Wrap Technologies, Inc. — Q2 2023 Form 10-Q
Reporting period: Three and six months ended June 30, 2023; unaudited. Wrap develops public-safety products and training services, including the BolaWrap remote restraint device and Wrap Reality virtual-reality training platform. Financial amounts below are in thousands of dollars unless otherwise noted.
Financial results and liquidity
| Metric | Q2 2023 | Q2 2022 | Six months 2023 | Six months 2022 |
|---|---|---|---|---|
| Revenue | $1,202 | $1,165 | $1,913 | $2,764 |
| Gross profit | $668 | $457 | $1,020 | $1,124 |
| Gross margin | 56% | 39% | 53% | 41% |
| Operating expenses | $5,747 | $5,240 | $10,359 | $11,341 |
| Operating loss | $(5,079) | $(4,783) | $(9,339) | $(10,217) |
| Net loss | $(5,007) | $(4,785) | $(9,035) | $(10,217) |
| Net loss per share | $(0.12) | $(0.12) | $(0.22) | $(0.25) |
- Q2 product sales were $1,034, up 7% year over year; other revenue was $168, down 14%. Six-month product sales fell 32% and other revenue fell 21%.
- For the six months, net cash used in operating activities was $776, versus $6,207 in the prior-year period. The improvement included a $7,149 increase in accrued liabilities and other; inventory growth used $2,545 of cash.
- At June 30, cash and cash equivalents were $11,688 and short-term investments were $6,500. Current assets were $27,379 versus current liabilities of $10,817, or working capital of approximately $16.6 million. The company reported no debt; liabilities included lease and deferred-revenue obligations.
- Cash and investments totaled approximately $18.2 million, including about $7.35 million received before quarter-end under an offering that closed July 5. The filing reports approximately $10 million gross and $9 million net proceeds from the offering.
Changes versus prior comparable periods
- Q2 revenue rose 3%, and gross margin improved to 56% from 39%, which management attributed to BolaWrap 150 sales, pricing changes and reduced promotional pricing.
- Q2 net loss widened by $222,000. Operating expenses increased $507,000, including approximately $1.4 million of one-time costs associated with organizational changes, severance and legal fees. Management estimated Q2 operating expenses excluding these items at $4.35 million, below the prior-year level.
- Six-month revenue declined 31%, principally amid lower international sales: international revenue was $35,000 versus $479,000. Management cited timing of orders and customer budgeting.
- Six-month operating loss improved 9% as operating expenses declined, but gross profit also declined with lower sales.
Outlook, commentary and risks
- Management expects 2023 revenue to exceed 2022, citing domestic growth and anticipated international orders, which it said were more likely to book and ship in the second half. It cautioned that large international deals are lumpy and their timing and completion are uncertain. No quantified revenue or earnings guidance was provided.
- Management expects lower operating costs after April organizational changes and believes the company has sufficient capital for the next 12 months. It also expects sales and marketing activity to expand and aims to reduce losses and cash burn.
- Backlog at June 30 was approximately $25,000, expected for delivery in Q3, and was subject to modification, rescheduling or cancellation. Deferred revenue was $340,000, including $217,000 related to VR; management expects deferred revenue to grow as the Wrap Reality subscription business develops.
- Management reported BolaWrap use in almost 1,000 U.S. agencies and 62 countries, and said voluntary agency reports indicated successful outcomes in 83% of reported uses. Reports may not cover all uses; these figures are management-provided and not independently established in the filing.
- Key risks include continued operating losses, uncertain order timing and customer adoption, reliance on distributors and certain large customers, supply-chain and inflation pressures, potential limits on capital-market access, and effects of management changes and public or political opposition to policing products. The company cited approximately $3.9 million of component and service commitments.
- Post-quarter events: The July offering issued preferred stock initially convertible into up to 6,896,553 common shares, with 8% cumulative annual dividends, and warrants for up to 6,896,553 shares at $1.45 per share. On August 9, the company agreed to acquire Intrensic for approximately $554,000 cash, subject to adjustment, plus 1,250,000 shares. CEO Kevin Mullins owns approximately 9.53% of Intrensic, creating a related-party interest.
- 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. A prior shareholder derivative suit was dismissed with prejudice in 2022; the company reported no litigation liability provision at June 30.
Important facts for investors to verify
- Whether anticipated second-half international orders materialize, given the small reported backlog and history of lumpy orders.
- Cash burn and runway excluding the offering proceeds, and the extent to which improved operating cash flow depended on accrued-liability timing.
- The actual recurring revenue, customer retention and margin contribution of Wrap Reality and BolaWrap consumables.
- The fully diluted share impact, dividend terms and warrant economics of the July offering, alongside the Intrensic acquisition’s final consideration and related-party safeguards.
- Whether one-time restructuring costs end and projected cost reductions translate into sustained lower losses without impairing sales growth.