Wrap Technologies, Inc. — 2019 Form 10-K Summary
Reporting period: Fiscal year ended December 31, 2019. This is an annual report, not a standalone fourth-quarter report; the filing compares full-year 2019 with full-year 2018.
Business context
Wrap Technologies develops security products for law enforcement and security personnel. Its principal product is the BolaWrap 100, a handheld remote restraint device intended to entangle a person at a distance of 10–25 feet. The company began shipping an updated version with a green-line laser in May 2019 and moved production, training and other operations to a new Tempe, Arizona facility during the year. The company remains early in commercialization and principally depends on the BolaWrap and related cartridges.
Financial results and liquidity
| Metric | 2019 | 2018 |
|---|---|---|
| Revenue | $696,790 | $23,150 |
| Gross profit | $276,774 | $4,539 |
| Gross margin | About 40% | About 20% |
| Operating expenses | $8,890,450 | $3,342,173 |
| Operating loss | $(8,613,676) | $(3,337,634) |
| Net loss | $(8,325,488) | $(3,336,435) |
| Net loss per share, basic and diluted | $(0.29) | $(0.14) |
| Cash used in operating activities | $(8,485,637) | $(2,692,136) |
Revenue rose sharply from a low 2018 base as product sales increased to $656,071. Gross profit also increased, but remained small relative to operating costs. Selling, general and administrative expense grew 155% to $6.65 million, and research and development expense grew 204% to $2.24 million. The company attributed higher costs to staffing, sales and marketing, product development, facilities and public-company expenses. Net loss widened substantially.
At December 31, 2019, cash and cash equivalents were $16,983,864, total current assets were $19,674,699, working capital was $18,598,899, and total liabilities were $1,225,818. The balance sheet reports operating lease liabilities of $278,149; it reports no outstanding borrowing balance. Cash provided by financing activities was $13,492,790, primarily from the June 2019 stock-and-warrant offering and exercises of warrants and options. Investing cash outflow was $382,185. The company reported cumulative losses attributable to stockholders of $12,729,824.
Material changes and operating developments
- Revenue increased to $696,790 from $23,150 as the company expanded sales of the updated BolaWrap 100 and began developing distributor channels.
- The company signed agreements with 11 domestic distributors covering 45 states and 16 international distributors representing 26 countries; it reported product deliveries to 22 countries in 2019.
- It delivered more than 300 evaluation devices at no cost during 2019, in addition to more than 200 in 2018. These promotional devices contributed to sales and marketing costs.
- Inventory increased to $2,244,541 from $158,267. The company also wrote off $193,506 of raw materials and scrap parts, primarily due to startup production, model changes and improvements.
- Cash increased to $16,983,864 from $12,358,896, largely reflecting equity financing. Shares outstanding at year-end were 29,829,916, compared with 27,364,607 a year earlier. At March 9, 2020, 30,044,241 shares were outstanding.
Outlook, risks and other notable items
- Management said it expected sales to accelerate in 2020 and believed cash on hand would fund operations for at least the next 12 months. It did not provide numerical revenue, earnings or margin guidance, and cautioned that sales could be sporadic and large opportunities might not close.
- At year-end, the company reported approximately $1.725 million of backlog expected to be delivered in 2020 and $344,000 of customer deposits on orders. Orders may be modified, rescheduled or cancelled.
- Management expected operating costs and research and development spending to increase as the company expanded sales, training, production and product development. Higher production volume was expected to be important to margins; management cautioned against treating 2019 gross margin as indicative of future margins.
- Key risks include unproven market acceptance, continuing losses and possible future financing needs; lengthy government sales and budget cycles; dependence on distributors and a limited supplier base, including a sole-source laser assembly supplier; product-liability claims; and firearms-related and export-control regulation. The company stated that the BolaWrap 100 is classified as a firearm by the ATF and that exports require licenses.
- The filing identifies COVID-19 as a potential source of disruption to the company and its suppliers, logistics providers and distributors. The actual impact was uncertain at the filing date.
- A related-party license agreement requires a 4% royalty on qualifying product revenue, up to an aggregate $1 million or until September 30, 2026, whichever occurs first. The licensor is owned and controlled by company officers and stockholders.
- One distributor accounted for 22% of 2019 revenue and 54% of year-end accounts receivable. Management also disclosed 9,857,457 shares potentially issuable under outstanding warrants, options and restricted stock units, creating potential dilution.
- The financial statements received an unqualified audit opinion. Management concluded disclosure controls and procedures were effective at the reasonable-assurance level; no auditor attestation on internal control over financial reporting was included.
Important facts for investors to verify
- Whether the reported backlog converts to shipments and collected revenue, given cancellation and rescheduling rights and government purchasing cycles.
- Whether customer adoption, repeat purchases and distributor performance support growth beyond the 2019 revenue base.
- Cash consumption, planned spending and the adequacy of the stated 12-month liquidity runway if sales ramp more slowly than expected.
- Inventory demand and quality, the effect of product updates and production volume on gross margins, and future warranty costs.
- Supplier alternatives for sole-sourced components, regulatory and export-license compliance, and exposure to product-liability claims.
- Potential dilution from warrants, options and restricted stock units, and the terms and related-party implications of the royalty arrangement.