Wrap Technologies, Inc. — Q3 2019 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2019. Wrap develops security products for law enforcement and security personnel; its lead product is the BolaWrap 100 remote restraint device. The interim financial statements are unaudited.
Financial performance
| Metric | Q3 2019 | Q3 2018 | Nine months 2019 | Nine months 2018 |
|---|---|---|---|---|
| Revenue | $268,763 | $1,890 | $446,018 | $1,890 |
| Gross profit (margin) | $110,977 (41%) | $283 | $191,317 (43%) | $283 |
| Operating expenses | $2,607,940 | $834,342 | $6,168,035 | $2,044,698 |
| Operating loss | $(2,496,963) | $(834,059) | $(5,976,718) | $(2,044,415) |
| Net loss | $(2,387,204) | $(833,884) | $(5,782,059) | $(2,044,804) |
| Basic loss per share | $(0.08) | $(0.04) | $(0.20) | $(0.09) |
For the nine months, net cash used in operating activities was $5.81 million, investing cash use was $305,000, and financing provided $13.01 million. Financing included $11.35 million net proceeds from a June offering and $1.66 million from warrant and option exercises. Cash increased to $19.26 million from $12.36 million at year-end 2018.
At September 30, cash was $19.26 million, working capital was $20.15 million, and total liabilities were $1.45 million, including $306,965 of operating lease liabilities. The filing reports no off-balance-sheet arrangements. Inventory rose to $1.97 million from $158,267 at year-end; the company also wrote off $130,591 of raw materials during the first nine months.
Changes versus the prior comparable periods
- Revenue increased from a very low base as product sales expanded, but remained modest relative to the company’s operating costs.
- Nine-month operating expenses grew 202% year over year, including SG&A up 187% and R&D up 254%. Management attributed increases to staffing, marketing and promotion, facilities, public-company costs, and product development.
- Net loss increased to $5.78 million for the nine months from $2.04 million. Operating cash use also increased from $1.63 million to $5.81 million.
- Cash was strengthened by the June 2019 public offering and warrant and option exercises; common shares outstanding rose to 29.669 million from 27.365 million at December 31, 2018.
Outlook, commentary and risks
- Management said cash on hand was expected to support operations for at least twelve months from the report date, while cautioning that additional capital may be needed and future financing may not be available on favorable terms, or at all.
- Management expected sales to grow but warned that orders and sales could be sporadic. At September 30, customer deposits were $238,510 and backlog was approximately $1.3 million, expected to ship over the next nine months; orders may be modified, rescheduled, or cancelled.
- The company began production at its new Tempe facility in September 2019. Added capacity may be offset initially by start-up, training, and overhead costs, potentially pressuring margins. Management cautioned that historical margins are not predictive, given limited sales, product changes, channel mix, and limited warranty experience.
- Management expected near-term increases in operating costs, including R&D, selling, marketing, training, production, and support. The company reported cumulative losses of $10.19 million and anticipated continuing significant operating losses.
- Risks include dependence on a limited number of suppliers, including a sole supplier for the laser assembly; limited operating history and personnel; uncertain market acceptance and order timing; and reliance on external capital. The company had approximately $540,000 in component purchase commitments.
- A related-party license with Syzygy, owned and controlled by company officers/stockholders, requires royalties of 4% of qualifying product revenue, capped at $1 million or ending September 30, 2026. The company recorded $16,634 of royalties for the first nine months of 2019.
- No pending material legal proceedings were reported. Management concluded disclosure controls were effective at a reasonable assurance level and reported no material change in internal control over financial reporting during the quarter.
Important facts for investors to verify
- Whether the reported $1.3 million backlog converts to deliveries and recognized revenue, given cancellation and rescheduling rights.
- Whether sales scale sufficiently to cover the rising operating cash burn and support the stated twelve-month liquidity outlook.
- Production ramp, supplier capacity, inventory quality, warranty experience, and the effect of start-up costs on future gross margins.
- Potential dilution from outstanding options, restricted stock units, and warrants; the filing reports 10,013,373 potentially issuable shares outstanding at September 30, 2019.
- The MD&A narrative says the nine-month operating loss increased by $3,392,303, while the financial table implies an increase of $3,932,303; verify this apparent inconsistency against the filed statements.