Wrap Technologies, Inc. — Q3 2021 Form 10-Q
Reporting period: Quarter ended September 30, 2021; interim financial statements are unaudited. Unless otherwise noted, amounts below are in millions of dollars.
Business context
Wrap develops public-safety products and training services for law enforcement and security personnel. Its main product was the BolaWrap 100 remote restraint device; it launched the next-generation BolaWrap 150 in October 2021. The company also markets Wrap Reality, a virtual-reality training system.
Financial performance and liquidity
| Metric | Q3 2021 | Q3 2020 | Nine months 2021 | Nine months 2020 |
|---|---|---|---|---|
| Revenue | $1.805 | $1.007 | $5.280 | $2.529 |
| Gross profit | $0.711 | $0.319 | $1.257 | $0.870 |
| Operating loss | $(6.019) | $(3.863) | $(19.256) | $(9.101) |
| Net loss | $(5.991) | $(3.862) | $(19.220) | $(9.024) |
| Basic and diluted loss per share | $(0.15) | $(0.11) | $(0.50) | $(0.28) |
- Q3 revenue increased 79% year over year; nine-month revenue increased 109%. Q3 gross margin was 39%, compared with 32% a year earlier. Nine-month gross margin was 38% excluding the $0.747 million product-line exit expense, versus 34% in 2020.
- Operating expenses rose substantially: nine-month SG&A increased 104% to $16.210 million and research and development increased 111% to $4.303 million. Nine-month share-based compensation was $4.310 million.
- At September 30, cash and cash equivalents were $9.858 million and short-term investments were $30.004 million. Working capital was $42.869 million; total liabilities were $3.209 million and stockholders’ equity was $45.464 million. The balance sheet reports no outstanding debt; it does include $0.079 million of operating lease liabilities.
- Nine-month operating cash use was $13.729 million, investing cash use was $6.511 million, and financing cash provided was $13.451 million. Cash declined by $6.789 million from year-end 2020. Financing included $12.048 million from warrant exercises and $1.678 million from option exercises.
- Accounts receivable was $3.257 million, inventory was $2.284 million, and deferred revenue was $0.240 million at quarter-end. The company reported $0.063 million of backlog expected to be delivered within 12 months; orders may be rescheduled or cancelled.
Material changes and unusual items
- In Q2, the company recorded $0.747 million of product-line exit costs as it wound down BolaWrap 100 production and shifted to BolaWrap 150. The charge included inventory write-offs and tooling retirement; the company said it did not expect the expense to recur.
- Q3 included a $0.170 million impairment charge for purchased software. The company also recorded a $0.023 million gain after eliminating contingent acquisition consideration.
- Nine-month SG&A included $0.818 million of shareholder-activism costs; the matter was settled in March 2021, and the company did not expect significant further costs during 2021.
- Common shares outstanding increased from 37.554 million at December 31, 2020 to 40.749 million at September 30, 2021, primarily reflecting warrant and option exercises. An additional 5.397 million shares were potentially issuable under outstanding options, RSUs, and warrants, but were excluded from diluted loss per share as antidilutive.
Outlook, commentary, and risks
- Management said it expected significant operating losses to continue for the foreseeable future, while believing available cash and investments would support operations for at least 12 months from the report date. It did not provide numerical revenue or earnings guidance.
- Management cited COVID-19-related travel, training, supply-chain, and customer-funding constraints, as well as social unrest and potential effects on police budgets and public perception. It said these factors could adversely affect sales and operations.
- The company said the BolaWrap 150 could have higher margins after its startup period, but cautioned that new production processes, product acceptance, ramp-up, quality, and warranty experience could affect results. It also expects operating costs and R&D spending to rise as it expands.
- Sales were concentrated: two distributors generated approximately 41% and 29% of Q3 revenue. Two distributors represented 45% and 22% of quarter-end receivables.
- A securities class action alleging misleading statements about the BolaWrap Los Angeles Police Department pilot program had a motion to dismiss under submission. Related shareholder derivative litigation was stayed pending that motion. The company said it believed the claims were without merit; it had no litigation liability provision at September 30, 2021.
- The company owed related-party licensor Syzygy royalties equal to 4% of qualifying product revenue, subject to a $1.0 million aggregate cap or September 30, 2026, whichever comes first. Nine-month royalties were $0.185 million. It also disclosed approximately $0.713 million of component and service purchase commitments.
Important facts for investors to verify
- Whether BolaWrap 150 production, customer adoption, and margins develop as management expects.
- Whether revenue growth converts into improved margins and cash generation, given rising operating expenses and continued operating cash burn.
- The status and potential financial impact of the securities and derivative litigation.
- Customer and receivable concentration, order cancellations or delays, and collection of accounts receivable.
- Actual liquidity runway relative to management’s 12-month estimate, including spending, investment maturities, and potential financing needs.
- Potential dilution from outstanding equity awards and warrants, alongside related-party royalty obligations and product commitments.