Wrap Technologies, Inc. — Q2 2020 Form 10-Q
Reporting period: Three and six months ended June 30, 2020. The company develops security products for law enforcement and security personnel, including the BolaWrap 100 remote restraint device and Wrap Armor tactical shields. Financial statements are unaudited.
Key financial results
| Metric | Q2 2020 | Q2 2019 | Six months 2020 | Six months 2019 |
|---|---|---|---|---|
| Revenue | $832,592 | $59,444 | $1,522,029 | $177,255 |
| Gross profit / margin | $267,622 / 32% | $23,749 / 40% | $551,247 / 36% | $80,340 / 45% |
| Operating expenses | $3,115,025 | $1,997,400 | $5,788,753 | $3,560,095 |
| Operating loss | $(2,847,403) | $(1,973,651) | $(5,237,506) | $(3,479,755) |
| Net loss | $(2,816,503) | $(1,914,074) | $(5,162,478) | $(3,394,855) |
| Basic loss per share | $(0.09) | $(0.07) | $(0.17) | $(0.12) |
- Product sales accounted for $823,164 of Q2 revenue and $1,497,777 for the first six months. Revenue increased sharply year over year from a very small comparison base.
- Cash and cash equivalents were $35.4 million at June 30, versus $17.0 million at December 31, 2019. Working capital was $36.7 million; total liabilities were $1.9 million and stockholders’ equity was $37.1 million.
- Operating cash use was $3.9 million for the first six months, compared with $3.7 million in 2019. Investing cash use was $151,000; financing provided $22.4 million. Cash increased by $18.4 million during the period.
- The company reported a $414,362 Paycheck Protection Program loan at 1% interest, with a two-year term. It expected all or most may be forgiven, but stated forgiveness was not assured. The filing does not provide a separate total-debt figure; the loan was classified as current and long-term bank-note liabilities.
Changes versus the prior comparable period
- Q2 revenue rose by $773,148 year over year, while operating expenses increased by $1.1 million and net loss widened by $902,429. For the first half, revenue increased by $1.3 million, but operating expenses rose by $2.2 million and net loss widened by $1.8 million.
- Gross margin fell to 32% in Q2 from 40%, and to 36% for the first half from 45%. Management attributed pressure partly to a ten-week production interruption related to COVID-19 restrictions, product mix, and lower margins on cartridges.
- SG&A growth reflected increased staffing, compensation, marketing and promotion, public-company costs, and stock-based compensation. R&D spending also increased, principally with higher personnel costs.
- Equity financing included a June public offering generating $11.7 million net, plus $10.4 million net proceeds from warrant and option exercises during the first half. Shares outstanding at June 30 were 34.36 million, compared with 29.83 million at year-end 2019.
Outlook, risks and unusual items
- Management said cash on hand was sufficient to fund operations for at least the next 12 months, while anticipating continued operating losses and increased spending on sales, training, administration and product development. No specific revenue or earnings guidance was provided.
- COVID-19 restricted demonstrations, training, travel and production, and affected customer staffing. The company shifted some sales and training to webinars. Management said future effects on operations and liquidity were uncertain and that sales could be sporadic; it gave no assurance of revenue growth for the remainder of 2020.
- Backlog was approximately $1.5 million, expected to be delivered within 12 months; customer deposits were $183,537. Orders may be modified, rescheduled or cancelled. The company also had approximately $1.7 million in component and contract-service commitments, generally subject to adjustment.
- Distribution included 11 domestic distributors covering 46 states and 19 international distributors covering 29 countries. Management described large agency and international opportunities but noted timing and conversion were uncertain.
- Supplier concentration is a risk, including a sole supplier for the laser assembly. Other disclosed risks include limited customer and revenue history, warranty and inventory estimates, COVID-19 disruption, and dependence on product acceptance and future financing needs.
- Related-party items included a 4% technology royalty to Syzygy Licensing, LLC, owned by company officers/shareholders, and $185,000 payable to V3 Capital Partners, owned by the executive chairman. V3 was engaged for services at $10,000 monthly and received a $175,000 financing bonus paid in July.
- Subsequent to quarter-end, the company reported $11.5 million gross proceeds from exercise of 2.17 million warrants and $11.0 million net proceeds from warrant and option exercises through the report date. A family trust of the chief technology officer exercised warrants for $1.17 million in July.
- No pending material legal proceedings were reported. Management concluded disclosure controls were effective at the reasonable-assurance level and reported no material change in internal control over financial reporting.
Most important facts for investors to verify
- Whether the $1.5 million backlog converts to shipments and cash collections, given its cancellation and rescheduling terms.
- Whether COVID-19 restrictions, customer demand and production interruptions continue to affect sales, training and gross margins.
- The company’s cash burn and spending trajectory relative to management’s 12-month liquidity statement.
- Whether the PPP loan qualifies for forgiveness and the resulting repayment obligation if forgiveness is denied.
- Potential dilution from outstanding warrants, options and restricted stock units; the filing reports approximately 10.0 million potentially issuable shares at June 30, and 36.55 million common shares outstanding as of July 29.
- Execution and governance implications of related-party payments, supplier concentration, and the $1.7 million purchase commitments.