability to continue as a going concern through September 8, 2018. It expected available cash plus July proceeds to fund operations only through approximately September 2017; additional financing was not assured and could dilute shareholders.
- Key risks include product development and commercialization, regulatory requirements, limited staffing and operating resources, dependence on law-enforcement demand and government budgets, supplier availability, product liability and warranty exposure, and lack of issued patent protection. The filing says the device is classified as a firearm regulated by the Bureau of Alcohol, Tobacco and Firearms and may face state restrictions.
- The company leases its facility through December 2019; remaining minimum lease payments were approximately $43,800. It also owes Syzygy Licensing, a related party, a 4% royalty on licensed-technology product revenues, capped at $1 million, and bears development and patent costs under the license.
- There were no pending material legal proceedings. Management reported disclosure controls effective at a reasonable assurance level and no material changes in internal control during the quarter.
Most important facts for investors to verify
- Whether the company obtained financing after the disclosed July stock sale and whether that funding was sufficient to address the going-concern warning.
- Whether BolaWrap 100 was completed, cleared for sale where required, produced in commercial quantities, and adopted by customers—and whether revenue followed.
- Whether the August 2017 public offering generated proceeds, and the resulting share count and dilution. The filing reports 20,000,000 shares at June 30 and 20,475,000 outstanding as of September 6, 2017.
- The filing’s cover page marks “No” for having filed all required Exchange Act reports during the preceding 12 months; investors should verify the filing history and any implications.
- The related-party Syzygy arrangements, including accrued compensation, royalty obligations, and development and patent costs.