WRAP TECHNOLOGIES, INC. 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.
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, 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
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
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 Recent Developments
During the year ended
? Received an aggregate of$12.0 million in proceeds from the exercise of 1,815,012 warrants. ? Received an aggregate of$1.7 million in proceeds from the exercise of 915,404 stock options. ? Shipped BolaWrap products to 15 new countries, with BolaWrap products now being used in 51 countries. ? Granted three newU.S. patents, and filed 16 newU.S. patent applications. ? Expanded the geographic scope of our international patent and trademark applications, which now cover up to 38 countries inEurope , and 17 other countries. ? Earned the ISO 9001:2015 Certification for our Quality Management System, a demonstration of our commitment to excellence in providing quality products and services. ? Extended our pilot program with theLos Angeles Police Department for one year, positioning the deployment of the BolaWrap 150 planned in the first quarter of 2022. ? Announced the first 50 reported field uses of the BolaWrap tabulated from police agencies, with the BolaWrap effectively assisting in taking a suspect into custody without excessive force, and thereby facilitating a successful outcome, in more than 80% of the reported field uses. ? Increased our focus on sustainability by becoming a participant of the United Nations Global Compact, the largest corporate citizenship and sustainability initiative, and publishing our initial Environmental, Social and Governance ("ESG") letter. ? Announced a collaboration withAmazon Web Services ("AWS") to deliver the Wrap Reality Virtual Training platform, and the capability to keep and maintain training records, to law enforcement, built on AWS GovCloud (US). ? Upgraded the Wrap Reality Virtual Training platform and began offering a subscription-based service model while beta testing the platform developed with AWS. ? Unveiled the next generation BolaWrap 150 remote restraint device featuring electronic deployment, and is more robust, smaller, lighter and simpler to deploy than the BolaWrap 100. ? Received a favorable non-firearm classification of the BolaWrap 150 from theRoyal Canadian Mounted Police ("RCMP"). ? Obtained the first risk pool funding to support agency purchases of BolaWrap from theArizona Municipal Risk Retention Pool ("AMRRP"). ? Increased revenue to$7.7 million , an increase of 96% over revenue in 2020. Management Restructuring
On
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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 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 year ended
Revenues for the year ended
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 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 our products. Over 1,000 agencies
have received BolaWrap training, with over 3,000 training officers at those
agencies actively certified as BolaWrap instructors, qualified to train the rest
of their departments. The number of agencies and training officers has doubled
compared to the year ended
With the acquisition of NSENA in
At
During the second quarter of 2021, we began to wind down our production line for
the BolaWrap 100 product line and in the third quarter completed a shift to a
new production process for the next generation BolaWrap 150 product, which
required new tooling, new production equipment and processes, and additional
licensing. We recorded
Since inception in
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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 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 operations, programs, growth, financial condition or results of operations. In addition, new members of management may have different perspectives regarding product development and opportunities for our business, which may cause us to focus on new business opportunities or reduce or change emphasis on our existing products and business.
Impact of COVID-19 and Social Unrest on our Business
We continue to face significant challenges in operating and growing our business
related to the global impact of the novel coronavirus ("COVID-19"). COVID-19
impact includes continued travel restrictions, quarantines, "stay-at-home" and
"shelter-in-place" orders, shutdowns and slowdowns of certain businesses around
the world and impacts on supply chains and logistics. The COVID-19 pandemic has
resulted in a substantial curtailment of business activities worldwide and is
causing weakened economic conditions, both in
? 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
during and beyond 2022; 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 also may be adversely affected by continued social unrest, protests against police 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 and deliver our products and services,
including as a result of travel restrictions, logistic and supply chain
challenges, 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.
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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.
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.
Periodically, certain customers request bill and hold transactions for future delivery as scheduled and designated by them. In such cases, revenue is not recognized until after control, title and risk of ownership has transferred which is generally when the customer has requested such transaction under normal billing and payment terms and has been notified that the product (i) has been completed according to customer specifications, (ii) has passed quality control inspections, and (iii) has been tagged and packed for shipment, separated from other inventory and ready for physical transfer to the customer. The value associated with custodial storage services is deemed immaterial in the context of such contracts and in total, and accordingly, none of the transaction price is allocated to such service.
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.
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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 expense included estimates of end of product life raw material write offs, costs of 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 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 ended
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.
Operating Expense
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 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 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 expenditures.
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Table of Contents Results of Operations
Year Ended
The following table and narrative sets forth for the periods indicated certain items of our condensed statement of operations, expressed in thousands of dollars. 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
2021 2020 $ %
(in thousands)
Revenues:
Product sales $ 7,381 $ 3,868 $ 3,513 91 %
Other revenue 348 76 272 358 %
Total revenues 7,729 3,944 3,785 96 %
Cost of revenues
Products and services 4,987 2,601 2,386 92 %
Product line exit expense 747 - 747 -
Total cost of revenues 5,734 2,601 3,133 120 %
Gross profit 1,995 1,343 652 49 %
Operating expenses:
Selling, general and administrative 20,276 11,631 8,645 74 %
Research and development 6,214 2,789 3,425 123 %
Total operating expenses 26,490 14,420 12,070 84 %
Loss from operations $ (24,495 ) $ (13,077 ) $ (11,418 ) 87 %
Revenue
We reported revenue of
We incurred product promotional costs of
We had
At
The impact of the COVID-19 pandemic and geopolitical conflicts, including the
recent war in
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.
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Table of Contents Gross Profit
Our cost of revenue for Fiscal 2021 was
Selling, General and Administrative Expense
Selling, general and administrative ("SG&A") expense increased by
We continue to invest in our marketing and promotion, which augments the media
attention we receive from external sources, such as news broadcasts. During
Fiscal 2021, we incurred increases of
For Fiscal 2021, our public reporting expense increased by
Other SG&A expense increases included a
In 2022, we expect to monitor and control the amount of resources we expend 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. We expect increased administrative costs due to costs associated with the Management Transition but cannot estimate such costs at this time.
Research and Development Expense
Research and development expense increased by
Net Loss
Loss from operations during Fiscal 2021 increased by
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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 Fiscal 2021, we received
During Fiscal 2020, we received
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 grow product revenues 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,
and geopolitical conflicts;
? 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.
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Off-Balance Sheet Arrangements
We have no off-balance sheet arrangements.
Cash Flow Operating Activities
During Fiscal 2021, net cash used in operating activities was
During Fiscal 2020, net cash used in operating activities was
Investing Activities
During Fiscal 2021, we used
During Fiscal 2020, we used
We used
Financing Activities
During Fiscal 2021, we received
During Fiscal 2020, we received
Contractual Obligations and Commitments
Pursuant to that certain exclusive Amended and Restated Intellectual Property
License Agreement dated
In
At
On
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Table of Contents 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
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