Wrap Technologies, Inc. Q1 FY2020 Earnings Call

Good afternoon, ladies and gentlemen, and welcome to the Wrap Technologies First Quarter 2020 Conference Call. At this time, all participants are in a listen-only mode. After the speakers’ presentation, there will be a question-and-answer session. As a reminder, this call is being recorded. Before we get started, we will be referring to the press release filed today which details the company's first quarter 2020 results and can be downloaded from the company's Events and Presentation page at www.wraptechnologies.com. Finally, a recording of the call will be available on the same Events and Presentations section of the company's website later this evening. Please be aware that some of the comments made during this call may include forward-looking statements within the meaning of the Federal Securities Laws. Statements about the company's beliefs and expectations, containing words such as may, will, could, believe, expect, anticipate, and similar expressions constitute forward-looking statements. These statements involve risk and uncertainties regarding the company's operations and future results that could cause Wrap Technologies results to differ materially from the management's current expectations. The company encourages you to review the Safe Harbor statements and risk factors contained in today's press release, and the company's filings with the Securities and Exchange Commission, including without limitation, the company's most recent annual report on Form 10-K and other periodic reports, which identify specific risk factors that may cause actual results or events to differ materially from those described and forward-looking statements. The company does not undertake to publicly update or revise any forward-looking statements after the date of this conference call. The company also notes that on this call, they will be discussing certain non-GAAP operational metrics, such as backlog, number of trainers, agencies, and distributors. The company is providing that information as a supplement to information prepared in accordance with accounting principles generally accepted in the United States or GAAP. And now, I'll turn the call over to David Norris, the company's Chief Executive Officer. Sir, please proceed.

Thank you, Jimmy, and thank you everyone for joining us today. After the market closed today, we issued our first quarter results for the period ending March 31, 2020, a copy of which is available on the investor page on our webpage, www.wraptechnologies.com. As discussed on our last call, 2019 marked the genesis of our company’s growth phase, and as the financial results of the first quarter of 2020 indicate, we’ve clearly been able to capitalize on the sales momentum we’ve generated in the back half of 2019 and accelerate growth right out of the gate in 2020. However, before we discuss specifics for the first quarter and why we were able to generate such successful results at the start of this year, I would like to take a few minutes to address a question that I’m sure is at the forefront of everybody’s mind: How is COVID-19 impacting Wrap Technologies, and how are we responding to the new normal? The world has changed substantially since our last call on March 10. Since then, stay-at-home orders have been implemented across the nation, and many people have seen their daily routines uprooted. Social distancing and remote working have become the norm. There is no doubt that COVID-19 has profoundly impacted people’s physical, mental health, personal relationships, and livelihoods. I would like to personally extend our sympathies to anyone within the Wrap community who has been adversely affected by the global pandemic. Wrap is a young and innovative company with a flexible culture and a customer base that is integral to the protection and preservation of everyone’s well-being. For those reasons and others that we’ll discuss throughout the call, I’m pleased to report that we are adapting to the dynamic working and social changes brought on by the global pandemic. During our last call, we mentioned the largest hurdles we had experienced from COVID-19 were related to travel. That still remains the case, but the hurdles have obviously become larger as both international and domestic travel has ground to a halt. Due to travel restrictions and social distancing measures, in-person demonstrations and training sessions have stalled for the time being. In lieu of personal meetings and physical product demonstrations, we have transitioned where we can to video conferencing. Tom will touch a little more on this later, but our customers, prospects, distributors, and partners have all been quite understanding and accommodating of the transition. While the situation is not ideal, everyone, including our customers and ourselves, is adapting and progressing. To date, we have not seen a significant impact in our supply chain, and we continue to monitor suppliers and our lead times. We have spent a great deal of effort over the past two years increasing our brand awareness, establishing the trust of both small and high-profile law enforcement departments, and building a strong pipeline of prospective customers through our training, product demonstrations, and distributor partners. Therefore, we are fortunate that the slowdown is coming at a time when Wrap is already known in the law enforcement community and has gained some attention from the general public as well. Moreover, there is also an additional silver lining here: we may be able to decrease our expenses in the short term as our personnel spend less time traveling. At the present moment, the COVID-19 pandemic continues to linger for many, but we have great confidence in our ability to weather the storm and continue executing against our strategic goals. However, before I get too ahead of myself, I’m going to turn our call over to our CFO, Jim Barnes, to walk us through the financial results of the first quarter. Tom Smith will then come to provide some color on the sales channel and key customer relationships before I return to make closing remarks. Jim Barnes?

Thank you, David, and good afternoon everyone. Our detailed operating results are set forth in the press release filed today and our quarterly report on Form 10-Q also filed today. As a reminder, we are still in the early stage of addressing a large worldwide target market for our remote restraint products and accessories. First quarter revenues increased from a mix of agency, distributor, and international order fulfillment. Revenues were $689,000 for the first quarter 2020, compared to $118,000 in the first quarter 2019. At the end of Q1 2020, we had $222,000 of customer deposits and a backlog of orders of approximately 1.4 million, expected to be delivered over the next 12 months. As a reminder, distributor and customer orders for future deliveries are generally subject to modification, rescheduling, or in some instances, cancellation in the normal course of business. We do not have enough insight into the timing and nature of large international and domestic orders to determine exactly how periodic backlog will relate to future revenues. Gross profit margin was 41% for the first quarter 2020, compared to 48% in the first quarter of 2019. We rely on direct and distributor sales, both domestically and internationally, and changes in sales channel mix can impact product margins. Other factors that impact margins include product updates, raw material and component changes, and warranty costs. Due to the startup nature of our sales and production activities, we do not believe historical margins should be relied upon as an indicator of future margins. Sales, General, and Administrative costs for the first quarter 2020 were $2.1 million, compared to $1.2 million for the year-ago quarter. The increase in SG&A is predominantly due to an increase in headcount and planned expansion in sales, training, and other activities to support our growth, as well as an increase in non-cash stock-based compensation expense. While we currently expect to expend comparable levels of resources on the marketing and selling of our products, training distributors and customers, and supporting our operations, amounts could vary depending on sales levels and the impact of the COVID-19 pandemic. R&D costs for the first quarter 2020 were $533,000, compared to $375,000 for the year-ago quarter. Since a year ago, we have expanded our internal R&D team, and we are committed to continuing to improve our product offering and developing new products. We expect our R&D costs will continue to vary depending on the timing of specific research project costs. The GAAP net loss for the first quarter of 2020 was $2.3 million, or $0.08 per share, compared to $1.5 million or $0.05 per share during the prior year's first quarter. The net loss for each quarter included approximately $467,000 and $227,000 respectively of non-cash stock-based compensation expenses. During the first quarter 2020, we obtained $801,000 from the exercise of warrants and options. We entered the quarter with $15.5 million in cash and cash equivalents. We have minimal debt, and stockholders’ equity was $18.1 million at quarter-end. For a more detailed analysis of our financial results, please reference our Form 10-Q filed today. Tom, over to you.

Thanks Jim, and good afternoon everyone. The impact of the coronavirus didn’t really begin taking effect in the United States until March, and up until that point, we were really gaining momentum. As you will remember, we started the year with a $1.7 million backlog and we have been working to convert that into revenue. Right at the start of January, we received international purchase orders for 200 BolaWraps and 2,000 cartridges and accessories. This sales momentum continued in earnest right up until the second of March when stay-at-home orders were ubiquitously instituted, and sales activity began to slow down. As David mentioned, we then transitioned to video conferencing, which has been relatively successful given the current state of things. There is obviously no perfect substitute for an in-person demonstration of the BolaWrap, as it is much more impressive to see live from the sound it makes and how fast it occurs. Those who had the opportunity to see the product for themselves will understand that it is one of those tools that people seem to grasp immediately when they can see it, feel it, and hear it deployed. Once they have experienced it themselves, the understanding grows. However, since our customers have had to adapt to the same changes, everyone has been very understanding and extremely supportive of the new sales methods. In fact, we had the chance during the second half of March for Mike Rothans and the team to do numerous video conferences with our distributors to find out what they are doing and get coordinated for the second part of the year. The substantial improvement in revenue year-over-year and significantly from Q4 to Q1 was largely driven by our distributor model. As a reminder, we shifted to a distributor model in May of last year, and clearly the momentum has been building ever since. To date, we have 11 domestic distributors representing 45 states and 16 exclusive international distributors representing 26 countries. During the first quarter, distributors conducted over 165 demos of the BolaWrap, and we conducted an additional over 40 domestically during that same time period. Distributors showcased the BolaWrap at approximately 30 trade shows domestically. We also attended two international trade shows and hosted several international delegations at our facility in Arizona. I personally attended several international demonstrations prior to the global slowdown. In total, we received over 700 inquiries for BolaWrap during the first quarter. As of March 31, 2020, we have trained over 195 departments and have more than 720 instructors who have been certified to train their colleagues at their respective agencies. This compares to approximately 50 departments and 200 instructors who were trained by the end of the first quarter of last year. We’ve mentioned before that we believe the international markets represent a large opportunity for Wrap, and the first quarter revenue mix certainly supports that theory. The bulk of sales in the first quarter from the international markets was primarily due to the activities we had undertaken over the last six to nine months. Due to confidentiality requests, we will not be breaking out which countries or regions have had the highest adoption rates thus far. I’m sure investors are curious to know the specifics within our space, but providing that degree of granularity at this time might compromise some of our competitive first-mover advantages from which we are currently benefiting. However, I can share that in addition to the high adoption rates we have seen internationally, we’ve also encountered a large number of smaller departments domestically coming forward requesting demonstrations or outright purchasing the product. We believe that the increase in orders from the smaller departments is primarily attributable to enhancing brand awareness and the law enforcement community becoming more comfortable with and accepting the BolaWrap, which is still in its infancy relative to the rest of the tools on an officer's belt. We also suspect that that shift could be a byproduct of the COVID-19 epidemic. Highly populated urban areas, which usually have large departments, are now more restricted in their ability to move about due to stay-at-home and social distancing measures. Therefore, smaller departments, which predominantly operate in less populated areas may be less preoccupied with the coronavirus and may have more time to test and implement new tools like the BolaWrap. In general, we believe this trend bodes well for us going forward, as smaller departments have been and remain our bread and butter. The contract sizes may not be as large, but these departments tend to move faster and can serve as excellent case studies for Wrap moving forward. One large department we’ve been working with that is worth discussing today is the Los Angeles Police Department (LAPD). As many of you are aware, LAPD began field testing the BolaWrap in February of this year. 200 BolaWraps have been circulating among approximately 1,100 trained officers throughout Los Angeles City. As of today, they have completed a little over two-thirds of their original 90-day trial period; however, given the complications the department has faced from the coronavirus, we expect that they will likely extend the field trial and we will be more than happy to continue to support the department. Large agencies evaluating new equipment constantly have many products come to market, yet very few make it to a field trial or regular adoption. The BolaWrap is likely one of the fastest tools in the use of force protocol for the LAPD that they have brought to a field trial since they upgraded their Taser program, which originally started in the 1970s and became widely adopted roughly 15 years ago. We will certainly continue to support them in their diligence process. We are limited in what we can say regarding field testing with LAPD because the department itself doesn't usually comment on cases until they have been reviewed internally and their use of force reviews, as well as worked their way through the criminal justice process to a conclusion. However, I can say that the device has been deployed, and all the feedback we have received thus far has been positive. In fact, just since the LAPD field trial began, we have also had field uses in Sacramento, Minneapolis, and just this past week in West Palm Beach. With the nature of the low-level of force with the BolaWrap, we do not receive reports on all incidents, but the responses from the users that we are aware of continue to demonstrate the success of the BolaWrap and its benefits without causing harm to its suspects. From a sales perspective, the first quarter of 2020 was our most successful quarter to date. While some regions have slowed down over the past two months, we’ve seen other markets come online far more quickly than we anticipated. In fact, aspects of our pipeline and interest from different parts of the world are actually accelerating. In some instances, we are surprisingly ahead of where we would be in a more normal market. While we can’t guarantee that the coming quarters will align with Q1, we do have good momentum, and our distributors seem well-capitalized, especially with the recent surge in firearm sales that they’ve experienced. Therefore, we remain positive about our ability to continue driving sales over the coming quarters and years. I’m happy to address any sales-related questions during the Q&A, but for now, I’d like to turn the call back over to David.

Thank you, Tom. As evidenced by our sales momentum and the overall improvement in our financial performance, we’re clearly making progress in the business and moving in the right direction. It’s apparent that the first quarter was a strong quarter for Wrap, but these are uncertain times, and while past performance does not necessarily guarantee future success, if you consider the market we serve and the current state of the business, I believe there are many reasons to remain confident in our ability to weather the current environment and execute against our shorter and long-term goals. In recent weeks, we’ve seen an increase in protests around the world as people are becoming impatient and ready to return to work. Tensions are rising. Today, perhaps more than ever, it’s in everyone's interest—first responders, civilians, and law enforcement officers—to have a tool that allows them to safely establish compliance without causing pain. We cannot say for certain whether current events will be a driver or inhibitor for our near-term growth, but what we do know is that the BolaWrap fills a gap that exists regardless of how the world evolves over the coming months and years. As a result, we’ve observed good customer momentum. We’ve generated substantial improvements in our top line, not only year-over-year but sequentially as well. On top of that, we’ve maintained a robust backlog. Equally important, if not more so, is that we have fortified our balance sheet. As of March 31, 2020, we have $15.5 million in cash and very minimal debt. So to summarize, Wrap Technologies remains on solid financial footing. We have a dynamic team that has and will continue to adapt to changes in the workplace. We have a product that is highly effective and fills a unique void that exists independent of broader market trends. We serve a highly resilient customer base and, therefore, stand well-positioned to execute our strategic initiatives for the benefit of our shareholders in the long run. With that, I’d like to open up the call for questions. Jimmy?

Thank you. Our first question comes from Jon Hickman with Ladenburg. Your line is now open.

Good afternoon. Congratulations on the revenue number.

Thank you, Jon.

Yes. So, I’m trying to get a little bit more information. Do you have any estimates, like, do you get to see numbers as far as how many use cases there have been versus what has been reported to you?

Yes, this is Tom. That’s a great question, and I’m going to have Mike Rothans who’s joining us here answer that one directly.

Hi, Jon. For many departments across the United States, they look at this total as one that’s not a reportable use of force. Therefore, they don't track it, and obviously, they don’t report it to us. In other cases, I would say in most cases across the U.S., it’s considered a low-level use of force. So, it’s really the last thing on their mind when it comes to reporting to us every time they use this product. It’s almost like reporting every time you handcuff somebody. So, we don't get the feedback that we often desire, but what we do find out is when we make follow-up contacts through our customer service personnel, our sales representatives, or trainers, that's when we learn about many of the uses and the success of the product.

Okay. And to follow up on that, can you tell us what the L.A. department is looking for in this trial? Are they looking for a certain number of use cases, and are there any key performance metrics that they’re specifically looking at?

Sure. I’d be happy to answer that too. The Los Angeles Police Department originally looked at a 90-day window, and their Chief mentioned in their press conference back in January that he was looking for about 30 or so uses in order to evaluate the effectiveness of the product and validate that it achieved the outcomes that they wanted, meaning that they didn't have to use additional levels of force, that nobody was injured, and they were able to take people into custody—or in many cases, to treatment for mental health issues—without injury. Now, with the pandemic that has slowed things down; they were on track to meet those goals in the first 30 days of their tests. The Chief also mentioned that if they didn't receive the results in the first 90 days, they would probably extend it for an additional 90 days, and Tom alluded to that in his presentation earlier. We plan to work with them on that, but so far, the progress has been very positive. They’ve used it quite a bit, and in fact, they’ve used it more than we anticipated they would during the trial period.

And then I have one last question. I guess Tom or David, have you received any re-orders from any of your agencies yet?

Yes, we have. This is Tom. Yes, we have definitely received re-orders from some of our agencies that are using the device.

And obviously, one of our objectives is full deployment in every department, and we’ve had a few departments go for full deployment, meaning they bought a few, liked them so much that they opted to outfit their entire department.

Every option. And so, I think I—last time we spoke, you mentioned that there was—money is more available now for agencies to actually purchase this product. Where is that coming from?

I’ll probably let Mike Rothans answer that since he’s a longtime law enforcement professional and understands how that works.

Well, currently right now, there are several grants that are available. One in particular that came out as a result of the coronavirus emergencies is issued by the Department of Justice, Bureau of Justice Assistance, The Coronavirus Emergency Supplemental Funding program that allows law enforcement agencies to apply for this grant for equipment. In this case, our product certainly meets that requirement at it provides time, distance, and space for officers to control someone's movement, restrict their mobility, allowing them time to put on PPE equipment and to protect themselves, as well as people around them. We have provided information about that grant, along with several others, to all of our customers and potential customers as a source of funding for them, and we don’t foresee that budget cuts as a result of the coronavirus will pose a problem.

Okay. And then...

Additionally, Jon, I would say that that’s very much a U.S. response. We’ve actually seen internationally that there’s been no pushback on budget or pricing because as you watch the news, you’ll see that a number of countries will become much more restrictive. The impact on individuals, businesses, and daily life has been heavily affected. Thus, police departments look for tools to restrain and provide a second chance to individuals who may be out of line, non-compliant, but have no criminal background—they're just struggling in a difficult position. So, in many cases, budgets aren't coming into question; it’s more the opportunity to apply a new tool.

So, one more question, I guess for Mike. So, is there a reluctance on the part of law enforcement right now to even approach people? I mean, there aren’t many people in the street, so I guess that would make it harder to get use cases?

Yes, to answer that question: There is a reluctance. Generally speaking across the U.S., officers have been encouraged not to be proactive for fear of contamination and bringing that back to their station house or department, and therefore limiting their ability to respond to emergency calls for service. Many agencies across the U.S. are only responding to emergency calls and not routine calls, which limits the chances of being proactive and encountering individuals in self-initiated activities, such as someone suffering from a mental health crisis or someone under the influence. Now they are encouraged to stay away from that individual, so it does limit the use. We’ve actually seen that even in LAPD's trial, but this is, of course, a limited time period. This is not going to go on forever.

Okay. Thank you. That’s it from me.

Thank you, Jon.

Thank you. And our next question comes from Brian Kinstlinger with Alliance Global Partners. Your line is now open.

Hi, this is Jacob in for Brian. Can you talk about how often officers in L.A. are using their Wrap devices compared to Taser devices?

Well, if you look at the report from 2018, I think with the 90,000 officers they reported like 313 uses. Again, ours is just in the trial period, so there’s 200 devices being shared between 1,100 officers. We're not far enough along yet to draw any strategic conclusions, but Mike mentioned it, and I mentioned it, we have seen them use it more than we anticipated during the trial period as we first started with them before the coronavirus.

Okay, great. And then could you provide any additional color on how COVID-19 has impacted the sales cycle?

Yes. Clearly, there is nobody traveling, and there are not group events due to the restricted stay-at-home orders. Right now, all of those activities have been paused, which means we do expect short-term reductions in expenses related to travel and demonstrations we were conducting. As departments adjust to what is the new normal, we’re seeing more activity starting at the end of April. Now that all the states are beginning to open up, we’re beginning to see more calls to set up trainings and other activities for the next couple of months. In terms of purchasing activity, I don’t think we have enough detail yet, but this has certainly been a pause for about 30 days, and we are starting to see that activity pick up. As I mentioned earlier, we are also seeing that activity pick up in some international markets, which has been quite the acceleration compared to prior efforts.

We’ve definitely seen larger departments experience a slowdown, but when you look at our leads and requests for quotes, smaller departments are generating significantly more leads than we have ever received in the past. Our assumption is that while large departments, particularly in big cities, are swamped and busy managing their own challenges due to social distancing, the smaller departments—which have, for the most part, not been heavily impacted by the coronavirus in their neighborhoods—are simultaneously under stay-at-home orders issued statewide. These departments have a lot of free time and are extremely interested in adding our product at this point.

Okay. And one more from me. You talked a bit about how L.A. has extended the trial. Can you discuss how police training using the device has been impacted in places other than L.A.?

Could you ask that question again?

Sorry. Can you talk about how police training using the device has been impacted in places other than L.A.?

I wouldn’t say we’ve seen a net decrease. As Tom had mentioned, or come to a complete halt. As Tom had indicated, in West Palm Beach, Florida just a few days ago it was also used. It really just depends upon the circumstances whether it has been utilized during this coronavirus or not. In many cases, particularly in large cities where officers are being discouraged from making routine stops or handling routine calls for service, that’s what limits the use of any less lethal option—not just our product. I would say it’s the same for other less lethal devices they carry on their belt or store in their car, but it doesn't mean that our users have completely stopped using the product.

On our training side, we are not sending our trainers out to as many departments as before because there’s been guidance discouraging a lot of interaction with outside individuals from their departments. We are seeing training continue within departments, albeit with more social distancing measures, and it’s much like the rest of the world—they’ve changed their practices, but they haven't completely halted operations.

Okay, great. Thanks. That's all from me.

Thank you. And I'm showing no further questions in the queue at this time. I would like to turn the call back to David for any closing remarks.

Well, thank you. Thank you to everyone for joining us today, and I’d like to also specially thank our employees and partners who are dedicated to our vision of helping law enforcement interact with the public. The last few months have required us to juggle additional responsibilities at home and in the community, and I appreciate the professionalism I see from our team each and every day. I know many of you on the call today may be new shareholders, and I would like to thank everyone for your continued support of Wrap Technologies. I would also like to remind shareholders that our virtual shareholder meeting will be on June 5, 2020, and details will be posted on our website. Thank you all again for joining us today, and we look forward to speaking again soon. Thank you, operator.

Thank you for joining us today for Wrap Technologies' first quarter 2020 conference call. You may now disconnect.