Wrap Technologies, Inc. — Q1 2021 Form 10-Q
Reporting period: Three months ended March 31, 2021; financial statements are unaudited. Wrap Technologies develops public-safety products and training services, including the BolaWrap remote restraint device and, through its wholly owned Wrap Reality subsidiary, virtual-reality training systems.
Financial results and liquidity
| Metric | Q1 2021 | Q1 2020 / comparison |
|---|---|---|
| Revenue | $1.542 million | $0.690 million; up 123% |
| Gross profit / margin | $0.605 million / 39% | $0.284 million / 41% |
| Operating expenses | $6.043 million | $2.674 million; up 126% |
| Operating loss | $5.438 million | $2.390 million |
| Net loss / loss per share | $5.429 million / $0.14 | $2.346 million / $0.08 |
| Cash used in operating activities | $4.444 million | $2.238 million |
At March 31, cash and cash equivalents were $2.000 million and short-term investments were $35.000 million, versus cash of $16.647 million and investments of $24.994 million at year-end 2020. The cash decline primarily reflects purchases and maturities of short-term investments; investing cash outflow was $10.216 million. Working capital was $40.124 million. Total liabilities were $3.491 million, including $0.123 million of operating lease liabilities and $0.198 million of business-acquisition liabilities; the filing reports a $0.100 million debt repayment related to the NSENA purchase. The company said available cash and investments were sufficient for at least the next 12 months.
Changes and operating developments
- Product sales rose 111% to $1.427 million; other revenue was $0.115 million. Revenue growth was led by the Americas and Europe, Middle East and Africa.
- Gross margin decreased from 41% to 39%. Management cited product mix, sales channels, manufacturing costs and limited warranty experience as factors affecting margins.
- SG&A increased to $4.978 million, including $1.205 million in public-company costs, of which $0.803 million related to shareholder activism. Management said the matter was settled in March and it did not expect significant additional costs in 2021.
- R&D increased to $1.065 million, reflecting added personnel, share-based compensation, product development and virtual-reality scenario work. Total share-based compensation was $0.859 million, compared with $0.467 million a year earlier.
- Inventory increased to $3.580 million from $2.655 million at December 31, 2020. Deferred revenue was $0.172 million, including $0.137 million for virtual-reality training and $0.035 million for extended warranties.
Outlook, risks and contingencies
- Management planned for revenue growth in 2021 but cautioned that sales could be uneven and that growth was not assured. It expected operating costs, including sales, distribution and R&D expenses, to increase.
- The company expected COVID-19 restrictions to adversely affect results, including revenue, earnings and operating cash flow, for at least the next two quarters of 2021. Risks cited include limits on travel and training, customer budget constraints, supply-chain disruption and lower employee or customer productivity. Management also identified social unrest and related effects on agency budgets and public perception as risks.
- Management reported more field-use reports for BolaWrap and said more than 620 agencies and 1,960 training officers had received training by quarter-end. It also disclosed a five-year prepaid Wrap Reality subscription sale signed in late March.
- The filing reports approximately $1.380 million of commitments for component deliveries and services, generally modifiable or reschedulable, plus future NSENA purchase consideration of $0.100 million due June 2021 and $0.075 million due September 2021. The Syzygy license agreement requires a 4% royalty on qualifying product revenue, subject to a $1.0 million aggregate cap or expiration in September 2026.
- Consolidated securities and shareholder derivative actions concern alleged statements about the BolaWrap Los Angeles Police Department pilot program. The company said it believes the claims are without merit and intends to defend them; it recorded no litigation provision at March 31, 2021. An adverse outcome could materially affect results, financial condition or cash flows.
- Revenue is concentrated: three distributors represented approximately 28%, 22% and 10% of Q1 2021 revenue. The filing also reports significant receivables concentration among three distributors.
- Subsequent events include April stock and equity awards, including director awards and a proposed 1.5 million-share increase in the incentive-plan authorization, subject to stockholder ratification. Potential dilution also includes 8.032 million options, RSUs and warrants outstanding at quarter-end, which were excluded from diluted loss per share as antidilutive.
Important facts for investors to verify
- Backlog is stated as approximately $232,000 in the business outlook but $132,000 later in the results discussion; confirm the correct amount. Both statements describe expected delivery within 12 months.
- Assess the sustainability of revenue growth and gross margin, particularly given distributor and customer concentration, cancellable or reschedulable orders, and COVID-19-related uncertainty.
- Track operating cash use, inventory growth and management’s stated 12-month liquidity outlook; short-term investments are distinct from cash and cash equivalents.
- Review the status and potential exposure of the securities and derivative litigation, for which no liability was accrued.
- Evaluate equity-compensation and potential dilution, including April 2021 awards and the proposed increase in shares authorized under the incentive plan.