Chit Chat Stocks - Fundamental Analysis: Wrap Technologies (WRTC)

Episode Date: May 10, 2020

On this show we discuss Wrap Technologies. Find out why Ryan gave it a rating of 5.8 and Brett a rating of 6.0 --- Support this podcast: https://anchor.fm/chit-chat-money/support Learn more about your ad choices. Visit megaphone.fm/adchoices Learn more about your ad choices. Visit megaphone.fm/adchoices

Hello and welcome. This is the Fundamental Analysis Show on Chit Chat Money. My name is Brett Schaefer and I'm here as always with Ryan Henderson and we're talking the smallest company we've ever done today. It's, I guess, a new record. We're trying to go as low as possible in these bear markets, but it's wrap technologies, almost a startup. So it really doesn't have a valuation, but we'll get into that. Dean, do you do want to talk about what they do and then the history of the company and their products yeah so rap technologies is a security technology company so in their 10k it says they deliver modern policing solutions but they really only have one solution and that is their bola wrap 100 and i'll get into what the actual product that they

offer does but their total addressable market consists of 900 000 total law enforcement officers in the u.s but they also have international sales as well the customers though are actually the law enforcement agencies not these specific um officers and there's over 15 300 federal state and local law enforcement agencies so their actual product the bola wrap 100 and i took a quote from their 10k it says is a handheld remote restraint device that discharges an eight foot bola style kevlar tether to entangle an individual at a range of 10 to 25 feet so everyone should go to their site and watch the demo basically like imagine a cop chasing a criminal or whatever he discharges this thing that looks like a taser but out comes this rope

it expands fast and then when it like hits them it wraps around really fast and then it's kevlar so you can't get out um even like a super strong or even someone that's going crazy i can't do that and it's something that you can help restrain someone i mean it's not going to stop a gun but it's another way to like you know there's trying to have technology that can help police officers not fire their firearms and this is what they're just you know there's a big trend in that and i think bolarapp's trying to take advantage of it yeah and they said there's three primary use cases for bolarapp one restrain or limit mobility of someone experience experiencing a mental health crisis so someone that's on drugs or whatever and they are a danger to others or law enforcement

The other one is remotely restrain and limit mobility of someone trying to evade law enforcement. So that's kind of the situation of someone running away. And then assist in subduing individuals actively resisting arrest. Those were kind of the three use cases they highlighted. They did have some history on the 10K as well. RAP was organized as a Delaware-based LLC. Everyone should be, right? I guess, yeah, that's what they teach you in Business 201 or whatever.

Yeah, and that was in March 2016. They were founded by Elwood Norris, Scott Cohen, and James Barnes. They formed after several months of research by their CTO and their primary inventor, who is Mr. Norris, so Elwood Norris, I assume. Mr. Norris has over 80 patents to his name, so just a serial inventor or serial entrepreneur. um and james barnes who is one of the other founders was previously the founder of a nasdaq listed company called genesis which special specialized in non-lethal sound technology not really sure how that works um and then in december of 2017 they completed a self-underwritten public offering never heard of that um in which they raised gross proceeds of around 3.5 million in cash they've done other security offerings and i looked at a lot of the like they they listed every time that they've raised cash and each time i've looked at it management themselves have bought like a shit ton yeah it's almost like it's almost like vc rounds where they're trying to keep

ownership of the company but they went public so early um and it's kind of strange but it's interesting and it's a little different it's sort of like virgin galactic but at a way smaller scale because I guess I'll get into the valuation. They have a market cap of $148 million, which is putting them into the micro-cap territory, almost too small for someone like us to invest in. And honestly, for someone like, if you're going to be a micro or nano-cap investor,

you have to be a really big expert, and we don't really think we're there yet. So this is kind of the low range of what we'd invest in. Their ticker is WRTC, and the stock price is $4.95. cents so again like virgin galactic they went public sort of as a startup with little to no revenue so the valuation doesn't make sense and it's all based on the future and the growth story fun fact though they are based in the same city as axon enterprises their big competitor with the taser product uh so i don't know what it is about phoenix arizona but it's just i think they're in

temp temp tempi tempi but that is still phoenix uh and then ev to sales is 105 which seems ridiculous but fun note again barely double what shopify's is uh if you've been seeing me on twitter i've been trying to see how shopify is so ridiculous but that's a whole nother topic and that's an example the ev to sales of why you are banking so much on the future for this investment however so go ahead i think it's important to note right now they are just barely generating sales they're sort of adopting and training these staffs or and creating awareness around the product they're almost pre-sales you'd say they're ramping up revenue right now and it's starting to get there and it's growing really fast um and so people think once like these police departments adopt

this as a new product it's going to happen at scale and there's going to be a lot of uh police departments that do that um so that's that's probably why the valuation has is an ev to sales of 105 yeah it seems like that is baked into the market cap uh but the margin adjusted price to sales which is price to sales divided by sales growth and gross margin is only 55 which is not too bad however that is boosted by giant sales growth numbers from a really low base so revenue growth on a percentage basis will probably slow in the next few years and push that number way higher it looks like a wrap costs about twelve hundred dollars from what i saw not sure what a cartridge refills look like you know it's similar to a taser where you have to

buy the thing and then if you shoot it out maybe you have to refill things or you pay up front so you don't have to you're not just paying all at once so that could get them if you base it off of all the federal agencies, $300 million in sales from this product with decent market penetration. But $1 billion just from this product is a total stretch. And I mean, you can kind of extrapolate what type of sales multiple you would get, but the total addressable market for this product isn't giant, but they're at a small market cap. So I think the opportunity is there yeah and i'll get into the earnings then there was basically two different um sectors to their earnings and one was financial financially and then there were like business highlights so

i'll get into both of those um first the financials in the first quarter of 2020 the revenue was 689 000 um i don't think i've seen revenue in the thousands maybe ever in the whole time that we've been doing no no virgin virgin galactic virgin galactic five million dollar company um and that revenue was up 484% because the year before they only had like a hundred something thousand. And that's, you know, a testament to them sort of being a pre-revenue business. They have a $1.4 million backlog. That's a revenue they expect to recognize over the next 12 months. They have gross margins of 41.1% versus last year, 48%. They, they had total operating expenses of 2.7 million. So revenue, $689,000. Operating expenses, $2.7 million. Their operating loss was $2.4

million. They spent a lot of money these last two years on stock-based compensation and increasing their staff, which is sort of a future growth opportunity for me because they really only do so many things, but they've been really ramping up on their staff. And so they're expecting a lot of increase in spending. And then they ended March 31st with $15.5 million in cash and cash equivalents, which is 15 times their total liabilities. So healthy balance sheet, honestly. And then the business aspects, they began field testing their BOLA wrap with the LAPD, who's the third largest police department in the US, has 9,000 officers. They received new orders from agencies in California, Missouri, Illinois, Virginia, Louisiana, Maryland, Minnesota,

and washington they shipped international purchase orders of 200 bowler apps and 200 or 2000 cartridges and they're now in 19 countries they received one u.s patent and two international patents i saw that they have i think in total eight u.s patents so i guess that gives them some protection over their ip and or their product and they have there are 195 departments now trained and their 720 instructors certified to teach their specific agencies all right next up is digging trenches so what do you give the moat rating for rap technologies this is an interesting one and they they highlighted on their earnings call that they now have eight u.s patents and that somehow expands their moat and it does in terms no no no

know patents don't expand moat i don't think well they said we enlarged our moat through yeah well they can say they can say that but well i mean patents do give competitive advantages because people can't come in and copy it but sometimes sometimes does that give them a huge moat no it's it's honestly strange because there's not like a ton of companies out there working on this um if anything would be the only other non-lethal weapons company is axon that i know yeah they're kind of the mini conglomerate for all the police tech so i'd say it's honestly like 0.5 or zero for rap i'd say anyone that has 15 million in cash is uh susceptible to uh like the entire business going to shit so yeah it's hard to have a moat when you don't have enough capital

um yeah even even the companies like okay even the companies with strong moats at the beginning didn't have strong moats so like amazon when they were a startup no matter what the business model was in the long term you have no moat then you have to prove it so yeah they do have product protection though if that's something that you're looking for yeah all right further reading uh what you got mine's efficacy so and this efficacy of the product how well does it actually work i mean i assume it's pretty well because it sounds like there's a lot of uh pds adopting it but if the physical product has any flaws like any massive flaws that i'm not aware of um it destroys the entire business so um i'd love to see it like actually happen in person um i don't know if

get that chance but i would love to see it work in in real life yeah so yeah if it would be worrying if uh police departments are coming back and just going like eh we don't really need this stuff uh because this is not a requirement for things for them to buy this is kind of discretionary spending um and it's not like you know they'll have to put it on the budget ad and stuff it's not like buying everyone guns and things like that so that would be concerning but if everyone likes it that's also a positive mine is going to be what other tech do they plan on coming out with their slogan as any companies is is very broad-based seems like the market cap is right around 10 to 25 percent market penetration and that's i know a broad range but it's really tough to gauge

so if you know they get what you're going to get good returns if you get 50 percent market penetration with the bolo wrap um i think that's pricing in a lot of their total addressable market and i know total addressable markets are kind of whack and you don't really need to use those but i don't know you're just pricing it a lot here and they need to probably come up with other products they say that they're going to just interested in what those are going to be yeah what do you have for future growth opportunities uh the big one they talk about in the conference call is testing with the lapd that is the los angeles police department so this is obviously one of the biggest ones in the country and some of the other departments probably

look up to them um as examples of like what people are using you know new york whatever all the big cities uh it probably trickles down you know connections all the police officers talking to each other things like that reading up online um they have 200 bowl wraps on a free trial with them right now so if this goes very well um successfully i know with everyone inside right now it might not get the same usage rate as you know previously but who knows and you could see a lot of momentum if this goes successful there could be a lot of media buzz which could help them a lot yeah it feels like they'll be able to sort of slow any marketing that they're having once there's adoption from the big police departments so chicago pd nypd lapd if those adopt them it's

probably going to be word of mouth that's able to market their product for them so yeah at least at least partly partly addressing those large police departments is a good idea um it was hard to find any other future growth opportunities um there i was thinking about ramping up the sales staff i guess other products like launching other products but those are all kind of vague so i'm going to do online training they said that they're doing this apparently in the conference call is that what you said uh yes yes they transitioned over to that um because obviously they can't travel around and do the demonstrations in person uh right now okay and then maybe carrying that out past corona um since it's a lower cost offering i would assume um however for those large police

departments it may have that trickle down effect like you just mentioned so i think that one and they said it was more effective to do the lessons in person so i think for the large police departments it's probably a good idea to do in-person training right because i mean i guess it's just like the hangover movie when they test out the taser or whatever you know what i mean when you see those things going on in person um or if you test it out on a police officer themselves you like you know say like one of the police officers gets shot in a testing thing with these bola wraps and they show like oh wow i can't get out of this at all it puts that in their mind instead of just a video demonstration they might be like ah do we really need this we already got

tasers and stuff like that right um highlights and lowlights what do you have okay well highlight for me is the tech seems very legit because the officers do seem to like it um obviously they're putting stuff that people like on their own website so maybe i'd have to go to some third parties to get some validation uh margins do look solid although they're shaky because they're very early uh so hopefully gross margins could get to around 50 or higher which it looks like you know They're already at 41% or something for the last quarter, but it has ranged a lot. It looks like there's a lot of growth potential ahead. Almost 500% growth in sales from a super small base.

Hopefully, they can keep up at least triple-digit growth for the next few years. Low lights, though. A larger competitor in Axon, which is an acquisition target, as I think you're going to mention. I don't necessarily like these VC-type plays that is betting on a ton of future growth being already priced in. And it seems like they are selling a one-time hardware sludge equipment that may get renewed every three years. These type of companies typically don't get a valuation multiple much above two to three times sales, unless there's someone like Apple with a really high margins and a very strong

brand. So that's it for me. Yeah. Yeah. It is sort of a low light for me that they are so one dimensional and it's not always horrible to be one dimensional as a startup. i mean you need to have something um but it like if one thing happens to this bowl around you know it's totally product dependent um and so it's uh that that could be kind of a flaw and i'm not sure

a product equates to a business um and that is why i think as a highlight they would be a perfect axon enterprises uh target or acquisition target the synergies are perfect it seems like a no brainer honestly axon has the capital to make sure that the business survives i know that uh i know that they have 15 million in cash or whatever uh rap technologies does but i mean they don't have a ton of runway um and there's just a lot of inherent risk with being a micro cap like rap technologies so i think axon could definitely use the uh the product itself because they work in non-lethal and that's another highlight for me is they provide a less lethal um solution and even less painful alternative to the taser or the gun obviously so and i mean

the further you can get away from having to kill people in order to stop them is probably better yeah and but that's that's right in axon's wheelhouse and i think that there's a good chance that this company or this product or maybe the patents around the product get acquired or get bought out um but yeah it's tough to invest in a business that's totally product dependent that's kind of my low light yeah i would say as an axon shareholder i would not be disappointed if rap technologies kind of went under during this economic crisis and then they bought them up uh but for rap technologies in general uh just a reference if they say they can replace the taser i don't think it's gonna totally replace the taser but it's something to watch out

for especially as me as an axon shareholder axon does about 60 to 70 million in taser sales per year or sorry per quarter which is very high um if you think the bola wrap can have that large addressable market maybe but uh the things aren't entirely different because cartridges for the taser make up a good amount of those sales don't know if the cartridges for the bola wrap will equate but let's wrap things up here with the rating what do you got um gosh uh i wish the i wish the the valuation was a little better to be honest it seems like it's priced in like they are already selling to a bunch of police departments the product is valid and everyone's like there's a bunch of people using it already which is not the case um so

they are literally pretty revenue but they're priced like they're like already generated sales So I don't know. I'll go with like a 5.8. I'm optimistic on the business. I think it sounds like the product is solid. It sounds like the tech is valid. And I think that they could be a serious acquisition target for Axon. So I like the business, but not the valuation. yeah it seems like a thousand percent of revenue growth or even more is already priced in because if you have an ev to sales of 105 and your typical uh at scale uh margins will be what like 10 15 operating margins or cash flow margins and you have a one-time product that maybe gets bought every few years and there's no subscription or recurring revenue and it's not digital at all you'll typically have an ev to sales of two to three if you're valued normally right um and that's quite the come down from 105 so yeah i'm gonna be right around you it's very interesting

business seems like they have a long runway ahead of them and if they can defeat or kind of you know be um normal for all the police departments especially in the united states with 15 000 total uh plus agencies there's a lot of potential there but it's already priced in so it's going to be on the watch list for me maybe if they come out with a lot of other cool products that'd be interesting uh but yeah it's going to be like six for me on the watch list but definitely not buying in right now this is not the type of stock could it 10x um maybe easily could 10x it's very small uh but that's not something i want to i think the risk on the downside you have to put that into the equation and it's definitely there um and by the way this was a show recommendation

through our email um chit chat money podcast at gmail.com thank you to whoever sent it in we've enjoyed these they're always i don't know it's more fun when we get them from other people because we don't have any idea what the business actually does no yeah and it's adding like you just want to go over as many businesses as possible because you want to just you know try to get all them through your radar just in case you're trying to get those ones that have that potential for the long term this is it you know this could be one uh just too bad the valuation was so high but that's going to do it for this episode thank you guys as always for listening follow us on the you know email us like ryan said and follow us on twitter at chit chat money remember we are not

financial advisors anything we say on this show it's not formal advice or recommendation thank you for listening. We'll see you all next time. Thank you. It's an honor. on Paramount Plus.