Wrap Technologies, Inc. — Q3 2022 Form 10-Q
Reporting period: Three and nine months ended September 30, 2022. Unaudited results; monetary amounts below are in millions unless stated otherwise. Wrap develops public-safety products and training services, principally the BolaWrap remote restraint device and Wrap Reality virtual-reality training.
Financial performance
| Metric | Q3 2022 | Q3 2021 | Nine months 2022 | Nine months 2021 |
|---|---|---|---|---|
| Revenue | $1.70 | $1.81 | $4.46 | $5.28 |
| Gross profit | $0.91 | $0.71 | $2.03 | $1.26 |
| Gross margin | 54% | 39% | 46% | 38% excluding prior-year product-line exit charge |
| Operating expenses | $4.82 | $6.73 | $16.16 | $20.51 |
| Operating loss | $(3.91) | $(6.02) | $(14.13) | $(19.26) |
| Net loss | $(3.87) | $(5.99) | $(14.08) | $(19.22) |
| Basic and diluted loss per share | $(0.09) | $(0.15) | $(0.34) | $(0.50) |
- Quarterly revenue fell 6%; product sales declined 6%. Nine-month revenue fell 15%, with product sales down 19%; other revenue rose 49% to $0.42 million.
- Quarterly gross margin improved to 54% from 39%; nine-month margin was 46%. The prior-year nine-month result included a $0.75 million product-line exit charge; excluding it, the filing gives a 38% prior-year margin.
- Operating expenses decreased 28% in Q3 and 21% year to date, primarily from cost controls and lower SG&A. Operating losses narrowed 35% for the quarter and 27% year to date.
Cash, liquidity and obligations
- At September 30, cash and cash equivalents were $3.83 million and short-term investments were $19.87 million, totaling about $23.7 million. Working capital was $27.3 million; total liabilities were $2.56 million.
- Net cash used in operating activities was $11.04 million for the first nine months, versus $13.73 million a year earlier. Cash and cash equivalents decreased by $1.11 million, to $3.83 million; investment maturities and purchases drove investing cash flows.
- The filing reports no debt outstanding. Operating lease liabilities totaled $0.33 million. Component-delivery and service commitments were approximately $4.38 million, generally modifiable or reschedulable. The company owes a 4% related-party royalty on applicable product sales, subject to a $1.0 million aggregate cap or expiration in September 2026.
Management outlook, risks and notable items
- Management said it believed available cash and investments would fund operations for at least 12 months. It targeted cash-flow break-even by the end of fiscal 2023 and said strong sales could support profitability by the end of 2024; these are forward-looking expectations, not assured results.
- The strategy emphasizes repeatable domestic BolaWrap sales, international sales of BolaWrap 150, broader agency deployments, paid training, distributor expansion and a SaaS model for Wrap Reality. Management expected reduced discounting after Q3 and continuing cost control.
- Management attributed sales pressure to the BolaWrap 100-to-150 transition, delayed international orders, COVID-related limits on demonstrations and training, and supply-chain constraints. It cited geopolitical and macroeconomic uncertainty, social unrest and potential effects on agency budgets, customer concentration, and execution and personnel changes as risks.
- Backlog was approximately $26,000 at September 30, expected for delivery within 12 months; orders may be changed, rescheduled or cancelled. Deferred revenue was $0.30 million. On October 11, the company received a government-agency order for over 2,000 devices and accessories worth more than $1.5 million, expected to be recorded in Q4 2022.
- Revenue was concentrated: one distributor represented about 59% of Q3 revenue and 39% of nine-month revenue. Two distributors represented 57% of receivables at quarter-end.
- A shareholder derivative action was dismissed without prejudice in May 2022; the related securities action had been dismissed with prejudice in December 2021. The company reported no litigation-loss provision at September 30. Management reported disclosure controls effective at the reasonable-assurance level.
Most important facts for investors to verify
- Whether the October government order was delivered, recognized as revenue, and collected, and whether subsequent international orders convert from pipeline to sales.
- Whether operating cash burn declines enough to meet management’s cash-flow break-even target, given continuing losses and $4.38 million of component and service commitments.
- Whether BolaWrap 150 pricing, margins, reduced discounts and training/SaaS initiatives improve sustainable revenue and gross profit.
- Distributor concentration and the apparent Q3 geographic-revenue discrepancy: the geographic table implies international revenue of about $0.22 million, while MD&A cites $0.38 million. The filing text does not reconcile these values.
- Potential dilution: 6.40 million stock options and RSUs were excluded from diluted loss per share as anti-dilutive; the filing also reports 1.62 million shares available for future grants under the incentive plan.