Wrap Technologies, Inc. — Q2 2021 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2021. Unaudited consolidated financial statements. Dollar amounts below are in millions unless stated otherwise.
Business context
Wrap develops public-safety products and training services, led by the BolaWrap remote restraint device, and sells the Wrap Reality virtual-reality training system. Its customers include law-enforcement and security agencies, generally reached through distributors. The company reported operations as one segment.
Financial performance and liquidity
| Metric | Q2 2021 | Q2 2020 | Six months 2021 | Six months 2020 |
|---|---|---|---|---|
| Revenue | $1.934 | $0.833 | $3.476 | $1.522 |
| Gross profit (loss) | $(0.060) | $0.268 | $0.545 | $0.551 |
| Operating expenses | $7.741 | $3.115 | $13.784 | $5.789 |
| Net loss | $(7.799) | $(2.816) | $(13.228) | $(5.162) |
| Basic and diluted loss per share | $(0.20) | $(0.09) | $(0.35) | $(0.17) |
- Revenue increased 132% in Q2 and 128% for the first half year over the comparable 2020 periods. Product sales were $1.852 million in Q2 and $3.278 million in the first half.
- Q2 reported gross margin was negative, including a $0.747 million product-line exit charge. Excluding that charge, management reported Q2 gross margin of 36%; first-half adjusted gross margin was 37%, versus 36% in first-half 2020.
- At June 30, cash and cash equivalents were $13.050 million and short-term investments were $30.002 million. Working capital was $46.759 million; current assets were $49.336 million and current liabilities $2.577 million. Total liabilities were $2.585 million, including lease and acquisition liabilities; no debt balance is shown on the balance sheet.
- First-half operating cash use was $10.254 million; investing cash use was $5.469 million, including net purchases of short-term investments; financing provided $12.126 million, primarily from warrant exercises. Cash declined $3.597 million from year-end to $13.050 million.
- Stockholders’ equity was $48.756 million. Shares outstanding were 39.911 million at June 30, compared with 37.554 million at December 31, 2020. The filing also reports 526,303 option exercises after quarter-end through the report date, for $0.908 million in proceeds.
Material changes and unusual items
- In Q2, Wrap began winding down the BolaWrap 100 product line and shifting production to a next-generation product. The $0.747 million exit charge included $0.531 million of raw-material write-offs, $0.106 million of retired tooling, and a $0.110 million reserve for non-cancelable purchase commitments. Management said it did not expect the charge to recur.
- Operating costs rose substantially year over year. First-half SG&A increased $6.879 million, including higher share-based compensation, staffing, marketing and public-company costs. The first half also included $0.818 million of shareholder-activism costs; the matter was settled in March, and management did not expect significant additional costs in 2021.
- First-half research and development expense doubled to $2.227 million, reflecting product-development staffing and consulting, including work on the next-generation BolaWrap and Wrap Reality scenarios.
- During the first half, the company received $12.048 million from warrant exercises and $0.278 million from option exercises, and repaid $0.200 million of acquisition-related debt.
Outlook, risks and contingencies
- Management stated that cash and short-term investments should fund operations for at least the next 12 months, while noting significant operating losses and negative operating cash flows since inception. It gave no specific revenue or earnings guidance and said it could not predict whether sales would continue to grow materially during the remainder of 2021.
- Wrap expected to begin production of a next-generation product in Q3. Delays in the transition could adversely affect revenue, earnings and cash flows; new product inputs and processes may also make historical margins poor indicators of future margins.
- Management cited COVID-19-related travel and training limits, customer funding constraints, supply-chain and delivery disruption, and continuing social unrest as risks to sales and operations. It also expects operating costs, including research and development, to increase as the business expands.
- Backlog was approximately $0.736 million, expected to be delivered within 12 months, but customer and distributor orders may be modified, rescheduled or canceled. Purchase commitments for components and services were approximately $1.005 million.
- Three securities class actions were consolidated; defendants’ motion to dismiss was under submission. A consolidated shareholder derivative action was stayed pending resolution of that motion. The company said it believes both matters are without merit; it recorded no litigation liability at June 30. An unfavorable outcome could materially affect the company.
- Two distributors represented approximately 37% and 22% of Q2 revenue. Three distributors represented 30%, 28% and 14% of accounts receivable at quarter-end. The company also pays a 4% royalty to related-party Syzygy on applicable product revenue, subject to contractual limits.
- Management concluded disclosure controls were effective at the reasonable-assurance level and reported no material changes in internal control over financial reporting during the quarter.
Important facts for investors to verify
- Whether next-generation product development, licensing and production transition remain on schedule, and how the transition affects unit economics and gross margins.
- Whether reported revenue growth converts into repeat orders and collections, given customer concentration, cancellable backlog and first-half operating cash use.
- How much of the rising operating expense reflects ongoing growth investment versus non-cash compensation and one-time shareholder-activism costs.
- Updates on the securities and derivative litigation, potential exposure, and any changes to the absence of a recorded litigation reserve.
- Post-quarter share issuance from option exercises and the potential dilution from outstanding options, restricted stock units and warrants.