Wrap Technologies, Inc. — Q3 2023 Form 10-Q
Reporting period: Three and nine months ended September 30, 2023. Amounts below are in $ millions unless otherwise noted. Wrap develops public-safety products and training services, including the BolaWrap remote restraint device, Wrap Reality VR training, and—following its August acquisition—Intrensic body-worn cameras and digital evidence management.
Financial performance and liquidity
| Metric | Q3 2023 | Q3 2022 | Nine months 2023 | Nine months 2022 |
|---|---|---|---|---|
| Revenue | $3.63 | $1.70 | $5.54 | $4.46 |
| Gross profit / margin | $2.18 / 60% | $0.91 / 54% | $3.20 / 58% | $2.03 / 46% |
| Operating loss | $(2.75) | $(3.91) | $(12.09) | $(14.13) |
| Net loss | $(2.78) | $(3.87) | $(11.82) | $(14.08) |
- Q3 revenue rose 113% year over year, led by product sales and a large increase in EMEA revenue. Nine-month revenue increased 24%. Cassettes represented 21% of Q3 revenue and 20% of nine-month revenue.
- Q3 loss attributable to common stockholders was $2.98 million, including $0.19 million of preferred dividends; basic and diluted loss per share was $0.07. Nine-month loss attributable to common stockholders was $12.01 million, or $0.29 per share.
- Operating cash used was $12.92 million for the first nine months, versus $11.04 million a year earlier. Cash and cash equivalents were $4.93 million and short-term investments $10.00 million at September 30. The company reported working capital of approximately $15.0 million and no borrowings identified in the supplied balance sheet.
- Total assets were $31.67 million and total liabilities $11.10 million. Current liabilities include $7.83 million of warrant liabilities, which are remeasured at fair value; the company recorded a $0.12 million Q3 fair-value expense.
Material changes and significant transactions
- Gross margin improved year over year, which management attributed to BolaWrap 150 production efficiencies, pricing changes and fewer promotional discounts. Q3 operating expenses increased 2%; nine-month operating expenses decreased 5%, principally as research and development spending fell.
- In July, the company completed a securities offering with approximately $10.0 million gross proceeds and approximately $9.0 million net proceeds, comprising Series A convertible preferred stock and warrants. The preferred stock carries an 8% annual cumulative dividend and is initially convertible at $1.45 per share; warrants for up to 6.90 million shares are exercisable at $1.45 after six months and expire after five years. The warrants are classified as liabilities.
- In August, Wrap acquired all of Intrensic for approximately $0.55 million cash and 1.25 million common shares valued at approximately $1.94 million. CEO Kevin Mullins held about 9.53% of Intrensic, making the transaction related-party in nature. The purchase-price allocation remains preliminary and includes $1.61 million goodwill; management said Intrensic’s contribution to reported periods was immaterial.
- Common shares outstanding were 43.29 million at quarter-end, compared with 41.18 million at December 31, 2022. Potential dilution from preferred conversion, warrants and equity awards is material; options and RSUs were excluded from diluted loss per share as antidilutive.
Outlook, commentary and risks
- Management expected 2023 revenue to exceed 2022, citing domestic growth and anticipated international orders, particularly in the latter part of the year; it cautioned that large international orders are lumpy and timing and completion are uncertain. Quarter-end backlog was only $48,000, expected for Q4 delivery, and orders may be changed or canceled.
- Management said the offering and available resources should fund operations for the next 12 months, while also acknowledging continuing losses, negative operating cash flow, capital-market access risk and potential liquidity constraints. It expects cost-control efforts and product growth to reduce losses and cash burn, but provided no quantified earnings or cash-flow guidance.
- Key risks include customer concentration (two distributors generated 74% of Q3 revenue; one generated 41% of nine-month revenue), reliance on large international orders, receivable collection, supply-chain disruption, inflation, product warranties, and continued operating losses. Inventory rose to $5.82 million from $3.98 million at year-end, and accounts receivable and inventory increases contributed to operating cash use.
- The company reported no litigation provision at September 30 and no material changes to the risk factors in its 2022 Form 10-K. It disclosed approximately $1.69 million of future component-delivery commitments. A new 89-month Miami office lease begins November 1, 2023.
- Subsequent events included the October appointment of Scot Cohen as Executive Chairman, with salary and equity compensation tied partly to market-capitalization and revenue targets, and two director resignations followed by two appointments. Management stated disclosure controls were effective.
Important facts for investors to verify
- Whether the expected Q4 international orders materialized, and how revenue, backlog and customer concentration developed after quarter-end.
- Whether operating cash burn and inventory levels improved, and whether the stated 12-month liquidity outlook remains supportable.
- The final Intrensic purchase-price allocation, acquisition performance and related-party governance disclosures.
- The potential dilution and dividend burden from the preferred stock, warrants and executive equity awards, including any changes in warrant fair value.
- Whether gross-margin gains, expense reductions and management’s stated path toward sustainable profitability continued in subsequent periods.