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
ended
Overview
We are a global public safety technology and services company organized in
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. 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 Statistics MRC, a market research consulting
firm, we participate in a segment of the non-lethal products global market
expected to grow to
We focus our efforts on the following products, services and solutions:
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 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
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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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 the 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 solution 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.
During the first six months of 2021 the Company received an increased number of 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. But 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 grew our business in the first six months of 2021 with revenues increasing
128% from the first six months of 2020. Second quarter revenues increased 132%
over the prior year and we continue to expand our business, both domestically
and internationally, through direct and distributor sales. We have a robust and
growing pipeline of market opportunities for our restraint product offering and
training services within the law enforcement, military 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 the
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 of
With the acquisition of
At
During the second quarter ended
Since inception in
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.
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Impact of COVID-19 and Social Unrest on our Business
We face significant challenges in operating and growing our business related to
the outbreak of the novel coronavirus ("COVID-19") which continues to impact
· Delays in our ability to travel and train, especially internationally;
· Greater funding challenges for our customer base, which may adversely
affect timing of anticipated contracts and new customer sales;
· Disruption to our supply chain caused by distribution and other logistical
issues, which may further delay our ability to deliver product to
customers; and
· Potential decrease in productivity of our employees or those of our
customers or suppliers due to travel bans or restrictions, work-from-home
or shelter-in-place policies and orders.
We may be adversely affected by continued social unrest, protests against racial inequality, protests against police brutality and movements such as "Defund the Police". These events may 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 or ineffective as a solution, which may adversely affect us, our business and results of operations, including our revenues, earnings and cash flows from operations.
It is currently not possible to predict the magnitude or duration of the COVID-19 pandemic's impact on our business or the future impact of the recent, ongoing and possible future unrest. The extent to which these events impact our business will depend on numerous evolving factors that we may not be able to control or accurately predict, including without limitation:
· the duration and scope of the challenges created by the COVID-19 pandemic
or by ongoing social unrest;
· governmental, business and individuals' actions that have been and
continue to be taken in response to these events;
· the impact of the COVID-19 pandemic and social unrest on economic activity
and actions taken in response;
· the effect on our customers and demand for our products and services;
· our ability to continue to sell our products and services, including as a
result of travel restrictions and people working from home, or
restrictions on access to our potential customers;
· the ability of our customers to pay for our products and services;
· any closures of our facilities and the facilities of our customers and
suppliers; and
· the degree to which our employees or those of our customers or suppliers
become ill with COVID-19.
Critical Accounting Policies and Estimates
The preparation of financial statements in accordance with accounting principles
generally accepted in
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.
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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 virtual reality 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 the
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.
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.
Exit Expense. Our product line exit expenses included estimates of end of product life raw material write offs, estimates of accrual for noncancelable raw material purchase orders and retirement of unamortized production tooling costs. We make these estimates based on current production plans and these judgments and estimates have an impact on our financial statements.
Accrued Expenses. 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 ended
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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 14, Major Customers and Related Information, in our financial statements for further discussion.
Operating Expense
Our operating expense includes (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 expenses. 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 do not expect any significant further material restructuring and other costs.
We expect our operating costs, excluding restructuring and other costs, will increase as we expand product distribution activities and expand our research and development, production, distribution, training, service and administrative functions in the near term. We may also incur substantial 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.
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
2021 2020 $ %
Revenues:
Product sales $ 1,852 $ 823 $ 1,029 125 %
Other revenue 82 10 72 720 %
Total revenues 1,934 833 1,101 132 %
Cost of revenues:
Products and services 1,247 565 682 121 %
Product line exit expense 747 - 747 -
Total cost of revenues 1,994 565 1,429 253 %
Gross profit (loss) (60 ) 268 (328 ) -122 %
Operating expenses:
Selling, general and
administrative 6,579 2,538 4,041 159 %
Research and development 1,162 577 585 101 %
Total operating expenses 7,741 3,115 4,626 149 %
Loss from operations $ (7,801 ) $ (2,847 ) $ (4,954 ) 174 %
Revenue
We reported revenue of
We incurred product promotional costs of
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We had
We believe we can substantially grow sales in future periods; however, the
impact of the COVID-19 pandemic has created much uncertainty in the global
marketplace by restricting our ability to travel internationally and, to a more
limited extent, domestically. We are therefore unable to predict at this time
whether our sales will continue to increase materially during the remainder of
the fiscal year ending
At
Gross Profit
Our cost of revenue for the three months ended
Due to our limited history of revenue and startup costs incurred to establish volume manufacturing, historical margins may not be indicative of future margins. In the third quarter we expect to start production of a new generation product with different material inputs and manufacturing processes such that historical margins may not be indicative of future margins. In addition, our margins vary based on the sales channels through which our products are sold and product mix. Currently, our cartridges 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.
Selling, General and Administrative Expense
Selling, general and administrative ("SG&A") expense for the three months ended
The largest driver of this increase was related to an increase of
We continue to invest in our marketing and promotion, which augments the media
attention we receive from external sources, such as news broadcasts. During the
second quarter, we incurred
Other SG&A expense increases included a
Research and Development Expense
Research and development expense increased by
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Net Loss
Loss from operations during the three months ended
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
2021 2020 $ %
Revenues:
Product sales $ 3,278 $ 1,498 $ 1,780 119 %
Other revenue 198 24 173 692 %
Total revenues 3,476 1,522 1,954 128 %
Cost of revenues:
Products and services 2,184 971 1,213 125 %
Product line exit expense 747 - 747 -
Total cost of revenues 2,931 971 1,960 202 %
Gross profit (loss) 545 551 (6 ) -1 %
Operating expenses:
Selling, general and administrative 11,557 4,678 6,879 147 %
Research and development 2,227 1,111 1,116 100 %
Total operating expenses 13,784 5,789 7,995 138 %
Loss from operations $ (13,239 ) $ (5,238 ) $ (8,001 ) 153 %
Revenue
We reported revenue of
We incurred product promotional costs of
We had
We believe we can substantially grow sales in future periods; however, the
impact of the COVID-19 pandemic has created much uncertainty in the global
marketplace by restricting our ability to travel internationally and, to a more
limited extent, domestically. We are therefore unable to predict at this time
whether our sales will continue to increase materially during the remainder of
the fiscal year ending
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Gross Profit
Our cost of revenue for the six months ended
Selling, General and Administrative Expense
SG&A expense for the six months ended
The largest driver of this increase was related to an increase of
We continue to invest in our marketing and promotion, which augments the media
attention we receive from external sources, such as news broadcasts. During the
first six months of 2021, we incurred increases of
For the first six months of 2021, our public reporting expenses increased by
Other SG&A expense increases included a
Research and Development Expense
Research and development expense increased by
Net Loss
The
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Liquidity and Capital Resources
Overview
We have experienced net losses and negative cash flows from operations since our
inception. As of
During the six months ended
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.
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Cash Flow
Operating Activities
During the six months ended
During the six months ended
Investing Activities
During the six months ended
We used
Financing Activities
During the six months ended
During the six months ended
Contractual Obligations and Commitments
Pursuant to that certain exclusive Amended and Restated Intellectual Property
License Agreement dated
We are committed to aggregate lease payments on our facility lease of
At
Pursuant to that certain Asset Purchase Agreement between
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 ended
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