The discussion and analysis set forth below should be read in conjunction with
the information presented in other sections of this Annual Report, including
"Item 1. Business," "Item 1A. Risk Factors," and "Item 8. Financial Statements
and Supplementary Data." The following discussion may contain forward-looking
statements that reflect our plans, estimates and beliefs. Words such as
"expects," "anticipates," "intends," "plans," "believes," "seeks," "estimates"
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. Our actual results could differ materially from
those discussed in these forward-looking statements.
We are a global public safety technology and services company organized in March
2016 delivering modern policing solutions to law enforcement and security
personnel. We began product sales of our first public safety product, the
BolaWrap 100 remote restraint device, in late 2018.
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 $11.85 billion by 2023.
Our products, services and solutions include:
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 100 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.
Wrap Armor - we offer a light-weight rifle rated police shield and a pistol
rated patrol shield that offers police agencies an affordable defense against
increasingly sophisticated threats.
In addition to the United States domestic law enforcement market, we have sold
our restraint products to 36 countries. We have established an active
distributor network with 14 domestic distributors representing all 50 states and
Puerto Rico. We have distribution agreements with 35 international distributors.
We focus significant sales, training and business development efforts to support
our 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.
Proceeds from Public Offering
In June 2020, we consummated a registered direct public offering resulting in
net proceeds of approximately $11.67 million ("June 2020 Offering"). We sold
2,066,667 units ("June 2020 Units"), with each unit consisting of (i) one share
of Common Stock and (ii) a warrant to purchase one share of Common Stock. The
June 2020 Units were offered and sold to Investors at a public offering price of
$6.00 per unit. Each of the warrants offered and sold in the June 2020 Offering
are exercisable for a period of 24 months from the date of issuance, are
non-transferrable and have an exercise price of $6.00 per share.
Proceeds from Warrant Exercises
During the year ended December 31, 2020 the Company received gross proceeds of
$26,190,483 from the exercise of 5,155,976 warrants and paid $1,016,645 as an
agent fee to facilitate exercise of certain warrants resulting in net proceeds
of $25,173,838. Elwood Norris, the Company's Chief Technology Officer, exercised
333,334 of these warrants at $5.00 per share for cash of $1,666,670.
In May 2020, we obtained $414,362 in proceeds from a U.S. Small Business
Administration ("SBA") Promissory Note (the "PPP Loan") pursuant to the Paycheck
Protection Program ("PPP") of the Coronavirus Aid, Relief, and Economic Security
Act (the "CARES Act") as administered by the SBA. Under the terms of the CARES
Act, the Company subsequently applied for and in December 2020 was granted
forgiveness for the PPP Loan plus interest. The Company's PPP Loan in the amount
of $414,362 and accrued interest was forgiven in full by the Small Business
Administration. The Company recognized $416,683 in debt forgiveness income as a
result of the forgiveness.
Asset Purchase Agreement with NSENA
On December 14, 2020, the Company, through a new wholly owned subsidiary Wrap
Reality, Inc. ("Wrap Reality"), entered into an Asset Purchase Agreement (the
"Asset Purchase Agreement") with NSENA Inc, a Delaware corporation ("NSENA") and
Ethan Moeller ("Moeller"), the majority stockholder of NSENA and acquired
NSENA's immersive virtual reality technology and business (the "Transaction").
In addition, the Company hired three NSENA persons as employees (including
Moeller) ("Key Employees") and retained two NSENA consultants ("Consultants").
Wrap Reality paid NSENA cash consideration of $210,000 and agreed to pay
$100,000 on March 15, 2021, $100,000 on June 15, 2021 and $75,000 on September
15, 2021. In addition, Wrap Reality assumed $15,000 of liabilities related to
funds received by NSENA but unearned on existing revenue related contract
arrangements. As additional earn-out consideration, Wrap Reality has agreed to
pay NSENA 10% of net revenues (or a lesser amount equal to 50% of direct profit)
from specific identified prospects that become revenue customers ("NSENA
Earn-out Consideration") before September 30, 2021, but only on amounts
collected between consummation of the acquisition and June 30, 2022.
Each of the Key Employees executed an At-Will Employment, Confidential
Information, Non-Compete/Non-Solicitation, Invention Assignment, and Arbitration
Agreement and the Key Employees were issued service-based stock options
exercisable for an aggregate of 150,000 shares of the Company's Common Stock
exercisable for ten years at $5.46 per share, vesting over two years unless
accelerated by certain events. Mr. Moeller was granted an additional ten-year
performance-based stock option exercisable at $5.46 per share on 100,000 shares
of Common Stock based on achieving certain virtual reality revenue targets by
December 1, 2024. Each of the two Consultants were granted service-based stock
options exercisable for 20,000 shares of the Company's Common Stock for five
years at $5.46 per share, vesting over two years unless accelerated under the
terms of the stock options.
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
We grew our business in 2020 with revenues increasing 460% and continue to
expand our business in 2021, both domestically and internationally, through
direct and distributor sales. We have a robust and growing pipeline of
opportunities and are pursuing large business prospects internationally and also
pursuing business with large police agencies in the U.S. It is difficult to
anticipate how long it will take to close these opportunities, or if they will
ultimately come to fruition.
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.
Over 520 agencies have received BolaWrap training with over 1,550 training
officers at those agencies certified as BolaWrap instructors qualified to train
the rest of their departments.
At December 31, 2020, we had backlog of approximately $120,000 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.
Since inception in March 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.
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.
We face significant challenges in operating and growing our business related to
the outbreak of the novel coronavirus ("COVID-19") which continues to spread
throughout the United States and the World. The outbreak of COVID-19 has
resulted in travel restrictions, quarantines, "stay-at-home" and
"shelter-in-place" orders and extended shutdown of certain businesses around the
world. We are monitoring the outbreak of COVID-19 and the related business and
travel restrictions and changes to behavior intended to reduce its spread, in
addition to the impact on our employees. We continued to operate with some
modifications, and we took actions intended to protect our employees and our
customers that adversely affected our results by increasing costs during a
period of stalled sales and production activity.
Starting during the second quarter of 2020 our customers experienced staffing
issues limiting our ability to demonstrate and train. We believe we made an
important transition during the second quarter including remote sales and
training through webinars and expect this to be an ongoing aspect of our
business. We curtailed most sales and training travel and reduced our production
personnel until late in the second quarter when some customer locations
domestically and internationally eased restrictions and we began to again close
business prospects. In the third quarter we continued to face some domestic and
substantial international restrictions that affected our ability to travel and
train customers. We believe this had an adverse effect on our sales in the third
and fourth quarters. Severe international travel restrictions persist and impact
the timing of future international orders. It is uncertain when these
restrictions will ease allowing our sales and training personnel to travel to
many international destinations.
The magnitude and the duration of the pandemic and the extent and duration of
the pandemic's adverse effect on economic and social activity, consumer
confidence, customer spending and preferences, labor and healthcare costs, and
unemployment rates is uncertain as of the date of this Report. Our ability to
sell, train and service our products and conduct our business may be adversely
impacted as a result of continuing or future pandemic related travel
restrictions, mandatory business closures, and stay-at home or similar orders;
temporary reductions in our workforce, closures of our offices and facilities
and the ability of our customers and suppliers to continue their operations as a
result of the pandemic. While there could ultimately be a material impact on
operations and liquidity of the Company, at the time of issuance of this Report,
the impact cannot be determined.
Critical Accounting Policies and Estimates
The preparation of financial statements in accordance with accounting principles
generally accepted in the 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
costs. 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 at a later time 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, operating lease liabilities,
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
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 Financial 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 during 2020 and 2019
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 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
Valuation of Intangible Assets. Intangible assets consisted of (a) capitalized
legal fees and filing costs 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 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. There were
no significant changes or modification of our critical accounting policies and
estimates involving management valuation adjustments affecting our results for
the year ended December 31, 2020.
Recent Accounting Pronouncements
New pronouncements issued for future implementation are discussed in Note 1 to
our financial statements.
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 16, Major Customers and Related Information,
in our financial statements for further discussion.
Our operating expense includes (i) selling, general and administrative expense,
and (ii) research and development 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 costs, and other factors, some of which
are outside of our control.
We expect our operating 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 stock-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
Results of Operations
Year Ended December 31, 2020 Compared to Year Ended December 31, 2019
The following table sets forth for the periods indicated certain items of our
condensed 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.
Year Ended December 31, Change
2020 2019 $ %
Product sales $3,868,384$656,071$3,212,313 490%
Other revenue 75,673 40,719 34,954 86%
Total revenues 3,944,057 696,790 3,247,267 466%
Cost of revenues 2,601,323 420,016 2,181,307 519%
Gross profit 1,342,734 276,774 1,065,960 385%
Selling, general and administrative 11,630,644 6,653,465 4,977,179 75%
Research and development 2,788,887 2,236,985 551,902 25%
Total operating expenses 14,419,531 8,890,450 5,529,081 62%
Loss from operations $(13,076,797)$(8,613,676)$(4,463,121) 52%
We reported revenue of $3,944,057for the year ended December 31, 2020 ("Fiscal
2020") as compared to revenue of $696,790 for the year ended December 31, 2019
(Fiscal 2019"), a 466% increase over the prior year. We believe our sales during
the second, third and fourth quarters of Fiscal 2020 were negatively impacted by
the COVID-19 pandemic as we were limited in our ability to make product
demonstrations and conduct training especially in our international markets. As
some areas of the United States eased restrictions, we were able to commence
limited in-person demonstrations and training to supplement our webinar
capabilities. We incurred product promotional costs of $747,443for Fiscal 2020
related to the cost of demonstration products and accessories delivered to law
enforcement agencies that were expensed as marketing costs.
We had $16,015 of deferred revenue at December 31, 2020, of which $14,125
related to virtual reality training and $1,890 related to extended warranties.
We believe we can grow sales in the future but the impact of the COVID-19
pandemic has created much uncertainty in the global marketplace. We are unable
to predict the impact on demand for our products in future periods. We expect
sales levels may be uneven as we grow both our domestic and international
customer base and as well as from the continued impact of COVID-19 restrictions.
While we plan for increased revenues in 2021, there can be no assurance,
especially given the uncertainties of the COVID-19 pandemic, that we can achieve
At December 31, 2020, we had backlog of $120,260 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.
Our cost of revenue for Fiscal 2020 was $2,601,323 resulting in a gross margin
of 34%. We curtailed production for ten weeks during the second quarter of
Fiscal 2020 due to the COVID-19 restrictions in Arizona and this down time
negatively impacted our gross margin. The gross margin for Fiscal 2019 of 40%
was assessed on a small revenue base.
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 addition, our margins vary based on the sales channels through which
our products are sold and product mix. Due to timing of international orders our
mix of cartridges was higher during Fiscal 2020 than Fiscal 2019. Currently, our
cartridges have lower margins than BolaWrap devices, however, late in 2020 we
implemented initiatives to improve gross margins attributable to our cartridges.
We continue to 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.
In September 2019 we relocated manufacturing operations and commenced production
at our new facility in Tempe, Arizona. While this significantly increases our
capacity, we continue to implement production and process changes targeted to
Selling, General and Administrative Expense
Selling, general and administrative expense increased by $4,977,179 during
Fiscal 2020, when compared to Fiscal 2019. We incurred a $546,723 increase in
non-cash stock-based compensation expense allocated to selling, general and
administrative expense that totaled $1,956,818 in the Fiscal 2020 as compared to
$1,410,095 in the Fiscal 2019. Other increases included a $2,043,748 increase in
cash compensation and recruiting costs from an increase in headcount over the
prior year and a $276,645 increase in public company related costs. Marketing
and promotion costs increased $979,833 due primarily to promotional products and
online advertising. Travel efforts resumed during the third quarter of the year
ended December 31, 2020, however, due to the COVID-19 pandemic, travel was still
limited. Our travel costs related to sales, demonstrations and training
decreased by $107,768 from the prior year even though the number of sales and
training personnel increased from the prior year.
Due in part to our receipt of $414,362 in PPP Loan proceeds, we maintained
staffing in April 2020, and were able to respond to limited re-openings
commencing late in the second quarter of Fiscal 2020. We developed and deployed
new tools such as webinars to communicate with prospective and existing
customers. We believe these decisions positioned us to respond to increased
opportunities resulting from recent highly publicized policing issues and an
increased focus on less lethal engagement. The Company's PPP Loan in the amount
of $414,362 and accrued interest was forgiven in full in December 2020 by the
Small Business Administration. The Company recognized $416,683 in debt
forgiveness income as a result of the forgiveness.
In 2021, we expect to spend increased resources on the marketing and selling of
our products, training distributors and customers and administratively
supporting our operations to respond to increased opportunities, but amounts
could vary depending on sales levels, the impact of the COVID-19 pandemic and
other factors outside of our control.
Research and Development Expense
Research and development expense increased by $551,902 for Fiscal 2020, when
compared to Fiscal 2019. We incurred a $153,925 period over period increase in
non-cash share-based compensation expense allocated to research and development
expense as a result of new award grants and vesting timing. The increase in
costs during Fiscal 2020 when compared to the prior year included a $485,910
increase in cash compensation costs resulting from an increase in headcount
primarily associated with product development. Prototype related costs increased
by $18,984 for Fiscal 2020, which increase was primarily related to development
efforts to improve our BolaWrap 100 product and develop new products. Outside
consulting costs decreased by $48,766 for Fiscal 2020, primarily due to the
addition of permanent staff. Travel costs related to research and development
decreased $100,822 for Fiscal 2020 when compared to Fiscal 2019 primarily due to
COVID-19 restrictions and completion of the Arizona facility setup. We expect
our research and development costs to increase in the future as we add staff and
expand our research initiatives in response to market opportunities.
Loss from operations during Fiscal 2020 increased by $4,463,121 when compared to
Fiscal 2019, resulting primarily from increased operating costs due to increased
personnel, marketing and selling and supporting activities.
Liquidity and Capital Resources
We have experienced net losses and negative cash flows from operations since our
inception. As of December 31, 2020, we had cash and cash equivalents of
$16,646,811, short-term investments of $24,994,360, positive working capital of
$44,586,395 and had sustained cumulative losses attributable to stockholders of
$25,310,033. 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
During Fiscal 2020 we received $11,667,206 of net proceeds resulting from the
consummation of a registered offering of our Common Stock in June 2020,
$25,879,188 of net proceeds from the exercise of previously issued warrants and
stock options and obtained $414,362 in proceeds from the PPP Loan.
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.
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 our products and the 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
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.
During Fiscal 2020, net cash used in operating activities was $12,186,924. The
net loss of $12,580,209 was decreased by non-cash expense of $2,079,882
consisting primarily of share-based compensation expense of $2,236,743 less debt
forgiveness income of $416,683 related to the PPP loan. Other major component
changes using operating cash included an increase of $1,685,727 in accounts
receivable, an increase in inventories of $342,741, a $341,629 decrease in
customer deposits and a $508,498 increase in prepaid expenses and other current
assets. An increase of $825,382 in accounts payable and an increase of $492,564
in accrued liabilities reduced the cash used in operating activities.
During Fiscal 2019, net cash used in operating activities was $8,485,637. The
net loss of $8,325,488 was decreased by non-cash expense of $1,585,699
consisting primarily of share-based compensation expense of $1,536,096. Other
major component changes using operating cash included a $1,892,768 increase in
inventories, an increase of $190,951 in accounts receivable, a $136,084 increase
in prepaid expenses and other current assets and a $96,000 reduction in deferred
compensation. An increase of $286,398 in accounts payable and accrued
liabilities and new customer deposits of $343,724 reduced the cash used in
During Fiscal 2020, we used $34,979,511 of cash to purchase short-term
investments and we had proceeds from maturities of short-term investments of
$10,000,000. We had no short-term investment activity in 2019.
We used $248,897 and $256,742 of cash for the purchase of property and equipment
during Fiscal 2020 and 2019, respectively. We invested $128,914 and $114,274 in
patents during the Fiscal 2020 and 2019, respectively. During Fiscal 2020, we
purchased $543,563 of indefinite life intangible assets and software and paid
$210,000 for the first installment of the NSENA acquisition.
During the year ended December 31, 2020, we received $11,667,206 of net proceeds
resulting from a registered offering of our Common Stock in June 2020,
$25,879,188 of net proceeds from the exercise of previously issued warrants and
stock options and $414,362 in proceeds from a PPP Loan.
During the year ended December 31, 2019, we received $11,351,214 of net proceeds
from the June 2019 Follow-On Offering and obtained $2,141,576 of net proceeds
from the exercise of previously issued warrants and stock options.
Contractual Obligations and Commitments
Pursuant to that certain exclusive Amended and Restated Intellectual Property
License Agreement dated September 30, 2016, by and between the Company and
Syzygy 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 until September 30, 2026, whichever occurs earlier.
We are committed to aggregate lease payments on facility leases of $94,011 in
2021 and $56,006 in 2022.
At December 31, 2020 the Company was committed for approximately $2.2 million
for future component deliveries and contract services that are generally subject
to modification or rescheduling in the normal course of business.
Pursuant to the NSENA Asset Purchase Agreement dated December 14, 2020 we are
obligated to pay to NSENA cash consideration of $100,000 on March 15, 2021,
$100,000 on June 15, 2021 and $75,000 on September 15, 2021. In addition, Wrap
Reality assumed $15,000 of liabilities related to funds received by NSENA but
unearned on existing revenue related contract arrangements. As additional
earn-out consideration Wrap Reality has agreed to pay NSENA 10% of net revenues
(or a lesser amount equal to 50% of direct profit) from specific identified
prospects that become revenue customers before September 30, 2021 but only on
amounts collected between Closing and June 30, 2022.
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 year ended December 31, 2020, or subsequently thereto,
that we believe are of potential significance to our financial statements.
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