Wrap Technologies, Inc. — FY2020 Form 10-K
Reporting period: Fiscal year ended December 31, 2020; comparisons are with FY2019. This is an annual report, not a standalone fourth-quarter report. The company develops and sells BolaWrap remote-restraint devices and related products and training, including the Wrap Reality virtual-reality system acquired in December 2020.
Financial results and liquidity
| Metric | FY2020 / Dec. 31, 2020 | FY2019 / Dec. 31, 2019 |
|---|---|---|
| Revenue | $3.94 million | $696,790 |
| Gross profit / gross margin | $1.34 million / 34% | $276,774 / 40% |
| Operating expenses | $14.42 million | $8.89 million |
| Operating loss | $13.08 million | $8.61 million |
| Net loss | $12.58 million; $0.37 per share | $8.33 million; $0.29 per share |
| Cash used in operating activities | $12.19 million | $8.49 million |
| Cash and cash equivalents | $16.65 million | $16.98 million |
| Short-term investments | $24.99 million | None reported |
| Working capital | $44.59 million | — |
- Revenue increased 466% year over year, while operating expenses rose 62% and net loss widened. Management attributed growth to increased sales, while saying COVID-19 restrictions constrained demonstrations, training, production and customer access.
- Gross margin declined from 40% to 34%. The company cited a ten-week production pause, product and sales-channel mix, and lower margins on cartridges as contributing factors.
- Operating cash burn exceeded the net loss in part because of increased receivables and inventory. Investing cash outflow was $26.11 million, including purchases of Treasury investments; financing provided $37.96 million, largely from equity offerings and warrant exercises.
- The company reported no conventional outstanding borrowing at year-end: its $414,362 PPP loan and accrued interest were forgiven, producing $416,683 of forgiveness income. Reported liabilities included $150,017 of operating lease obligations and acquisition liabilities of $297,500.
- Management said available cash and short-term investments were sufficient to fund at least the next twelve months, but the company had a history of losses and expected continued losses. Equity financing and warrant exercises were important sources of liquidity.
Business developments and changes
- In December 2020, Wrap acquired NSENA’s virtual-reality training business and rebranded it Wrap Reality. Consideration included $210,000 paid at closing, $275,000 in scheduled payments, assumed unearned revenue liabilities and contingent earn-out terms. The acquired content library was described as 47 training modules.
- Product sales were $3.87 million; other revenue was $75,673. International sales represented approximately 64% of FY2020 revenue. Two distributors represented approximately 17% and 16% of revenue, respectively.
- Year-end accounts receivable was $1.87 million. Management disclosed that 56% of international revenue remained uncollected at year-end, creating collection and liquidity risk.
- Backlog at December 31, 2020 was approximately $120,260 and was expected to ship within twelve months; orders may be modified, rescheduled or canceled.
- The company raised $11.67 million net in a June 2020 stock-and-warrant offering and received $25.17 million net from warrant exercises. Common shares outstanding increased to 37.55 million at year-end; 7.57 million shares were subject to outstanding options, warrants and restricted stock units.
Outlook, commentary and material risks
- Management planned to grow sales in 2021, develop and improve products, expand distributor support and invest in marketing, training and Wrap Reality. It anticipated international sales could constitute a majority of 2021 sales, but gave no specific revenue or earnings guidance and cautioned that orders and timing were uncertain.
- COVID-19-related travel restrictions, customer staffing limitations and production interruptions adversely affected the business in 2020; the duration and future impact remained uncertain.
- Key risks include ongoing losses and cash burn, dependence on BolaWrap adoption, long and budget-sensitive government sales cycles, international receivable collection, customer and distributor concentration, reliance on certain suppliers, product liability and warranty costs, export and firearms regulation, competition, and potential dilution from equity awards and warrants.
- Multiple securities class actions and shareholder derivative actions relating to alleged statements about the Los Angeles Police Department BolaWrap pilot program were pending. The company denied the allegations and stated it would defend the cases. It recorded no litigation liability at year-end.
- The company paid a 4% royalty on applicable licensed product revenue to Syzygy Licensing, an entity owned or controlled by company officers; FY2020 royalty expense was $143,390. It also reported related-party payments to V3 Capital Partners, controlled by the executive chair.
- The company reported effective disclosure controls at year-end. The auditor gave an unqualified opinion on the financial statements; it did not audit internal control over financial reporting.
Important facts for investors to verify
- Whether revenue growth converts into repeat orders and materially higher gross margins, rather than remaining dependent on promotional spending and demonstration activity.
- Collection of international receivables, subsequent-period cash burn, and whether management’s stated twelve-month liquidity outlook remains adequate.
- Actual 2021 sales, backlog conversion and the effect of ongoing travel, regulatory and government-budget constraints; the filing provides no quantified guidance.
- Wrap Reality customer traction, integration costs and contingent acquisition payments, alongside the company’s ability to fund continued product development.
- Developments in the securities and derivative litigation, and any resulting financial, insurance or reputational exposure.
- Potential dilution from outstanding warrants, options and restricted stock units, and the terms of future financing or equity issuance.