Wrap Technologies, Inc. — Q1 2020 Form 10-Q
Reporting period: Three months ended March 31, 2020. Unaudited interim results. Wrap develops security products for law enforcement and security personnel; its primary product is the BolaWrap 100 remote restraint device.
Financial results and liquidity
| Metric | Q1 2020 | Q1 2019 |
|---|---|---|
| Revenue | $689,437 | $117,811 |
| Gross profit / margin | $283,625 / 41% | $56,591 / 48% |
| Operating expenses | $2,673,728 | $1,562,695 |
| Operating loss | $(2,390,103) | $(1,506,104) |
| Net loss | $(2,345,975) | $(1,480,781) |
| Basic and diluted loss per share | $(0.08) | $(0.05) |
| Cash used in operating activities | $(2,238,303) | $(1,588,977) |
- Revenue increased 485% year over year; product sales were $674,613. Management also reported revenue was 175% above Q4 2019.
- Gross margin was 41%, down from 48%. Management cautioned that limited sales history, product changes, channel mix, warranty costs and manufacturing overhead could make future margins differ.
- Cash and cash equivalents were $15.49 million at quarter-end, versus $16.98 million at December 31, 2019. Working capital was $17.50 million; total assets were $19.26 million.
- Total liabilities were $1.14 million, including $247,352 of operating lease liabilities. The filing reports no debt borrowings.
- Cash declined by $1.49 million during the quarter. Financing provided $801,286 from warrant and stock-option exercises; investing used $54,063.
Changes, outlook and risks
- Compared with Q1 2019, revenue growth was accompanied by operating expenses rising 71%, including SG&A up 80% and R&D up 42%. Net loss widened by $865,194.
- Stock-based compensation increased to $467,246 from $227,047. Weighted-average shares rose to 29.98 million from 27.36 million.
- At March 31, backlog was approximately $1.4 million, expected to be delivered over the next 12 months, and customer deposits were $222,388. Orders may be modified, rescheduled or cancelled.
- Management said cash on hand was expected to support operations for at least 12 months from the report date, but gave no assurance and anticipated continued operating losses. It said quarterly sales could be sporadic and provided no firm revenue guidance.
- COVID-19 effects on operations, demand and liquidity were uncertain and could be material. The company applied for Paycheck Protection Program funding; funding was not assured.
- Other risks include dependence on a limited number of suppliers, including a sole supplier for the laser assembly; limited customer and warranty history; and the need for additional capital if growth or product development requires it.
- Commitments include approximately $275,000 for components and contract services, operating lease payments, and a 4% royalty to related-party Syzygy on applicable product revenue, subject to a $1.0 million aggregate cap or September 30, 2026 termination date, whichever comes first. No pending material legal proceedings were reported.
Important facts for investors to verify
- Whether the reported backlog converts to delivered, collected sales, given cancellation and rescheduling provisions.
- How COVID-19 affected demand, sales activity, supply availability, cash use and any PPP funding after the reporting date.
- Whether cash runway remains adequate as operating losses and planned sales, marketing and development spending continue.
- Whether gross margin is sustainable as production volume, product costs, warranty experience and sales-channel mix change.
- Potential dilution: 9,684,225 shares underlying outstanding options, restricted stock units and warrants were excluded from diluted loss per share as antidilutive; the company also approved a proposed increase in its stock incentive plan, subject to stockholder ratification.
- Related-party royalty terms and supplier concentration, including any changes to the disclosed arrangements or supply risks.