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. 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
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
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.
2020 Developments
Proceeds from Public Offering
In
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Proceeds from Warrant Exercises
During the year ended
PPP Loan
In
Asset Purchase Agreement with NSENA
On
Wrap Reality paid NSENA cash consideration of
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
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.
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
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.
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At
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.
COVID-19 Impact
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
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
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.
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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
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 carrying value.
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.
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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
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 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 expenditures.
Results of Operations
Year Ended
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. -33- Year Ended December 31, Change 2020 2019 $ % Revenues: Product sales$3,868,384 $656,071 $3,212,313 490% Other revenue 75,673 40,719 34,954 86% Total revenues 3,944,057 696,790 3,247,267 466% Cost of revenues 2,601,323 420,016 2,181,307 519% Gross profit 1,342,734 276,774 1,065,960 385% Operating expenses:
Selling, general and administrative 11,630,644 6,653,465 4,977,179 75%
Research and development 2,788,887 2,236,985 551,902 25% Total operating expenses 14,419,531 8,890,450 5,529,081 62% Loss from operations$(13,076,797) $(8,613,676) $(4,463,121) 52% Revenue
We reported revenue of
We had
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 revenue growth.
At
Gross Profit
Our cost of revenue for Fiscal 2020 was
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.
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In
Selling, General and Administrative Expense
Selling, general and administrative expense increased by
Due in part to our receipt of
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
Net Loss
Loss from operations during Fiscal 2020 increased by
Liquidity and Capital Resources
Overview
We have experienced net losses and negative cash flows from operations since our
inception. As of
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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 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 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.
Cash Flow
Operating Activities
During Fiscal 2020, net cash used in operating activities was
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During Fiscal 2019, net cash used in operating activities was
Investing Activities
During Fiscal 2020, we used
We used
Financing Activities
During the year ended
During the year 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 facility leases of
At
Pursuant to the NSENA Asset Purchase Agreement dated
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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