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Wrap Technologies (WRTC) is a one-product company that features the BolaWrap 100, a hand-held remote restraint device that discharges an eight-foot bola style Kevlar tether meant to entangle a subject at a range of 10-25 feet. WRTC went public on the OTC in May, 2018, shortly after it completed a $3.5M “self-underwritten IPO”. It was trading on the OTC exchange until it got uplisted to the NASDAQ on 12/4/18.
Bulls will argue that recent law enforcement protests and calls for change will make WRTC’s BolaWrap a secular beneficiary. The reality: the BolaWrap is an impractical device with a limited use-case for law enforcement. As the tether extends 8 feet when fired, it requires at least 4 feet on either side of the target to extend properly, and a minimum of 10 feet of further separation between the officer and the target.
A demonstration is shown with someone in this stance on the front page of the company’s website, as shown below:
When would a suspect ever stand or behave in such a manner in a hostile confrontation?
We’ve spoken with many police officers asking if they would ever use the BolaWrap. Many have told us that using this device would be in such rare situations, that it would be hard to use.
The only plausible application of the device appears to be during street stops. Which are when a police officer stops a citizen on the street to ask questions or ask to conduct a search. According to the US Department of Justice (Table 5) only ~1.0% of police to public contact takes place during street stops. Even more extreme, is that only 4.1% (Table 17) of the altercations typically lead to an arrest. And this is further narrowed by the subsegment already being served by many other devices.
Investors should be even more wary of the backgrounds of both the company’s management and key shareholders. Previous public companies led by WRTC management have led to many bankruptcies, all at the expense of shareholders. Investors should be particularly wary of recent and upcoming insider selling, as well as any outstanding warrants.
BolaWrap’s inventor and WRTC's Chief Technology Officer (CTO), Elwood Norris, is a serial entrepreneur that has had three companies that he created stock drop 90%+ from their peak, some went to zero. We expect WRTC to also drop considerably from its current peak level. Elwood’s son, David Norris, was appointed the CEO of WRTC.
Wrap Tech’s Unsustainable Rally
As shown in the lifetime WRTC chart above, shares of WRTC have more than tripled in recent months, hitting an all-time midday high of $14.40 in July. The recent rally has been consistent with Black Lives Matter (“BLM”) protests, with investors appearing to bet on the BolaWrap as a direct beneficiary.
Gearing up the stock rally, the company activated its promotion machine and promptly issued 15 press releases in June 2020 alone – significantly more than in previous months:
# of Press Releases
4 (all 4 in short period of time between 5/26 and 5/31 before announcing a $12.4m financing on 6/1. Deal terms: WRTC sold 2.1m shares @ $6 per share with 100% warrant coverage @ $6 warrant execution price)
3 (including 2 related to quarterly results announcements)
3 (including 2 related to quarterly results announcements)
Source: WRTC PRs
As protests continue to cool off, investors should prepare for the stock to do the same.
BLM comparative law enforcement and security stocks like Digital Ally (DGLY) appreciated over 500% since the beginning of the riots. The stock has fallen 40% from highs, and we expect the same to happen to WRTC.
We believe WRTC revenues will continue to disappoint, rising to no further than $2M-$5M annually in the foreseeable future. As new shareholders turn over in a pattern of perpetual disappointment, investors should expect the stock to slump down to $3, consistent with 2018 levels.
Warrants and Insider Selling
We foresee an upcoming downtrend in share price particularly as insiders scramble to exercise millions of share warrants expiring in October, at less than half of the current price (page 10 of 10-Q).
Source: WRTC 3/31/20 10-Q
On 7/8/20, WRTC’s two largest shareholders, the Executive Chairman, Scot Cohen, and the CEO, David Norris, filed to sell 1.5M shares each. This is shown below:
Source: S-3 filing
All in all, about 7.2M shares could potentially hit the market over the next quarter. This represents 21% of shares outstanding (including assumed execution of warrants).
- 1.5M shares - Scot Cohen, Executive Chairman of Board. S-3 declared effective on 7/10.
- 1.5M shares - David Norris, CEO. S-3 declared effective on 7/10.
- 0.25M shares - Elwood Norris, CTO, father of David Norris. 0.25m shares relate to the executed portion of his warrants @ $5 in two deals, on 6/1 and 7/14.
- 0.7M shares - $5 warrants that were executed as a part of the last financing round in June 2020 in addition to Elwood Norris’s warrant execution.
- 3M shares - unexecuted $5 warrants that expire on October 30, 2020. There is an urgency to execute them.
- 0.3M shares - unexecuted $3 warrants that expire on October 30, 2020. There is an urgency to execute them.
With insiders selling, investors may want to follow their lead.
The BolaWrap Has A Small TAM – Targeted Use for The Mentally Ill
BolaWrap’s TAM (Total Addressable Market) is very small. Lots of space is needed to successfully execute the device. As stated in the 2019 10-K:
The BolaWrap 100 is designed to engage a suspect at 10 to 25 feet operable by the weak hand, allowing other force options to remain available. The design of the device makes it ineffective at close distances, and it is not recommended for use at less than ten feet.
Most importantly, the device is only being marketed for the use on the mentally ill, as per the company’s 2019 10-K:
Law enforcement encounters with the mentally ill or those suffering a mental health crisis present a difficult challenge, often generating public controversy and costly consequences.
This YouTube video features Tuscaloosa County’s Sheriff’s office that recently purchased the BolaWrap. It states:
Mental health officers with the Tuscaloosa County Sheriff’s Office demonstrated Thursday how the Bola Wrap works. Officers say the wrap would make it easier for them to subdue someone who has mental illness…
This is further reiterated in WRTC’s December 2019 investor presentation:
Source: Page 7 Wrap Tech December 2019 Investor Presentation
Notice the key part of the above quote that illustrates the impracticality of the BolaWrap: “You came to my house”. The BolaWrap wouldn't have helped in that situation. As referenced above, the BolaWrap is limited to unobstructed, open spaces. Unless the confrontation is in a mansion, the device is restricted to street confrontations.
The combination of both a limited target market and the device’s impracticality in most environments points to a significant limitation for the TAM. With most mental health episodes taking place domestically, police department demand and resulting sales are likely to remain constrained.
A real-world example provides further perspective: one mentally ill individual was shot and killed by the police in 2017 after approaching the officers with a knife. Although a taser may have been a more appropriate response, a BolaWrap could have endangered the officers further by startling the assailant, especially by misfiring. This is an incremental issue with the device that is yet another drawback.
Demonstrations Further Show The BolaWrap’s Impracticality
Our research has shown the BolaWrap to be ineffective in the vast majority of situations. And in many situations, it would actually escalate a confrontation and make it worse. Measuring the appropriate distance between an assailant is the last thing an officer should be asked of in a high-stress interaction. Even worse if the suspect charges the officer and limits their reaction time.
Other issues with the BolaWrap:
- The subject needs to be standing still with their legs close together for Bola Wrap to work properly. While the product seems to work in a controlled environment where the person standing still / is moving slowly and is unarmed (and the police officer knows for sure that the person is unarmed, there is no threat to the police officer, and it’s just a controlled demonstration), such conditions happen rarely in real life situations.
- After deploying the Bola Wrap, the officer still needs to handcuff the subject, as the subject is not fully immobilized and probably will continue to fight and will be able to use a firearm or a knife before the officer can reach him. Usage of Bola Wrap is too risky unless you certainly know that the subject is unarmed and is no threat to the police officer. In the end, a Taser or another weapon still needed to be used after deploying a Bola Wrap.
- Bola Wrap device will need additional space on the officer’s belt (where weapons and other equipment is already placed). There is only so much room on the belt.
- Law enforcement agencies budgets are too limited to switch from current solutions and to bet on unproven product. Extensive field tests are needed before agencies decide to commit financially to such new and unproven device.
On June 17, 2020 WRTC issued a PR stating that United Kingdom “use of force” experts published a report on the efficacy of the BolaWrap. The report did reveal a high degree of safety with the use of the device relative to other tools (a point we do not dispute). The report fails to mention any claims about the device’s efficacy – a point completely omitted until the end of the PR. The report notes: “we recommend scenario reconstruction and operational trials so that the likely efficacy of the device can be determined to minimise any operational risks to police officers.” We believe any serious tests by law enforcement have and will continue to show a lack of efficacy and real-world practicality. Note that the report authors were paid by Emergency Protection, Ltd, which is the exclusive UK distributor for WRTC.
With WRTC only spending $2.2M in R&D last year, it's unlikely that future generations of the BolaWrap will improve practicality. Compare this to Axon Enterprise (AAXN), the company that sells the Taser, which spends $100M per year in R&D.
Most of Wrap Tech’s Sales Are to Tiny Police Departments
We are always looking for ways to limit the amount of force used during tense encounters,” commented Chief Priest. “We are increasingly called to situations where people are experiencing a mental health crisis and our officers are forced to take action to protect that person. The BolaWrap is another tool that could help bring situations under control.
On 7/14/20, we reached out to Chief Priest (“Richey”), to get an idea of the effectiveness of the BolaWrap and how much he expects it to be used. He responded:
We just purchased 3 of them, we are a small agency. I will need to get about 6-8 more next year. It will be in addition to our other tools. We have yet to deploy them in the field. I need to set up the training. I have our policy in place.
I don’t anticipate that many replacements per year, we are discharging Tasers maybe 2-4 times a year dept wide. So that is pretty low, I am fortunate to have a lot of tenured officers who can de-escalate and know how to handle situations by knowing what to say. Mental health crises ( or at least calls for them) were very uncommon 15-20 years ago. Much more common now, maybe 3-4 emergency detentions in the past 3 weeks. One with a handgun. We also have a mental health facility in our town (a voluntary one where if you get mad you can leave) so that poses more issues. I see a use for various arrest situations as well, it’s really about options that will make our job safer for everyone. – Richey
The fact that Chief Priest said that they only discharged Tasers 2-4 times in an entire year for the department, suggests a similar or even rarer use of the BolaWrap. We don’t foresee any material incremental or recurring revenues for BolaWrap cartridges in this and many other police departments.
The above example of a tiny police department customer is just one of many. For example, on 6/12/20 WRTC issued a PR trumpeting that BolaWrap had been purchased by the Sheriff’s Department of Sanborn County, SD, which has a population of 2,429.
We find it telling that WRTC dedicated a PR to just this sale. Sheriff Tom Fridley of the Sanborn County Sheriff’s Department was quoted. Revenues WRTC will receive from Sanborn County and South Dakota will likely be miniscule. As stated in a profile of Sanborn County:
As Sheriff of Sanborn County, Tom oversees a staff of three which includes two deputies.
The YouTube Video Wrap Tech Refers to In Their Investor Presentation Shows the BolaWrap Failing To Work
This YouTube video shows police in Fresno, California encountering a suspect on the road . The individual is gingerly walking back and forth in front of the officers: an ideal, open target for the BolaWrap. The BolaWrap can be heard firing on four occasions, with none hitting nor restraining the target. The camera operator can be heard asking:
“are they shooting him with pebbles or something?”
These comments below the YouTube video help to paint the picture:
Source: YouTube video
Amazingly, a screenshot of the video has been featured in WRTC’s December 2019 investor presentation as shown below. Unsurprisingly, a link to the video itself was not provided.
Source: Page 14 of WRTC Dec 2019 Investor Presentation
With the Amount Of Time That Has Passed, It’s Likely That Wrap Tech Didn’t Get the Los Angeles PD Contract
The Los Angeles Police Department (“LAPD”) started a 90 day field trial with the BolaWrap in February of this year. At the time, this was a big deal, and was parroted a lot in the media in December/January right before the field trial. However, after January, the BolaWrap hasn’t been mentioned by the media with respect to the LAPD.
In WRTC’s Q220 earnings call, on 4/29/20, the LAPD field trial was discussed a lot, both by management and analysts. WRTC President Tom Smith stated:
There is one large department we’ve been working with that is worth discussing today and that is the Los Angeles Police Department or LAPD.
As many of you are aware, LAPD began field testing the BolaWrap in February of this year. 200 BolaWraps have been circulating among approximately 1,100 trained officers throughout L.A. City. As of today, they are a little over two-thirds of the way through their original 90-day trial period, however given what the complications the department has faced from the coronavirus, we expect that they will likely extend the field trial and we will be more than happy to continue to support the department.
WRTC’s Chief Operating Officer Mike Rothans stated in the call:
Many agencies across the U.S. are only responding to emergency calls and not routine calls, which means as supposedly being proactive and maybe encountering somebody self initiated activities for somebody that’s suffering from mental health crisis, somebody under the influence, now they’re encouraged to stay away from that individual. So, that does limit the use and we’ve actually seen that even in LAPD's trial, but this of course is a limited period of time.
The above quote is Rothans explaining that since the LAPD isn’t responding to routine calls, there are less situations to use the BolaWrap. Therefore, the LAPD needs more time to test the BolaWrap than the original 90 days. However, since that earnings call, there have been many Black Lives Matter protests in Los Angeles, with many of them turning violent. There must be an uptick of confrontations with the mentally ill for the police to use the BolaWrap more. That is, if it’s actually worth using. But we have not seen any media story or video mentioning its use during the protests.
At this point, it has been three months since WRTC’s earnings call where Smith said the LAPD field trial is two-thirds finished. If the LAPD really felt a strong need for it, we believe the deal would have been announced by now. Since it hasn’t been announced, then the clear implication is that it appears that LAPD decided not to make the purchase, or at least one that matters. The affirmation of the LAPD’s rejection would be a negative catalyst for the stock. WRTC has been known to put out PRs that aren’t very material, so we wouldn’t be surprised to see them put out a PR of a token sale to the LAPD.
City Governments Are Cutting Their Police Budget, Leaving Less Room for New Tools
The BLM protests have called for the “defunding” of police departments. Many city governments are cutting their police budget, which will make them less able to buy unessential, experimental tools like the BolaWrap. The following are some examples:
- On June 30, 2020, New York City officials agreed to $1B in budget cuts from the police department.
- On July 1, 2020, the Los Angeles City Council voted on police budget cuts, that will take police staffing to its lowest level in 12 years.
- Seattle is in discussions to cut its police department’s budget by a whopping 50%.
- The police budgets in Washington DC, Austin, and Oakland are being cut.
The cost of the BolaWrap devices and any incremental training are surely very low on the list of priorities for police departments.
Wrap Technologies Financials
WRTC first started making sales in 2018, and its growth increased substantially in 2019, but they are still very small numbers in relation to WRTC’s market cap.
The following are the company’s basic financial numbers from full year 2018 to the first quarter of 2020:
Source: WRTC SEC filings
As shown above, sales had just started in 2019, and took a major jump in Q120. However, at around $13/share and market cap of around $450M including warrants, WRTC is trading at a whopping trailing twelve-month price-to-sales ratio of about 300. If the company makes $4M over the next twelve months, it's forward twelve-month price-to-sales ratio would be over 100.
We believe revenues will continue to disappoint, rising to no further than $2M-5M annually in the foreseeable future. As new shareholders turn over in a pattern of perpetual disappointment, investors should expect the stock to slump down to $3, consistent with 2018 levels.
The Bull Case Still Doesn’t Come Close to Justifying Wrap Tech’s Current Market Cap
We believe even the most egregious of blue-sky calculations do not justify the company’s valuation. On 4/30/20, Landenburg Thalmann issued a bullish report on WRTC with a $9.75 price target – much lower than its current price. This is with revenue projections of $20.5M in 2021 and $50.8M in 2022. We show in this section that those revenue projections are way too high and unrealistic. In reality, WRTC would be lucky to make over $5M in revenues per year. We present the following bullish scenario for WRTC.
As the company stated in this PR, WRTC performs over 100 demonstrations a month, and they anticipate that to grow. We will give the company the benefit of the doubt and estimate it to be 150 demonstrations a month. How many of those will convert to a sale?
The company receives a lot of rejections. For example, a WRTC PR from 7/30/19 mentioned a demo done for the Howard County PD, among other locations. On July 8th, Sherry Llewellyn, Director of Public Affairs of the Howard County PD, responded to our email inquiry stating:
An HCPD representative did attend the demo, which was hosted by another agency. After the demo, the HCPD was not interested in implementing the technology.
This PR from 7/21/20 states "BolaWrap is carried by more than 150 police agencies across the United States".
Let’s bullishly estimate that 10% of demos convert to a sale. That equals around 15 sales per month. With 12 months in a year, that would total 180 new department sales per year. Let’s assume that an average of 15 BolaWraps are sold to a police department per sale. This could be too high, as most of WRTC’s sales are to tiny departments, but we’ll go with that number. That would total: 180 x 15 = 2,700 BolaWraps sold per year.
In this sell-side report by Ladenburg Thalmann, it states that the BolaWrap retails for about $1,000, and the cartridges sell for about $30. With the purchase of additional accessories like the belt clip and holster, plus 3 to 4 cartridges for training, we’ll assume the device costs $1,200 in total.
2,700 BolaWraps x $1,200 = $3.24M in device revenues per year.
Keep in mind, that is just a one-time sale of the device, not recurring revenue. The in-field cartridges are the recurring revenues in this razor/razor blade model. As we showed in earlier sections of this report, the situations to use the BolaWrap are rare occurrences. We estimate that an average of 3 cartridges will be used per year per BolaWrap device. Recall in our interview with Chief Priest earlier in this report, he doesn’t foresee that his department would even use it that much.
Each cartridge costs $30, therefore, from our annual use estimate, annual cartridge revenue per BolaWrap comes to $30 x 3 = $90. For 2,700 BolaWraps, that comes to $90 x 2,700 = $243K recurring revenue per year.
Therefore, total revenues for the year comes to $3.24M + $243K = $3.48M.
Now let’s go forward three years, assuming WRTC is still selling to 180 police departments per year, and the same amount of cartridges are used per BolaWrap. That comes to only $3.48M + $243K x3 = $4.21M.
From our above estimates, even after being marketed for three years, WRTC annual revenues will still be less than $5M. At a 40% gross margin, that wouldn’t be nearly sufficient to bring the company to profitability, as the company currently loses $9-10M per year. In both an unrealistic (Landenburg’s estimate) or realistic (our estimate) bullish scenario, the company’s current hefty market cap still isn’t close to being justified.
BolaWrap’s Inventor Has A History Of Value Destruction
BolaWrap’s inventor and WRTC's CTO, Elwood “Woody” Norris, is a serial inventor/entrepreneur. He holds ~100 patents primarily around audio systems and audio engineering. He has founded several public companies centered around his patents and inventions, all of which have failed to generate material profitability; the companies have either failed altogether or have been taken over as shell companies. Despite management optimism about these technologies and products, shareholders in these companies have clearly not benefited.
The following are the returns of the companies he has created:
Source: Google, Norris Biography
James Barnes, WRTC’s CFO, co-founded and oversaw many of the business failures alongside Norris in a pattern suggestive of WRTC’s future. The technologies all appeared to have promising applications on the surface, but ultimately gained little momentum. Longer-term, investors were left holding the bag, wondering what happened to all the potential that each of the respective products appeared to have.
Today’s market has many more retail investors involved in small cap stock investing. This has resulted in many stocks being hyped and launched to ridiculous levels. We put WRTC in that category. With the BLM movement urging for more non-lethal police action, the BolaWrap that restrains a suspect without causing much pain sounds appealing. However, a closer look will show that the BolaWrap is impractical in the vast majority of situations, and we believe it will be left unused by many police departments that have purchased it.
We believe reality will sink in for WRTC investors as the financial results are revealed and its miniscule revenues confirmed. The company will report its Q220 financial results on 7/30/20. If its results disappoint, the stock could fall significantly. The CEO and Executive Chairman are also looking to sell 1.5M shares each, which could also be a downward catalyst for the stock.
Stock options are also liquid, and since we believe the stock has the potential to fall significantly, buying out of the money August or September puts could be a good play. Puts could make more money than shorting the stock on a significant fall, and if the market continues to be irrational, they could save a short seller money if the stock continues going up significantly.
We’ll leave you with Elwood Norris’ own advice: “Be Not Deceived”. Early on in his career, Norris wrote a book by this title.