Wrap Technologies, Inc. — Q3 2020 Form 10-Q
Reporting period: Three and nine months ended September 30, 2020; financial statements are unaudited. Wrap develops security products for law enforcement and security personnel, led by the BolaWrap 100 remote restraint device, and also began selling Wrap Armor tactical shields.
Financial performance
| Metric | Q3 2020 | Q3 2019 | Nine months 2020 | Nine months 2019 |
|---|---|---|---|---|
| Revenue | $1.007 million | $0.269 million | $2.529 million | $0.446 million |
| Gross profit | $0.319 million | $0.111 million | $0.870 million | $0.191 million |
| Gross margin | 32% | 41% | 34% | 43% |
| Operating expenses | $4.182 million | $2.608 million | $9.971 million | $6.168 million |
| Operating loss | $3.863 million | $2.497 million | $9.101 million | $5.977 million |
| Net loss | $3.862 million | $2.387 million | $9.024 million | $5.782 million |
| Basic loss per share | $0.11 | $0.08 | $0.28 | $0.20 |
Revenue rose sharply from the prior-year periods as product sales expanded from a low base. Q3 revenue also increased 21% from Q2 2020, to $1.007 million from $832,592. Management attributed lower-than-potential sales to COVID-19 limits on demonstrations, training and travel. Gross margins declined year over year; management cited product mix, lower-margin cartridge sales and production downtime related to COVID-19 restrictions.
Selling, general and administrative expense increased 73% in Q3 and 74% for the nine-month period, primarily reflecting higher staffing, marketing and public-company costs. Research and development expense increased 27% and 26%, respectively, as the company added personnel and funded product development. Stock-based compensation was $0.546 million in Q3 and $1.563 million for the nine months.
Cash, liquidity and financing
- At September 30, cash and cash equivalents were $20.118 million, short-term U.S. Treasury investments were $24.986 million, and working capital was $46.833 million. Total assets were $49.395 million.
- Cash used in operating activities was $7.693 million for the first nine months, compared with $5.806 million in 2019. Investing activities used $25.283 million, chiefly reflecting purchases of short-term investments; financing activities provided $36.111 million.
- Total liabilities were $1.958 million, including a $414,362 Paycheck Protection Program loan and $183,187 of operating lease liabilities. The PPP loan bears 1% interest; the company applied for forgiveness in October and expected all or most might be forgiven, but forgiveness was not assured.
- Financing included $11.667 million net proceeds from a June public offering and $24.029 million net proceeds from warrant and option exercises. Common shares outstanding were 37,109,317 at September 30 and 37,211,217 at October 28. An additional 7,615,959 shares were potentially issuable from outstanding warrants, options and restricted stock units and were excluded from diluted loss per share as antidilutive.
Outlook, risks and notable items
- Management said existing cash and short-term investments were expected to support operations for at least the next 12 months. No revenue or earnings guidance was provided. The company anticipated continuing operating losses and expected operating, marketing and research costs to increase.
- Backlog was approximately $1.1 million, expected to be delivered over the next 12 months; customer deposits were $128,143. Orders may be modified, rescheduled or canceled, so backlog is not assured revenue.
- COVID-19 restrictions disrupted demonstrations, training, travel and production; management said the effect on future operations and liquidity could not yet be determined. The company also identified reliance on a limited number of suppliers, including a sole supplier for its laser assembly, and possible revenue and receivables concentration among a limited customer base.
- Three putative securities class actions filed in September and October 2020 allege misleading statements concerning the Los Angeles Police Department’s BolaWrap pilot program. The company said it considered the claims without merit and intended to defend them; the cases were expected to be consolidated. The filing does not provide a clear estimate of potential loss.
- The company reported approximately $0.5 million in component and contract-service purchase commitments, generally modifiable or reschedulable, and a 4% royalty obligation on qualifying licensed-product revenue, subject to a $1.0 million cap or expiration in 2026, whichever comes first.
- Management reported disclosure controls and procedures were effective at the reasonable assurance level and no material change in internal control over financial reporting occurred during the quarter.
Most important facts for investors to verify
- Whether revenue growth and the reported backlog convert into sustained shipments and collections, given cancellation rights and customer concentration.
- Whether COVID-19 restrictions continue to impede sales, training, production and international distribution, and how margins develop as product mix and manufacturing processes change.
- The cash burn rate and whether management’s stated 12-month liquidity outlook remains supportable without further financing.
- The outcome of the securities litigation and PPP loan forgiveness application, neither of which had a resolved financial impact disclosed in this filing.
- Potential dilution from outstanding warrants, options and restricted stock units, alongside the reported share count.