Wrap Technologies, Inc. — Q1 2022 Form 10-Q
Reporting period: Three months ended March 31, 2022; unaudited. Wrap develops public-safety products and training services, including the BolaWrap remote restraint device and Wrap Reality virtual-reality training. Financial amounts below are in U.S. dollars; financial statement figures are in thousands unless noted.
Financial performance and liquidity
| Metric | Q1 2022 | Q1 2021 / prior date |
|---|---|---|
| Revenue | $1.599 million | $1.542 million; up 4% |
| Gross profit / margin | $667,000 / 42% | $605,000 / 39% |
| Operating expenses | $6.101 million | $6.043 million |
| Operating loss | $5.434 million | $5.438 million |
| Net loss | $5.432 million; $0.13 per share | $5.429 million; $0.14 per share |
| Operating cash flow | $(4.850) million | $(4.444) million |
| Cash and cash equivalents | $5.014 million | $4.937 million at Dec. 31, 2021 |
| Short-term investments | $24.956 million | $29.983 million at Dec. 31, 2021 |
| Working capital | $34 million | — |
| Total liabilities | $3.199 million | $2.967 million at Dec. 31, 2021 |
Q1 investing activities generated net cash of $4.852 million, primarily reflecting $10 million of investment maturities against $4.996 million of purchases. Financing activities provided $75,000 from option exercises. The balance sheet reports no debt at March 31, 2022. Total cash and short-term investments were approximately $30.0 million; management said available resources should fund operations for at least twelve months from the report date.
Changes and notable items
- Revenue grew only modestly. Product sales were $1.462 million, up 2%; other revenue was $137,000, up 19%.
- Net revenue included $388,000 of promotional discounts to encourage upgrades to BolaWrap 150, versus $4,000 of normal discounts in Q1 2021. Gross sales before these discounts were $1.99 million. Management expected the promotion to continue into Q2 and then decline.
- Gross margin rose to 42% from 39%, despite promotional discounts. Management expects BolaWrap 150 margins to improve after startup, but notes that product mix, supply costs, warranty experience and sales channels affect margins.
- SG&A fell 7% to $4.606 million, partly because Q1 2021 included $803,000 of shareholder-activism costs. R&D increased 40% to $1.495 million, reflecting development staffing and consulting, including work on BolaWrap 150 and virtual-reality software.
- Cash used in operations increased to $4.850 million from $4.444 million. The company reported a $5.432 million net loss, partly offset by $1.029 million of non-cash share-based compensation; receivables and inventory also used cash.
- Management reported a leadership transition: the former CEO resigned in January, and TJ Kennedy was appointed CEO and Kevin Mullins President effective April 18, 2022. Q1 included $300,000 of severance expense and $242,000 of accelerated share-based compensation.
Outlook, risks and contingencies
- Management expects 2022 revenue to exceed 2021 revenue, but gave no specific forecast and said it could not predict whether sales would continue to increase. It cited ongoing trials and demand for less-lethal options, while emphasizing uncertainty.
- Management anticipates continuing operating losses and expects operating costs to rise as distribution, product development, production, training and administrative activities expand. It expects R&D spending to remain at comparable levels for the rest of 2022 and SG&A to remain below the prior year due to cost controls.
- COVID-19-related travel restrictions, social unrest and police-budget pressures, geopolitical conflict including the war in Ukraine, and component shortages, longer lead times and logistics constraints could affect sales, production, costs and cash flows. Management expected supply-chain challenges to persist through 2022.
- Backlog was approximately $505,000, expected to be delivered within twelve months; deferred revenue was $282,000. Orders may be modified, rescheduled or cancelled.
- Two distributors represented approximately 25% and 14% of Q1 revenue. At quarter-end, two distributors accounted for 50% and 13% of receivables, respectively, creating customer concentration and collection exposure.
- The company had approximately $2.3 million in component-delivery and contract-service commitments, generally modifiable or reschedulable. It also has a 4% royalty obligation to related-party Syzygy on applicable product revenue, capped at $1 million or ending September 30, 2026, whichever occurs first.
- Consolidated shareholder derivative litigation remained pending: a stipulation to dismiss without prejudice was filed April 29, 2022, but was awaiting court approval. The company reported no litigation liability provision at March 31.
- Subsequent to quarter-end, the company granted substantial equity awards to its new CEO and President. An increase of 1.5 million shares authorized under the stock plan was approved by the Board, subject to shareholder ratification.
Key facts for investors to verify
- Whether BolaWrap 150 adoption, post-promotion pricing and product mix deliver the expected revenue and margin improvement.
- Whether the stated cash runway remains adequate given recurring operating losses, cash burn and planned investment in growth and R&D.
- Conversion of the $505,000 backlog and $282,000 deferred revenue into recognized revenue, considering cancellation and rescheduling terms.
- Customer and receivables concentration, collection timing, and the effect of supply-chain constraints on production and delivery.
- Execution of the management transition, the cost and dilution implications of the new executive awards, and the outcome of the pending derivative-litigation dismissal.