Wrap Technologies, Inc. — Q2 2019 Form 10-Q
Reporting period: Three and six months ended June 30, 2019. Wrap develops security products for law enforcement and security personnel; its first product is the BolaWrap 100 remote restraint device.
Financial performance and position
| Metric | Q2 2019 | Six months 2019 | Comparable 2018 |
|---|---|---|---|
| Revenue | $59,444 | $177,255 | $0 in both periods |
| Gross profit and margin | $23,749; 40% | $80,340; 45% | No revenue or gross profit |
| Operating expenses | $1,997,400 | $3,560,095 | $775,204 Q2; $1,210,356 six months |
| Net loss | $1,914,074 | $3,394,855 | $775,542 Q2; $1,210,920 six months |
| Basic loss per share | $0.07 | $0.12 | $0.03 Q2; $0.05 six months |
- Cash and cash equivalents were $21.38 million at June 30, up from $12.36 million at December 31, 2018. Working capital was $22.10 million.
- Operating cash use was $3.73 million for the first half, versus $1.06 million in the prior-year period. Investing cash use was $188,286; financing provided $12.93 million.
- The June follow-on offering generated $11.35 million net proceeds. The company also received $1.58 million from warrant and option exercises during the half.
- Total liabilities were $967,229, including $320,107 in operating lease liabilities. The filing reports no finance leases or off-balance-sheet arrangements. Stockholders’ equity was $22.53 million.
- Inventory increased to $1.26 million from $158,267. The company wrote off $65,012 of raw materials in the first half, primarily due to model improvements.
Changes versus the prior comparable period
- Revenue began after product sales commenced in late 2018; there was no revenue in the first half of 2018. The company recorded $162,901 of product sales and $14,354 of other revenue in the first half of 2019.
- First-half operating expenses rose 194% to $3.56 million, reflecting higher staffing, marketing and promotion, product development, facilities, travel and public-company costs. First-half net loss increased to $3.39 million from $1.21 million.
- Cash increased substantially, principally due to equity financing and warrant exercises. Common shares outstanding rose to 29.64 million at June 30 from 27.36 million at year-end; the June offering included warrants.
Outlook, commentary and risks
- Management said cash on hand should sustain operations for at least the next 12 months, while noting that additional capital may be needed and future financing is not assured. It expects continued operating losses and increased operating costs.
- Management expects sales may accelerate in the second half of 2019 but cautioned that orders and sales may be sporadic; no quantified revenue or earnings guidance was provided. Gross margins may vary and the reported margins are not considered indicative of future margins.
- By June 30, the company had nine domestic distributors covering 38 states and seven international distributors covering 12 countries. It reported delivery of devices to more than 70 agencies and provided over 330 devices at no cost for evaluation. In July, after the quarter, it announced an international distributor order valued at over $1 million, three further international orders and five initial domestic distributor orders.
- Risks include uncertain product acceptance and order timing, limited personnel and execution capacity, reliance on a limited number of suppliers (including a sole laser-assembly supplier), possible production delays or cost increases, and potential need for further capital. Component purchase commitments were approximately $1.1 million.
- The company owes a related-party royalty of 4% of relevant product revenue, subject to a $1 million aggregate cap or an end date of September 30, 2026. It reported no pending material legal proceedings. Management concluded disclosure controls were effective at a reasonable assurance level.
Important facts for investors to verify
- Whether the July orders convert into recurring, recognized revenue and whether distributor activity produces meaningful sales.
- Cash burn, working-capital needs and the sufficiency of the stated 12-month runway as spending and production scale.
- Future gross margins, warranty costs and inventory obsolescence as the product is updated and manufacturing expands.
- Potential dilution from outstanding warrants and equity awards; 9,997,123 shares underlying options, restricted stock units and warrants were excluded from diluted loss per share as anti-dilutive.
- Execution of production plans given supplier concentration, staffing constraints and the $1.1 million component commitment.