Wrap Technologies, Inc. — Q1 2023 Form 10-Q
Reporting period: Three months ended March 31, 2023; financial amounts below are in thousands of dollars unless noted. Wrap develops public-safety products and training, including the BolaWrap remote restraint device and Wrap Reality virtual-reality training. Interim results are unaudited.
Financial performance and liquidity
| Metric | Q1 2023 | Q1 2022 / comparison |
|---|---|---|
| Revenue | $711 | $1,599; down 56% |
| Gross profit and margin | $352; approximately 50% | $667; approximately 42% |
| Operating expenses | $4,612 | $6,101; down 24% |
| Operating loss | $(4,260) | $(5,434) |
| Net loss | $(4,028); $(0.10) per diluted share | $(5,432); $(0.13) per diluted share |
| Cash used in operations | $(3,067) | $(4,850) |
| Cash and cash equivalents | $9,503 at March 31 | $5,330 at December 31, 2022 |
| Short-term investments | $6,500 at March 31 | $13,949 at December 31, 2022 |
Product sales were $616, down 58%; other revenue was $95, down 31%. Revenue was overwhelmingly from the Americas ($710 versus $1,194 a year earlier); Europe, the Middle East and Africa contributed $1, and Asia Pacific was reported as zero. SG&A fell 23% to $3,540 and research and development fell 28% to $1,072. Interest income was $236 versus $2 a year earlier.
At quarter-end, current assets were $23,638 and current liabilities $3,393, giving working capital of approximately $20.2 million. Cash plus short-term investments totaled approximately $16.0 million. The filing reports no borrowings; liabilities were primarily accounts payable, accrued items, deferred revenue and operating lease obligations. Total liabilities were $3,679.
Changes, outlook and management commentary
- Revenue declined substantially, which management attributed in part to customer order and budget timing and the near absence of international sales in the quarter. Management said larger international orders are difficult to forecast and expected more likely in the second half of 2023, without assurance.
- Gross margin improved to about 50% from 42%, while lower revenue reduced gross profit dollars. Management cited pricing and product-mix factors and said BolaWrap 150 design and pricing could support margins; actual margins depend on mix, warranty costs and supply conditions.
- Management reported a $1.489 million reduction in quarterly operating expenses year over year. Following April cost measures, it expected at least $1.5 million of quarterly expense reductions, or $6 million annually, and a shift toward just-in-time production. These are expectations, not realized results; severance costs were expected in Q2.
- The April 17, 2023 leadership changes occurred after quarter-end: Kevin Mullins became CEO, TJ Kennedy stepped down as CEO and director, and Glenn Hickman stepped down as COO as part of a reduction in force. The company said it would reassess previously communicated 2023 outlook and guidance after new leadership reviewed the business.
- Management said available cash and investments were sufficient for at least the next 12 months, but also noted continuing operating losses, uncertain revenue timing, potential financing needs, supply-chain exposure and inflationary cost pressures. It reported a Q1 backlog of approximately $21, expected for Q2 delivery, and $291 of deferred revenue, generally to be recognized over as much as five years.
Risks, contingencies and notable items
- Operating losses and negative operating cash flow continue. Inventory rose to $5,626 from $3,975 at year-end, and accounts receivable was concentrated: one distributor represented 41% of net receivables. Two distributors accounted for approximately 28% and 15% of Q1 revenue.
- Future component-delivery and service commitments were approximately $3,493 at March 31, generally subject to modification or rescheduling. A related-party license requires a 4% royalty on applicable product revenue, subject to an aggregate cap; $257 of maximum payout remained available.
- Management cited possible disruption from supplier shortages, logistics, customer budget timing, international deal variability, public-policy and reputational factors, and pandemic-related effects. Customer orders and backlog may be changed, rescheduled or cancelled.
- The previously disclosed shareholder derivative action was dismissed with prejudice in May 2022. The company reported no provision for liability under existing litigation at March 31, 2023, while noting that future claims could adversely affect results.
- Management reported no material changes to the risk factors in its 2022 Form 10-K. Disclosure controls were concluded effective at the reasonable-assurance level.
Important facts for investors to verify
- Whether expected international orders materialize, and whether revenue recovers from the 56% year-over-year decline.
- Whether the announced cost reductions are achieved, including their timing and the impact of Q2 severance charges.
- Cash burn, working-capital needs and the stated 12-month liquidity outlook; review inventory levels and distributor receivable concentration.
- Progress converting the small reported backlog and deferred revenue into recognized revenue, and the durability of gross margins as product and channel mix changes.
- Updated guidance following management’s reassessment, along with execution of the production transition and the outstanding purchase commitments.