WRAP TECHNOLOGIES, INC. You should read the following discussion in conjunction with the financial statements and other financial information included elsewhere in this Quarterly Report on Form 10-Q (this "Report") and with our audited financial statements and other information presented in our Annual Report on Form 10-K for the year endedDecember 31, 2021 . The following discussion may contain forward-looking statements that reflect our plans, estimates and beliefs. Words such as "expect," "anticipate," "intend," "plan," "believe," "seek," "estimate," "continue," "may," "will," "could," "would," or the negative or plural of such words and similar expressions or variations of such words are intended to identify forward-looking statements, but are not the only means of identifying forward-looking statements. Such forward-looking statements are subject to a number of risks, uncertainties, assumptions and other factors that could cause actual results and the timing of certain events to differ materially from future results expressed or implied by the forward-looking statements. Factors that could cause or contribute to these differences include, but are not limited to, those discussed below and elsewhere in this Report and in our other filings with theSecurities and Exchange Commission ("SEC"), including particularly matters set forth under Part I, Item 1A (Risk Factors) of our Annual Report on Form 10-K. Furthermore, such forward-looking statements speak only as of the date of this Report. Except as required by law, we undertake no obligation to update any forward-looking statements to reflect events or circumstances after the date of such statements. For purposes of Management's Discussion and Analysis within this Report, all monetary amounts are stated in thousands except for par values and per share amounts, unless otherwise stated. Overview We are a global public safety technology and services company organized inMarch 2016 delivering modern policing solutions to law enforcement and security personnel. We are a mission-driven organization focused on improving public safety encounters and outcomes. We began sales of our first public safety product, the BolaWrap 100 remote restraint device, in late 2018. InOctober 2021 we released a new generation product, the BolaWrap 150. The BolaWrap 150 is electronically deployed and is more robust, smaller, lighter and simpler to deploy than the BolaWrap 100 that is being phased out. In 2020 we added a new solution to our public safety technologies, which is our virtual reality training platform - Wrap Reality. Wrap Reality is now sold to law enforcement agencies for simulation training as well as corrections departments for the societal reentry scenarios. The immediate addressable domestic market for our solutions consists of approximately 900,000 full-time sworn law enforcement officers at over 15,300 federal, state and local law enforcement agencies, and over 12 million police officers in over 100 countries. We are also exploring other domestic markets, including military and private security. Our international focus is on countries with the largest police forces. The 100 largest international police agencies are estimated to have over 12.1 million law enforcement personnel. According to 360iResearch, a market research consulting firm, we participate in a segment of the non-lethal products global market expected to grow to$16.1 billion by 2027.
We focus our efforts on the following products and services:
BolaWrap Remote Restraint Device - is a hand-held remote restraint device that
discharges an eight-foot bola style Kevlar tether to entangle an individual at a
range of 10-25 feet. BolaWrap assists law enforcement to safely and effectively
control encounters early in the use of force continuum without resorting to
painful force options.
Wrap Reality - is a law enforcement training system employing immersive computer
graphics virtual reality ("VR") with proprietary software-enabled content. It
allows up to two participants to enter a simulated training environment
simultaneously, and customized weapons controllers enable trainees to engage in
strategic decision making along the force continuum.
In addition to the United States law enforcement market, we have shipped our
restraint products to 53 countries. We have established an active distributor
network with 13 domestic distributors representing 50 states and one dealer
representing Puerto Rico . We have distribution agreements with 49 international
distributors covering 56 countries. We focus significant sales, training and
business development efforts to support our global distribution network.
We focus significant resources on research and development innovations and continue to enhance our products and plan to introduce new products. We believe we have established a strong branding and market presence globally and have established significant competitive advantages in our markets.
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--------------------------------------------------------------------------------Table of Contents Management Changes As previously reported inJanuary 2022 , the Board of Directors approved and initiated a leadership transition plan to support the next phase of its corporate strategy, which is focused on new leadership diversifying the Company's suite of products, offerings and services. The transition and corporate strategy included the resignation of our President, Chief Executive Officer and directorThomas P. Smith and the announcement of the planned retirement of our Former Chief Financial Officer, Secretary and TreasurerJames A. Barnes ,who retired inJuly 2022 upon the appointment ofChris DeAlmeida as our Chief Financial Officer. After a period of transition managed by Special Transition Committee consisting of directorsScot Cohen andKim Sentovich and including interim contract executives, onApril 18, 2022 , the Company appointed TJ Kennedy, a current director, as our Chief Executive Officer andKevin Mullins as our President. Both Messrs. Kennedy and Mullins have significant leadership experience in public safety technology prior to their appointment.Mr. Mullins is leading go to market functions in the President role.
Business Outlook and Challenges
Our products and solutions continue to gain worldwide awareness and recognition through social media, media exposure, trade shows, product demonstrations and word of mouth as a result of positive responses from agencies and early adoption and deployment success. We believe Wrap is gaining traction as a recognized global brand, with innovative technology and an initial product foundation achieved through aggressive marketing and public relations. We believe that we have strong market opportunities for our remote restraint and VR solutions throughout the world in the law enforcement and security sectors as a result of increasing demands for less lethal policing and increasing threats posed by non-compliant subjects. We continue to receive field reports of successful BolaWrap usage from law enforcement agencies. Many agencies consider BolaWrap as a very low level, or non-reportable, use of force option and, accordingly, many uses are not reported to us. Others are considered evidence and are also not shared. Some law enforcement agencies have shared bodycam footage of their field uses, some of which we are allowed to use in our marketing activities. We believe increased reports of avoiding escalation will help grow revenues in the future. We believe we have a robust and growing pipeline of market opportunities for our restraint product offering and training services within the law enforcement, military, corrections, and homeland security business sectors domestically and internationally. Social trends demanding more compassionate and safe policing practices are expected to continue to drive our global business. We are pursuing large business prospects internationally and also pursuing business with large police agencies in theU.S. It is difficult to anticipate how long it will take to close these opportunities, or if they will ultimately come to fruition especially given the uncertainty of COVID-19 and social unrest, as discussed below. To support our increased sales and distribution activities we have developed and offer robust training and class materials that certify law enforcement officers and trainers as BolaWrap instructors in the use and limitations of the BolaWrap in conjunction with modern policing tactics for de-escalation of encounters. We believe that law enforcement trainers and officers that have seen demonstrations or have been trained about our products are more supportive of their department's purchase and deployment of product. As ofJune 30, 2022 , over 1,130 agencies have received BolaWrap training with over 3,660 training officers at those agencies certified as BolaWrap instructors and qualified to train the rest of their departments. This represents a 41% increase in agencies and a 31% increase in training officers compared toJune 30, 2021 . Operating expenses in Q2 of 2022 reduced 39% from Q2 of 2021. The focus on reducing operating expenses was an immediate focus on the new management team. In the second quarter, our new management team focused on assessing all facets of the business and completed a strategic roadmap to drive long-term growth and produce lasting value for shareholders. Our strategic roadmap is centered on sustainably growing sales through building repeatable domestic BolaWrap sales, ramping international sales on the new BolaWrap 150, and implementing a customer success function expanding existing agencies to full patrol-wide BolaWrap deployment. We also have added a dedicated inside sales function to grow our velocity on new leads. We will be expanding our distributor and partner relationships, and leveraging product diversification and innovation to catalyze sales growth. A key decision in the strategic roadmap was to improve our pricing on BolaWrap 150 devices and cassettes now that the product has proven itself to law enforcement as a significant upgrade. We have also transitioned to charging for our respected training services. We have implemented changes to how we sell Wrap Reality and have now solidified our go forward virtual reality model as a Software as a Service (SaaS) model. These changes will have significant positive impact on our future success and growth. We firmly believe that focusing on these strategic changes can drive significant sales growth and put us on a path to sustainable profitability. Management intends to execute on its strategic roadmap immediately driving changes in Q3. While geopolitical tensions and macroeconomic headwinds have impacted us in recent quarters, we remain uniquely positioned to deliver best-in-class technologies and data-driven services that can empower law enforcement officers across the globe to have safe, effective encounters with minimal use of force. Wrap has a distinct value proposition in a growing addressable market. Now with improved pricing, reduced operating expenses, and by growing future sales we expect to have reduced losses and improved cash flow. We are recovering from supply chain impacts and a difficult transition from the BolaWrap 100 to the BolaWrap 150 . We expect to make more product demonstrations and conduct more training sessions, especially in international markets, as pandemic-related restrictions continue to ease in 2022. We also expect to see increased sales momentum in the back half of 2022 internationally as we raise awareness of all of the BolaWrap 150 enhancements and transition countries to the BolaWrap 150. Lastly, we anticipate discount and promotional costs to decline after Q3 as we have phase out upgrade offers and prioritize growing brand awareness. Looking beyond 2022, we expect to continue to see strong sales growth of the BolaWrap 150 and Wrap Reality. This coupled with continued cost savings and cost control, should lead to a continuing reduction of cash burn going forward. As a result, we anticipate moving to a cash flow break-even point by the end of 2023 and we anticipate strong sales could lead to profitability by the end of 2024. -17-
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Table of Contents
With the acquisition of NSENA inDecember 2020 , and the rebranding of the NSENA business as Wrap Reality, we have continued to market our VR system while working to integrate previous scenarios into a robust platform, employing BolaWrap and additional de-escalation techniques into new Wrap Reality scenarios. The improved law enforcement simulator platform continues to be used by additional agencies. InJuly 2022 we announced new wins with large correction agencies inOhio andPennsylvania that introduced our new scenarios focused on societal reentry and preventing recidivism. We plan to increase marketing activities for our VR solution to both law enforcement and corrections. OnJune 30, 2022 , we had backlog of approximately$72 thousand expected to be delivered in the next twelve months. Additionally, we had deferred revenue of$344 thousand expected to be recognized generally over the next five years. Distributor and customer orders for future deliveries are generally subject to modification, rescheduling or in some instances, cancellation, in the normal course of business. Since inception inMarch 2016 , we have generated significant losses from operations and anticipate that we will continue to generate significant losses from operations for the foreseeable future. We believe that we have adequate financial resources to sustain our operations for the next year. In the second quarter of fiscal 2022 we reduced our net loss by more than$3 million versus the comparable prior year quarter. Net cash used in operations during the six months endedJune 30, 2022 was$4 million less than cash used in operations during the first six months of the prior year. We expect that we will need to continue to innovate new applications for our public safety technology, develop new products and technologies to meet diverse customer requirements and identify and develop new markets for our products. InMarch 2020 , theWorld Health Organization ("WHO") classified the COVID-19 outbreak as a pandemic. We believe our sales during the first six months of 2022 were negatively impacted by the transition to the BolaWrap 150 product and the stopping of our BolaWrap 100 production line and the effects of limited ability to demonstrate and train in 2021 due to the COVID-19 pandemic, especially internationally. We continue to monitor developments and assess areas where there is potential for our business to be impacted by the pandemic. Businesses and governments with which we engage may be operating under restrictions and experiencing disruptions, which may create obstacles in the coordination of business activities, including demonstrations, training and the negotiation and fulfillment of orders. Disruptions in the supply chain have already impacted us and could negatively impact our ability to source materials or manufacture and distribute products. We could experience a decrease in new orders from pandemic related events, which could negatively impact our revenues and reduce our liquidity and cash flows. Growth in revenue could also be impeded by these factors. The financial markets have been subject to significant volatility that could impact our ability to enter into, modify, and negotiate favorable terms and conditions relative to equity and debt financing activities. We have$28.5 million in cash and cash equivalents and short-term investments as ofJune 30, 2022 , which we believe provides sufficient capital to fund our operations for at least the next twelve months and withstand the potential near-term consequences of the pandemic, although liquidity constraints and access to capital markets could adversely impact our liquidity and warrant changes to our investment strategy. The full magnitude of the pandemic cannot be measured at this time, and therefore, any of the aforementioned circumstances, as well as other factors, may cause our results of operations to vary substantially from year to year and quarter to quarter. Based on various standards published to date, we believe the work our employees and associates perform is critical and essential. We are taking a variety of measures to promote the safety and security of our employees while ensuring the availability and functionality of our critical infrastructure. We are followingCenter for Disease Control and local guidelines regarding COVID-19 safety in the workplace. In addition, the following events related to the COVID-19 pandemic could result in lost or delayed revenue to the Company: limitations on the ability of our suppliers to meet delivery requirements and commitments; limitations on the ability of our employees to perform their work due to illness caused by the pandemic, or local, state or federal orders requiring employees to remain at home; limitations on the ability of carriers to deliver our products to customers; unforeseen deviations from customers or foreign governments restricting the ability to do business; and, limitations on the ability of our customers to pay us on a timely basis, if at all. We also may be adversely affected by continued social unrest, protests against racial inequality, protests against police brutality and movements such as "Defund the Police" and such unrest may be exacerbated by inaccurate information or negative publicity regarding our solutions. Although the negativity of some of these events has been reduced, some of these events may still directly or indirectly affect police agency budgets and funding available to current and potential customers. Participants in these events may also attempt to create the perception that our solutions are contributing to the perceived problems, which may adversely affect us, our business and results of operations, including our revenues, earnings and cash flows from operations. Our business may be impacted by global economic conditions, which have been in recent years, and continue to be, volatile. Geopolitical conflict, such as the recent conflict inUkraine , and related international economic sanctions and their impact may exacerbate this volatility. Specifically, our revenues and gross margins depend significantly on global economic conditions and the demand by foreign governments and agencies for the BolaWrap in many of our target markets. Changes in management and other key personnel have the potential to improve and disrupt our business, and any such disruption could potentially adversely affect our operations, programs, growth, financial condition or results of operations. Improvements to operations, operating expenses and go to market approaches also have the opportunity to impact the success of the business going forward. -18- --------------------------------------------------------------------------------
Table of Contents
Critical Accounting Policies and Estimates
The preparation of financial statements in accordance with accounting principles generally accepted inthe United States ("U.S. GAAP") requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenue and expense, and related disclosure of contingent assets and liabilities. We evaluate our estimates, on an on-going basis, including those estimates related to recognition and measurement of contingencies and accrued expense. We base our estimates on historical experience and on various other assumptions we believe to be reasonable under the circumstances. Actual results may differ from these estimates under different assumptions or conditions. As part of the process of preparing our financial statements, we are required to estimate our provision for income taxes. Significant management judgment is required in determining our provision for income taxes, deferred tax assets and liabilities, tax contingencies, unrecognized tax benefits, and any required valuation allowance, including taking into consideration the probability of the tax contingencies being incurred. Management assesses this probability based upon information provided by its tax advisers, its legal advisers and similar tax cases. If later our assessment of the probability of these tax contingencies changes, our accrual for such tax uncertainties may increase or decrease. Our effective tax rate for annual and interim reporting periods could be impacted if uncertain tax positions that are not recognized are settled at an amount which differs from our estimates. Some of our accounting policies require higher degrees of judgment than others in their application. These include share-based compensation and contingencies and areas such as revenue recognition, allowance for doubtful accounts, valuation of inventory and intangible assets, estimates of product line exit costs, warranty liabilities and impairments. Revenue Recognition. We sell our products to customers including law enforcement agencies, domestic distributors and international distributors and revenue from such transactions is recognized in the periods that products are shipped (free on board ("FOB") shipping point) or received by customers (FOB destination), when the fee is fixed or determinable and when collection of resulting receivables is reasonably assured. We identify customer performance obligations, determine the transaction price, allocate the transaction price to the performance obligations and recognize revenue as we satisfy the performance obligations. Our primary performance obligations are products/accessories and VR software licensing or sale. Our customers do not have the right to return product unless the product is found to be defective. Share-Based Compensation. We follow the fair value recognition provisions issued by theFinancial Accounting Standards Board ("FASB") in Accounting Standards Codification ("ASC") Topic 718, Stock Compensation ("ASC 718") and we adopted Accounting Standards Update ("ASU") 2018-07 for share-based transactions with non-employees. Share-based compensation expense recognized includes stock option and restricted stock unit compensation expense. The grant date fair value of stock options is determined using the Black-Scholes option-pricing model. The grant date is the date at which an employer and employee or non-employee reach a mutual understanding of the key terms and conditions of a share-based payment award. The Black-Scholes option-pricing model requires inputs including the market price of the Company's Common Stock on the date of grant, the term that the stock options are expected to be outstanding, the implied stock volatilities of several publicly traded peers over the expected term of stock options, risk-free interest rate and expected dividend. Each of these inputs is subjective and generally requires significant judgment to determine. The grant date fair value of restricted stock units is based upon the market price of the Company's Common Stock on the date of the grant. We determine the amount of share-based compensation expense based on awards that we ultimately expect to vest and account for forfeitures as they occur. The fair value of share-based compensation is amortized to compensation expense over the vesting term. Allowance for Doubtful Accounts. Our products are sold to customers in many different markets and geographic locations. We estimate our bad debt reserve on a case-by-case basis and the aging of accounts due to a limited number of customers mostly government agencies or well-established distributors. We base these estimates on many factors including customer credit worthiness, past transaction history with the customer, current economic industry trends and changes in customer payment terms. Our judgments and estimates regarding collectability of accounts receivable have an impact on our financial statements. Valuation of Inventory. Our inventory is comprised of raw materials, assemblies and finished products. We must periodically make judgments and estimates regarding the future utility and carrying value of our inventory. The carrying value of our inventory is periodically reviewed and impairments, if any, are recognized when the expected future benefit from our inventory is less than carrying value. -19-
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Table of Contents Valuation of Intangible Assets. Intangible assets consisted of (a) capitalized legal fees and filing expense related to obtaining patents and trademarks, (b) customer agreements, tradenames, software, non-solicitation and non-compete agreements acquired in business combinations and valued at fair value at the acquisition date, and (c) the purchase cost of indefinite-lived website domains. We must make judgments and estimates regarding the future utility and carrying value of intangible assets. The carrying values of such assets are periodically reviewed and impairments, if any, are recognized when the expected future benefit to be derived from an individual intangible asset is less than carrying value. This generally could occur when certain assets are no longer consistent with our business strategy and whose expected future value has decreased. Accrued Expense. We establish a warranty reserve based on anticipated warranty claims at the time product revenue is recognized. This reserve requires us to make estimates regarding the amount and costs of warranty repairs we expect to make over a period of time. Factors affecting warranty reserve levels include the number of units sold, anticipated cost of warranty repairs, and anticipated rates of warranty claims. We have very limited history to make such estimates and warranty estimates have an impact on our financial statements. Warranty expense is recorded in cost of revenues. We evaluate the adequacy of this reserve each reporting period. We use the recognition criteria of ASC 450-20, "Loss Contingencies" to estimate the amount of bonuses when it becomes probable a bonus liability will be incurred and we recognize expense ratably over the service period. We accrue bonus expense each quarter based on estimated year-end results, and then adjust the actual in the fourth quarter based on our final results compared to targets. Historically, our assumptions, judgments and estimates relative to our critical accounting policies have not differed materially from actual results. Other than the planned production change requiring a new estimate of exit expense, there were no significant changes or modification of our critical accounting policies and estimates involving management valuation adjustments affecting our results for the period endedJune 30, 2022 .
Segment and Related Information
The Company operates as a single segment. The Company's chief operating decision maker is its Chief Executive Officer,who manages operations for purposes of allocating resources. Refer to Note 13, Major Customers and Related Information, in our financial statements for further discussion. Operating Expenses Our operating expenses include (i) selling, general and administrative expense, (ii) research and development expense, and in the most recent fiscal quarter, (iii) product line exit expense. Research and development expense is comprised of the costs incurred in performing research and development activities and developing production on our behalf, including compensation and consulting, design and prototype costs, contract services, patent costs and other outside expense. The scope and magnitude of our future research and development expense is difficult to predict at this time and will depend on elections made regarding research projects, staffing levels and outside consulting and contract costs. The future level of selling, general and administrative expense will be dependent on staffing levels, elections regarding expenditures on sales, marketing and customer training, the use of outside resources, public company and regulatory expense, and other factors, some of which are outside of our control. We expect our operating costs will remain at comparable current levels in the near term. We may also incur additional non-cash share-based compensation costs depending on future option and restricted stock unit grants that are impacted by stock prices and other valuation factors. Historical expenditures are not indicative of future expenditures. -20- --------------------------------------------------------------------------------
Table of Contents Results of Operations
Three Months Ended
The following table sets forth for the periods indicated certain items of our
condensed consolidated statement of operations. The financial information and
the discussion below should be read in conjunction with the financial statements
and notes contained in this Report.
Three Months Ended June 30, Change
2022 2021 $ %
Revenues:
Product sales $ 969 $ 1,852 $ (883 ) (48% )
Other revenue 196 82 112 136 %
Total revenues 1,165 1,934 (769 ) (40% )
Cost of revenues:
Products and services 708 1,247 (539 ) (43% )
Restructuring inventory charge - 747 (747 ) -
Total cost of revenues 708 1,994 (1,286 ) (64% )
Gross profit (loss) 457 (60 ) 517 (862% )
Operating expenses:
Selling, general and administrative 3,764 6,579 (2,815 ) (43% )
Research and development 1,476 1,162 314 27 %
Total operating expenses 5,240 7,741 (2,501 ) (32% )
Loss from operations $ (4,783 ) $ (7,801 ) $ 3,018 (39% )
Revenue
We reported net revenue of $1.2 million for the three months ended June 30,
2022 , as compared to $1.9 million for the prior year quarter. While domestic
revenues were constant at $1.1 million in each quarter, international revenues
decreased from $0.8 million for the second quarter of 2021 to $75 thousand for
the quarter ended June 30, 2022 . We incurred discounts of $161 thousand during
the three months ended June 30, 2022 , primarily as a result of promotional
programs designed to encourage domestic customers to upgrade to the BolaWrap
150. These discounts compares to business discounts of $77 thousand in the prior
year quarter. We expect selected discounts in the third quarter but thereafter a
decline to minimal discounts as we have phased out our promotional upgrade
offer.
International revenues generally consist of larger orders with the end user
being large, centralized government agencies. These orders continue to be lumpy
and difficult to predict as to both timing and amount. International orders
anticipated in the second quarter were delayed due to the change over from the
BolaWrap 100 but those orders for BolaWrap 150 are anticipated in future
quarters. We believe that revenue during the fiscal year 2022 will still be an
increase compared to the revenue recorded during 2021 due to growth of domestic
sales and anticipated international orders from a robust pipeline, although no
assurances can be given.
We incurred product promotional costs of $265 thousand during the quarter ended
June 30, 2022 , related primarily to BolaWrap 150 demonstration products and the
cost of training products and accessories delivered to law enforcement agencies
that were expensed as marketing costs. A total of $379 thousand of such product
promotional costs were incurred during the prior year quarter. We are responding
to increased demand for training as a result of expanded product and brand
awareness with more efficient training approaches. With increased successful
field use by agencies and greater brand awareness, as well as the transition to
the BolaWrap 150, we expect reductions in product promotional costs to decline
versus the prior year.
We had $344 thousand of deferred revenue at June 30, 2022 , of which $221
thousand related to VR training and $123 thousand related to BolaWrap extended
warranties and services. As we potentially secure increased bookings for Wrap
Reality, as well as BolaWrap extended warranties, we expect our deferred revenue
to grow in future quarters.
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Table of Contents AtJune 30, 2022 , we had backlog of$72 thousand expected to be delivered in the next twelve months. Distributor and customer orders for future deliveries are generally subject to modification, rescheduling or in some instance's cancellation in the normal course of business. The impact of the COVID-19 pandemic and geopolitical conflicts, including the recent war inUkraine , has created much uncertainty in the global marketplace. The COVID-19 pandemic has and may continue to restrict our ability to travel internationally. Although no assurances can be given, we do believe, however, that the challenges to substantially increasing sales caused by COVID-19 will abate as the pandemic wanes, especially given the number of BolaWrap trials currently ongoing and the current environment where non-lethal options are being widely considered by law enforcement domestically and internationally.
We have experienced recent changes in management. Changes in management and other key personnel have the potential to disrupt our business, and any such disruption could adversely affect our revenue growth in future periods, especially in the near term as we execute our Management Transition plan.
Gross Profit Our cost of revenue for the quarter was$708 thousand resulting in a gross margin of 39%. The gross margin for the comparable prior quarter, was also 39% after excluding$747 thousand of restructuring charges related to the wind down of BolaWrap 100 production. The most recent quarter period gross margin was impacted by the lower sales volume, warranty costs and promotional discounts. We also were impacted by certain higher raw material prices in the second quarter to obtain certain parts. Our margin is expected to improve in future quarters as these issues abate. Due to our limited history of revenue historical margins, however, may not be indicative of planned future margins. The BolaWrap 150 has higher margins than historical production. Our margins also vary based on the sales channels through which our products are sold and product mix. Currently, our cassettes have lower margins than BolaWrap devices. We implement product updates and revisions, including raw material and component changes that may impact product costs. With such product updates and revisions, we have limited warranty cost experience and estimated future warranty costs can impact our gross margins. Our global supply chain has been subject to significant component shortages, increased lead times, cost fluctuations, and logistics constraints that have impacted our product costs. We expect these supply chain challenges to continue throughout 2022. Supplier shortages, quality issues and logistic delays affect our production schedules and could in turn have a material adverse effect on our financial condition, results of operation and cash flows.
Selling, General and Administrative Expense
Selling, general and administrative ("SG&A") expense for the quarter ended June
30, 2022 were $2.8 million less than the prior year comparable quarter due to
cost containment efforts and due to certain one-time costs in the prior year
quarter.
Share-based compensation costs allocated to SG&A decreased to $0.6 million
compared to $2.0 million for the comparable prior quarter. This $1.4 million
decrease resulted primarily from a one-time $1.2 million cost in the prior year
quarter for legacy and new directors appointed in April 2021 .
Cash compensation costs of $1.5 million for the quarter ended June 30, 2022 were
comparable to the prior year as staffing remained at similar levels. During the
quarter ended June 30, 2022 , as compared to the prior year comparable quarter,
we incurred reduced advertising and promotions costs (including product
promotion costs) of $254 thousand , reduced professional fees of $116 thousand ,
reduced annual meeting costs of $234 thousand and reduced consulting and
contract services fees of $643 thousand . We expect expenditures for SG&A
expenses for the balance of 2022 to remain below the prior year due to
management's active cost containment efforts.
Research and Development Expense
Research and development expense increased by$314 thousand for the quarter endedJune 30, 2022 , compared to the comparable period in the prior year. Non-cash share-based compensation expense allocated to research and development personnel was$136 thousand for the quarter endedJune 30, 2022 comparable to the$121 thousand for the prior period. Cash compensation costs for the quarter endedJune 30, 2022 increased$102 thousand compared to the prior year resulting from an increase in headcount primarily associated with product development. Prototype related costs for quarter endedJune 30, 2022 , increased$106 thousand related to BolaWrap 150 continued improvements. We expect our research and development costs to remain at comparable levels for the balance of 2022. Operating Loss
Loss from operations during the three months ended
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Six Months Ended
The following table sets forth for the periods indicated certain items of our
condensed consolidated statement of operations. The financial information and
the discussion below should be read in conjunction with the financial statements
and notes contained in this Report.
Six Months Ended June 30, Change
2022 2021 $ %
Revenues:
Product sales $ 2,431 $ 3,278 $ (847 ) (26% )
Other revenue 333 198 135 68 %
Total revenues 2,764 3,476 (712 ) (20% )
Cost of revenues:
Products and services 1,640 2,184 (544 ) (25% )
Restructuring inventory charge - 747 (747 ) -
Total cost of revenues 1,640 2,931 (1,291 ) (44% )
Gross profit 1,124 545 579 106 %
Operating expenses:
Selling, general and administrative 8,370 11,557 (3,187 ) (28% )
Research and development 2,971 2,227 744 33 %
Total operating expenses 11,341 13,784 (2,443 ) (18% )
Loss from operations $ (10,217 ) $ (13,239 ) $ 3,022 (23% )
Revenue
We reported net revenue of $2.8 million for the six months ended June 30, 2022 ,
as compared to $3.5 million for the quarter ended June 30, 2021 . Domestic
revenues of $2.3 million for the six months reflected growth of 30% over the
prior comparable quarter of $1.8 million . International revenues decreased from
$1.7 million for the six months ended June 30, 2021 to $0.5 million for the six
months ended June 30, 2022 . We incurred discounts of $549 thousand during the
six months ended June 30, 2022 , primarily as a result of promotional programs
designed to encourage domestic customers to upgrade to the BolaWrap 150. The
discounts compare to business discounts of $81 thousand in the comparable
six-month period of the prior year. We expect selected discounts in the third
quarter but thereafter a decline to minimal discounts as we have phased out our
promotional upgrade offer.
International revenues generally consist of larger orders with the end user
being large, centralized government agencies. These orders continue to be lumpy
and difficult to predict as to both timing and amount. International orders
anticipated in the second quarter were delayed due to the change over from the
BolaWrap 100 but those orders for BolaWrap 150 are anticipated in future
quarters. We believe that revenue during the fiscal year 2022 will still be an
increase compared to the revenue recorded during 2021 due to growth of domestic
sales and anticipated international orders from a robust pipeline, although no
assurances can be given.
We incurred product promotional costs of $479 thousand during the six months
ended June 30, 2022 , related primarily to BolaWrap 150 demonstration products
and the cost of training products and accessories delivered to law enforcement
agencies that were expensed as marketing costs. A total of $678 thousand of such
product promotional costs were incurred during the six months ended June 30,
2021 . We are responding to increased demand for training as a result of expanded
product and brand awareness with more efficient training approaches. With
increased successful field use by agencies and greater brand awareness we expect
reductions in product promotional costs to decline versus the prior year.
We had
AtJune 30, 2022 , we had backlog of$72 thousand expected to be delivered in the next twelve months. Distributor and customer orders for future deliveries are generally subject to modification, rescheduling or in some instance's cancellation in the normal course of business. -23- --------------------------------------------------------------------------------
Table of Contents Gross Profit Our cost of revenue for the six months endedJune 30, 2022 , was$1.6 million resulting in a gross margin of 41%. The gross margin for the six months endedJune 30, 2021 , was 37% after adjusting excluding$747 thousand of restructuring charges related to the wind down of BolaWrap 100 production. The most recent period gross margin was impacted by the lower sales volume and promotional discounts. We also were impacted by certain higher raw material prices in 2022 to obtain certain parts. Our margin is expected to improve in future quarters as these issues abate. Due to our limited history of revenue historical margins, however, may not be indicative of planned future margins. The BolaWrap 150 has higher margins than historical production. Our margins also vary based on the sales channels through which our products are sold and product mix. Currently, our cassettes have lower margins than BolaWrap devices. We implement product updates and revisions, including raw material and component changes that may impact product costs. With such product updates and revisions, we have limited warranty cost experience and estimated future warranty costs can impact our gross margins. Our global supply chain has been subject to component shortages, increased lead times, cost fluctuations, and logistics constraints that have impacted our product costs. We expect these supply chain challenges to continue throughout 2022. Supplier shortages, quality issues and logistic delays affect our production schedules and could in turn have a material adverse effect on our financial condition, results of operation and cash flows.
Selling, General and Administrative Expense
Selling, general and administrative ("SG&A") expense for the six months ended
June 30, 2022 were $8.4 million reflecting a, decrease of $3.2 million when
compared to $11.6 million for the six months ended June 30, 2021 . The reduction
in SG&A costs reflected active cost containment efforts and nonrecurrence of
certain one-time costs in the prior year quarter.
Share-based compensation costs allocated to SG&A was $1.5 million for the six
months ended June 30, 2022 compared to $2.6 million for the comparable prior
period. This $1.4 million decrease included the effect of a one-time $1.2
million cost in the prior period for legacy and new directors appointed in April
2021 .
Cash compensation costs of $3.1 million for the six months ended June 30, 2022
was a $179 thousand increase from the prior year six months but included a $300
thousand severance expense offset by cost containment efforts. During the six
months ended June 30, 2002 , as compared to the prior year comparable six months,
we incurred reduced advertising and promotions costs (including product
promotion costs) of $341 thousand , reduced professional fees of $842 thousand ,
reduced annual meeting costs of $234 thousand and reduced consulting and
contract services fees of $748 thousand . We expect expenditures for SG&A
expenses for the balance of 2022 to remain below the prior year due to active
cost containment efforts.
Research and Development Expense
Research and development expense increased by$744 thousand for the six months endedJune 30, 2022 , compared to the comparable six-month period in fiscal 2021. Non-cash share-based compensation expense allocated to research and development personnel was$271 thousand for the six months endedJune 30, 2022 compared to the$378 thousand for the prior period which included effects of new hires. Cash compensation costs for the six months endedJune 30, 2022 increased$269 thousand compared to the prior year resulting from an increase in headcount primarily associated with product development. Prototype related costs for the six months endedJune 30, 2022 , increased$305 thousand related to BolaWrap 150 startup costs and continued improvements. We expect our research and development costs to remain at comparable levels for the balance of 2022. Operating Loss Loss from operations during the six months endedJune 30, 2022 , of$10.2 million was a reduction of$3.0 million compared to that of the six months endedJune 30, 2021 reflecting second quarter reduced costs from the prior year. -24- --------------------------------------------------------------------------------
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Liquidity and Capital Resources
Overview We have experienced net losses and negative cash flows from operations since our inception. As ofJune 30, 2022 , we had cash and cash equivalents of$3.6 million , short-term investments of$24.9 million , positive working capital of$30 million and had sustained cumulative losses attributable to stockholders of$60 million . We believe that our cash on hand and short-term investments will sustain our operations for at least the next twelve months from the date of this Report. Our primary source of liquidity to date has been funding from our stockholders from the sale of equity securities and the exercise of derivative securities, consisting of options and warrants. We expect our primary source of future liquidity will be from the sale of products, exercise of stock options and warrants and if required from future equity or debt financings. Capital Requirements Due in part to the volatility caused by COVID-19, we do not have a high degree of confidence in our estimates for our future liquidity requirements or future capital needs, which will depend on, among other things, capital required to introduce new products and the operational staffing and support requirements, as well as the timing and amount of future revenue and product costs. We anticipate that demands for operating and working capital may grow depending on decisions on staffing, development, production, marketing, training and other functions and based on other factors outside of our control. We believe we have sufficient capital to sustain our operations for the next twelve months.
Our future capital requirements, cash flows and results of operations could be affected by, and will depend on, many factors, some of which are currently unknown to us, including, among other things:
? The impact and effects of the global outbreak of the COVID-19 pandemic,
and other potential pandemics or contagious diseases or fear of such
outbreaks;
? Decisions regarding staffing, development, production, marketing and other
functions;
? The timing and extent of market acceptance of our products;
? Costs, timing and outcome of planned production and required customer and
regulatory compliance of our products;
? Costs of preparing, filing and prosecuting our patent applications and
defending any future intellectual property-related claims;
? Costs and timing of additional product development;
? Costs, timing and outcome of any future warranty claims or litigation
against us associated with any of our products;
? Ability to collect accounts receivable; and
? Timing and costs associated with any new financing.
Principal factors that could affect our ability to obtain cash from external sources including from exercise of outstanding warrants and options include:
? Volatility in the capital markets; and ? Market price and trading volume of our Common Stock.
Off-Balance Sheet Arrangements
We have no off-balance sheet arrangements.
-25---------------------------------------------------------------------------------
Table of Contents Cash Flow Operating Activities During the six months endedJune 30, 2022 , net cash used in operating activities was$6.2 million . The net loss of$10.2 million was decreased by non-cash expense of$2.2 million consisting primarily of share-based compensation expense of$1.76 million . Other major component changes using operating cash included an increase of$467 thousand in inventories and a net reduction in accounts payable and accrued liabilities of$311 thousand . A decrease in accounts receivable of$2.4 million reduced the cash used in operating activities. During the six months endedJune 30, 2021 , net cash used in operating activities was$10.25 milllion. The net loss of$13.2 million was decreased by non-cash expense of$4.3 million consisting primarily of share-based compensation expense of$3 million , restructuring inventory charges of$747 thousand and shares issued for services of$239 thousand . Other major component changes using operating cash included an increase of$798 thousand in accounts receivable and an increase in inventories of$713 thousand . An increase of$101 thousand in accounts payable and accrued expenses and an increase of$170 thousand in deferred revenue reduced the cash used in operating activities. Investing Activities
During the six months ended
We used$168 thousand and$367 thousand of cash for the purchase of property and equipment during the six months endedJune 30, 2022 , and 2021, respectively. We invested$102 thousand and$96 thousand in patents during the six months endedJune 30, 2022 , and 2021, respectively. Financing Activities During the six months endedJune 30, 2022 , we received$75 thousand in proceeds from the exercise of previously issued stock options. During the six months endedJune 30, 2021 , we received$12 million in proceeds from the exercise of outstanding stock warrants,$278 thousand in proceeds from the exercise of previously issued stock options and repaid$200 thousand in debt relating to the NSENA acquisition.
Contractual Obligations and Commitments
Pursuant to that certain exclusive Amended and Restated Intellectual Property License Agreement datedSeptember 30, 2016 , by and between the Company andSyzygy Licensing, LLC ("Syzygy"), we are obligated to pay to Syzygy a 4% royalty fee on future product sales up to an aggregate amount of$1.0 million in royalty payments or untilSeptember 30, 2026 , whichever occurs earlier.
We are committed to aggregate lease payments on our facility lease of
At
Effects of Inflation
We do not believe that inflation has had a material impact on our business, revenue or operating results during the periods presented.
Recent Accounting Pronouncements
There have been no recent accounting pronouncements or changes in accounting pronouncements during the period endedJune 30, 2022 , or subsequently thereto, that we believe are of potential significance to our financial statements. -26- --------------------------------------------------------------------------------
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