Wrap Technologies, Inc. (NASDAQ:WRAP) Q3 2022 Earnings Conference Call November 9, 2022 5:00 PM ET
Company Participants
TJ Kennedy – Chief Executive Officer
Chris DeAlmeida – Chief Financial Officer
Kevin Mullins – President
Conference Call Participants
Greg Gibas – Northland Capital Markets
Allen Klee – Maxim Group LLC
Operator
Good afternoon. Welcome to the Wrap Technologies Third Quarter 2022 Earnings Conference Call. Joining me today is our CEO, TJ Kennedy; our CFO, Chris DeAlmeida; and our President, Kevin Mullins.
Following the prepared remarks, we will open the call for your questions. I’d like to remind everyone that this call will be recorded and made available for replay via a link in the Investor Relations section of the company’s website at wrap.com/investors.
As a reminder to listeners certain statements made during the call today constitute forward-looking statements and made pursuant to the safe harbor provisions of the Private Securities Litigation Act of 1995 as amended. Such forward-looking statements are subject to both known and unknown risks and uncertainties that could cause actual results to differ materially from such statements. These risks and uncertainties are described in our earnings press release and more fully in our filings with the SEC. The forward-looking statements today are made of the date of this call, and we do not undertake any obligation to update the forward-looking statements.
Now, I’d like to turn the call over to our CEO, TJ Kennedy.
TJ Kennedy
Good afternoon, everyone, and thank you for joining us today. After the market closed, we issued a press release announcing our results for the third quarter ended September 30, 2022. A copy of the press release is available in the Investor Relations section of our website. I encourage all listeners to view our release for additional information regarding the quarter.
As an overview of today’s discussion, I’ll begin by providing a high level summary of the third quarter activities and results. Then, I will hand it over to our CFO, Chris DeAlmeida, to discuss the financial results. Our President, Kevin Mullins, will then come on to provide an update on the effectiveness of our updated go-to-market strategy within our strategic roadmap. I’ll then close out our discussion before we move into Q&A.
With that, let’s begin. As I mentioned during our last update, in my first 90 days as CEO, I along with the other members of the board and the senior leadership team worked to develop a multiyear strategic roadmap, targeting growth, profitability, and immense value creation as top priorities. After another 90 days, we’ve now begun to implement programs, hire new leaders, and develop systems designed to execute on our plans. Not quite 6 months into it is not a long period of time. But in that window, I believe we set significant goals and put in place a process that will ultimately enable us to achieve them.
During the third quarter, we released and started to execute against that new strategic roadmap, making meaningful strides towards re-accelerating growth, achieving sustainable profitability and ultimately enhancing value for shareholders. 2022 has thus far been a successful transition year for the company. And our third quarter results demonstrate that we are on track for our plan. This quarter, we improve substantially all key profitability metrics, highlighted by a record gross margin performance and nearly $2 million reduction in operating expenses. The initial momentum we’ve generated as a clear indication that our strategy is working.
Driving new sales growth remains a top priority as well. During the period, we generated a 36% increase in domestic revenue as compared to the prior year period, aided by continued deployment in orders across multiple police agencies and departments. Internationally, we just announced the largest BolaWrap 150 deal in our history and initial $1.5 million agreement with a very large police agency in the EMEA region, as well as a new sale of BolaWrap 150 to a large police agency in South America. These new sales support our thesis that international opportunities despite the longer sales cycles of the potential to generate outsized returns that justify our investment in these regions.
In August, we announced the extension of the LAPD BolaWrap Pilot Program, entering large-scale field deployment with 500 BolaWrap 150 devices in two key divisions of the City of Los Angeles. Kevin will have more updates on that initiative shortly. Additionally, this past month, we launched Wrap Reality ADAPT, a capability that enables more customization and options to our Wrap Reality virtual training software platform. This capability has been designed to deliver a customizable instructional experience with over 6,000 possible scenario variations to better address in-the-field situations for law enforcement officers and first responders.
Providing law enforcement to the highest qualitative [ph] cost effective and in the moment adaptable training to better protect them and their community is Wrap Reality’s mission. This enhancement to our world class platform will provide an even higher level of engagement for agency customers and a substantial return on their investment, financially and operationally. We are proud to be a leader in the market of virtual reality training for law enforcement, corrections and societal reentry.
Most recently, at the end of October, we had over a dozen team members in attendance at the Annual International Association of Chiefs of Police Conference or IACP. At this conference, we exhibited the BolaWrap 150 and Wrap Reality. Our booth is one of the most trafficked at the event, giving us hundreds of new leads, which we are now pursuing. Law enforcement officers are seeing how our holistic offering of public safety tools can truly help agencies achieve safer outcomes, and it is our aim to further develop cross-selling opportunities going forward. Interest in BolaWrap and Wrap Reality was even higher than expected.
Before going any further, I’d now like to turn over the call to Chris to go over our financials.
Chris DeAlmeida
Thank you, TJ, and good afternoon, everyone. Moving to our financial results for the third quarter. In Q3, we generated net revenues of $1.7 million compared to $1.8 million in the prior year period, representing a 6% decrease year-over-year, driven by the timing of certain international sales. However, we saw sequential sales growth from Q2 in both domestic and international markets, and Q3 2022 was a company record for quarterly domestic sales.
Our third quarter 2022 revenue performance also includes $240,000 promotional discounts and incentives, primarily related to converting customers to the BolaWrap 150 from our legacy BolaWrap 150. During Q3, we started phasing out the promotional pricing, which is customary in our industry during a product transition. So those impacts the revenue should decline going forward.
Gross revenues before such discounts and incentives were $1.9 million. Gross profit improved to record $900,000 or 54% of net revenue, a 28% year-over-year increase from $700,000 or 39% of net revenue in the prior year period. Our gross margin performance was a company record and reflects this year’s cost containment efforts as well as our shift to the higher margin product offering mix. To reiterate, we started phasing out promotional pricing in Q3 2022, and we expect our margins to benefit from this action in future periods.
As a reminder, our goal has been to achieve a 50% blended quarterly gross margin and a quarter before the end of the year. Additionally, we are on track to be above 50% gross margin again next quarter as well. Continued focus on keeping expenses low, has allowed our Q3 SG&A expense to decrease $1.1 million, or 23% to $3.6 million from $4.7 million in the prior year period. Share-based compensation decreased to $700,000 from $1.1 million in the prior year period. We also expect SG&A expense for the balance of 2022 to remain below the prior year.
R&D expenses for the third quarter decreased $800,000 or 40% to $1.2 million from $2.1 million in the prior year period. The decline is largely attributable to the cost containment effort we implemented during the second quarter 2022 as well as higher deployments – development costs associated with the BolaWrap 150 in the prior year period.
Operating expenses decreased $1.9 million or 28%, to $4.8 million from $6.7 million in the prior year period. The decrease in operating expense was a result of the decreases in both SG&A and R&D expenses previously noted, and our strategic roadmap focus on improved operating model. Our goal is to keep total operating expenses below $5 million for the foreseeable future.
Net loss for the third quarter improved 35% to a loss of $3.9 million or $0.09 loss per share, from a loss of $6 million or $0.15 loss per share in the prior period. The improvement in net loss was a result of increased sales focus, and cost containment effort implemented since the second quarter of 2022.
Our balance sheet remains strong with approximately $24 million of cash and short-term investments to support the growth plan we have in place. During the third quarter, we leveraged $4.8 million of net cash. We believe we have ample working capital support our operations for at least the next 12 months.
Moving to a review of our key performance indicators. In Q3, our total trained law enforcement agencies grew to more than 1,300, or a 39% increase from the prior year period. Total certified officer instructors also grew to more than nearly 4,400, or a 36% increase from the prior year period. During the first 9 months of 2022 with a 72% increase in device sales as compared to the first 9 months of last year. Additionally, cassette sales grew to 25% of total revenue for the first 9 months of 2022 as compared to 15% in the prior year period.
Now, let’s spend a minute to discussing our current outlook. Based on our financial performance to date, as well as information available of today’s call, we will reiterate our expectation for sales growth year-over-year and 2022. As supply chains disruptions ease and the transition from the BolaWrap 100 to the BolaWrap 150 accelerates. We also anticipate sequential increased sales in the fourth quarter and into 2023. New sales are expected to come from a combination of domestic and international expansion with existing customers, as well as contract signings for new products in both regions.
Additionally, based on progress achieved as part of the company’s updated strategic roadmap, expected sales growth, and continued cost savings, we are also reiterating our expectation that cash burn should decrease going forward. The company is currently targeting a quarterly cash flow break-even point by the fourth quarter of 2023, with the potential for profitability by the fourth quarter 2024. More importantly, we believe this level of increased BolaWrap uses was dramatically help save lives and help save careers.
In summary, the third quarter was defined by a substantial improvement across our key profitability metrics, including record gross margin, and meaningful cost reductions across R&D, and SG&A, and other areas. Our top-line results reflect ongoing transition from the BolaWrap 100 to the BolaWrap 150, as well as the timing of some international sales. However, we record our best quarter of the year and a meaningful quarter-to-quarter improvement, which should continue to ramp in Q4 and into 2023. While we invest for new sales growth and greater brand awareness, we remain focused on diligent cost management, which has us comfortably on pace to hit our 50% gross profit margin again in the fourth quarter.
With that, I’ll turn the call over to Kevin to discuss our early results from our new go-to-market strategy.
Kevin Mullins
Thanks, Chris. As TJ noted at the beginning of the call, we have already begun to see encouraging results from a revamped sales approach that we put in place last quarter. Building our go-to-market strategy is a fundamental component of our strategic roadmap. And we have given focus to maximizing processes for our future sales success. The goal for the BolaWrap 150 is to achieve repeatable and predictable sales across domestic and international markets. As a reminder, in the second quarter, we instituted several major changes to the way we approach our sales process. I’ll briefly illuminate those changes once more, as well as provide an update on our progress.
First, we look inwardly at how we can drive more success with existing customers. In response, we created a new customer success team in mid-Q3, focused on retaining and expanding existing customer relationships. During our initial assessment, we determined only a marginal percentage of existing partner agencies, who were at full operational deployment. Expansion sales in the public safety vertical, especially within existing law enforcement agencies are more efficient, predictable, and occur faster than landing other new customers.
We have now a dedicated team and a clear path to growing our existing customer base, while maintaining focus on expansion. During the third quarter, we saw success in this effort. As a result of the hard work and dedication of the customer success team, we were able to help drive additional sales to direct discussions with over 220 of our customers.
Second, we look outwardly at our new customer sales process, and implemented a dedicated inside sales team function for new leads with a regionalized approach. By shifting to a regionalized approach, we have created a more regimented system to ensure leads are logged and tracked properly. This process has already resulted in improved lead flow and customer conversion. We’ve also improved how we implement quotas, and have developed a commission incentive structure that is better aligned with our overall results.
Additionally, we have initiated weekly pipeline management and sales commit calls. This level of structure has created a new transparency and accountability throughout our sales operation. During the quarter, this led to a monumental effort to focus on smaller agencies across the U.S. During the quarter, we increased our outbound sales calls to over 1,000 calls in just 2 months. This resulted in several new leads coming in from smaller agencies in the quarter, as well as a substantial increase in our future pipeline.
Most importantly, in Q3, we implemented a review of domestic and international distributors to ensure they were aligned with our new strategic roadmap. This resulted in key changes to our team to manage these distributors to ensure our mutual success. Existing distributors are now performing even better, and some additional distributors have been added and brought on board, Additional changes to our international distributors, is also now underway. The improvements in domestic sales are attributable to these changes made to our inside sales team, as well as our distributors.
Lastly, we analyze our training programs as part of our strategic review, and consider the immense value each provides to our agencies and partners. Based on our review, we decided to begin charging for training services similar to other companies in our space. This decision is consistent with industry standards, and has been further validated in discussion with our agency partners, who did not raise concerns about this charge.
We have also implemented changes to how we sell Wrap Reality resulting in new wins and solidified our go-to-market virtual reality offering as a software-as-a-service model. So far, we have seen acceptance of our new training methodology, and the feedback has an interest in Wrap Reality has increased substantially during the quarter.
To that point, in October, we announced the launch of Wrap Reality ADAPT, a new major upgrade to our virtual training software platform. ADAPT allows wearable real world scenarios to be customized and conducted with the trainer acting as the voice of the subject through VR headset. Users will be able to experience wearable real world scenarios, where the situation is customized and the subject voice is transmitted to create an immersive training experience. This formatting provides the highest level of engagement for trainees and allows for almost unlimited scripting and up-to-the-moment training possibilities, eliminating costly setup and teardown of older, traditional scenarios created with live actors or with built-in hardware on two-dimensional sets. This enhancement to our platform will provide a higher level of engagement for agency customers and a substantial return on their investment, financially and operationally.
I’ll now provide a brief update on sales during the quarter. Both domestic and international sales grew over Q2 this year. Moving to our ongoing Pilot Program with the LAPD at trial remains underway, this quarter we extended the pilot to large scale field deployment. We now have 500 BolaWrap devices in 2 divisions in the City of Los Angeles. The early feedback is encouraging, and we will continue to provide updates as the program moves forward over the next year.
In discussing this program, it also makes sense to review our product strategy and how that also relates to our typical sales cycle. As mentioned previously, we have made the decision to deliver the BolaWrap 150 to the marketplace for the next 5 to 10 years to give certainty to our customers and to our distributors. We will also be innovating new products through our R&D efforts to these will be additive to the BolaWrap 150 and not replace it to avoid getting into any revenue or longevity issues that occurred with the BolaWrap 100 to the 150 transition.
The sales cycle for both of our products also takes time, as most law enforcement agencies must train on how to use the device, write policy around it, and field test and use it before agency full deployment. Internationally, this process can take much longer, because we are typically working with larger customers, where we are simply working with a new product in a new transition with its own rules and regulations to follow. As evidenced by the recent EMEA and South America orders, we believe our efforts in this area are justified by the large and untapped sales opportunities represented in these geographies.
In summary, we believe our improved go-to-market changes will help drive more consistent sales moving forward over the long-term. That tremendous amount of interest we received at our tennis [ph] at last month’s IACP Conference was an eye opening experience for many members of the team. And we have a healthy pipeline of opportunities to show more. While we are building success in our domestic repeatable sales this year for BolaWrap 150, we are also implementing changes to our international approach to sale of BolaWrap 150 that will generate momentum to carry current sales into Q4 and into 2023.
I’ll now turn it back over to TJ
TJ Kennedy
Thanks, Kevin. In closing, I’m proud of the progress we have made thus far to execute against our new strategic roadmap. We remain focused on expanding sales in the United States, ramping internationally and expanding within existing agencies. I’m confident that we have the right plan and are building the right team to continue to grow revenue, drive stronger margins and support long run profitability. Looking ahead, we are in a strong position to meet our year-end goals to complete this transition and expect another meaningful step function improvement and sequential revenue growth, as we fully transition to our next generation product lines.
We also remain committed to delivering on our cash flow and profitability outlook for 2023 and 2024, respectively. Law enforcement agencies across the globe are continuing to look for alternatives to pain compliance. BolaWrap is now considered by many departments as not elevating to the level of a higher level of use of force and usage is being rewarded as far as avoidance or prevention. As those departments deal with an increasing number of mental health calls, and also deal with expensive settlements, it is clear that the BolaWrap 150 is gaining more traction, and that our sales show that. There are also increasing opportunities for police departments in the U.S. to secure funding from government grants to acquire our product.
We are now seeing agencies using multiple federal and state grants to purchase BolaWrap as well as Wrap Reality. We are also seeing agencies dedicated budget to these important investments and are convinced that it will reduce use of force payouts on a yearly basis. Wrap Reality with the new edition of Wrap Reality ADAPT is a powerful tool that we see as a successful step forward toward the future of law enforcement training.
We saw an increased interest in Wrap Reality at IACP last month, and its enhanced capabilities, we believe it can become a dynamic tool in law enforcement and corrections departments training regimens. Our efforts are all part of a continuous push to improve the way law enforcement and corrections departments offer training to their staff. This also highlights Wrap’s own mission, to change the way law enforcement save lives. We want to empower public safety with innovative training and tools moving forward. We’re achieving this by working not just with the agencies, but also with the community and leadership as well.
Kevin and I are almost at the 6-month mark since joining. And I can tell you, I continue to be more optimistic and excited about the enormous market opportunity for Wrap than I have been to date. With the team now executing on our strategic roadmap, I am determined to lead us through this transformative period and establish a foundation for Wrap’s long-term success.
I will now turn over the call to Kelsey to facilitate the Q&A.
Question-and-Answer Session
Operator
Thank you, TJ. [Operator Instructions] Our first question will come from Greg Gibas with Northland Capital Markets. Please proceed.
Greg Gibas
Hey, thanks for taking the questions, TJ, Chris, Kevin and Kelsey. Congrats on the record order as well.
TJ Kennedy
Thank you.
Greg Gibas
I was just wondering, it sounds like pipeline is building. Are you seeing changing interest levels from departments either domestically or internationally? Or would you kind of attribute that more to your new go-to-market strategy?
TJ Kennedy
I think, it’s a little bit of both. Greg, it’s TJ. I think, first off, we at IACP definitely had a shift and change in the way chiefs and decision makers were coming to the Wrap booth and talking to us. As an example, in the past that seemed to be more about – we haven’t seen it, show it to us, this particular IACP. It was very much about, we’ve seen it, we’d like to have it, someone on my staff actually said, we should come and check it out and learn more, and make sure that we get it into our department. So, a lot more awareness, a lot of people have seen our videos have talked to other agencies, who already use BolaWrap or Wrap Reality and that referral business is certainly growing.
I do think our new approaches are definitely helping us close deals faster than we had before in some cases, and certainly having more follow-up and even outbound approaches to our sales approach, but definitely increasing interest and increasing desire to leverage BolaWrap and Wrap Reality.
Greg Gibas
Great. Good to hear. If I could follow-up on the LAPD, nice to see that trial extended, I think you said 500 people Wrap devices with them. I was just kind of wondering, when you expect and maybe get more definitive results, when that trial ends, or just anything more inclusively.
TJ Kennedy
Yeah, the trial started in late August, and it was expected to last for 12 months in this phase part of that so that they can gather data over time. So, we’re a couple of months into that now, we are getting some positive feedback. I’ve been out there to listen to the officers in the field. And they expect to continue with throughout the next year. So, I think, we’ll have a lot more over time. They’re looking at a little more longitudinally, and we’ll share that as we get more data.
Greg Gibas
Okay. Sounds good. Regarding the new – so the record order of $1.5 million and then you also mentioned a pretty sizable order in South America. I’m wondering maybe the relative size, I guess, a bit that order, and then kind of would you expect both of those to be recognized in the Q4 timeframe?
TJ Kennedy
Yeah, so the South America order came in actually late in Q3, but we were already in a blackout period, which is why we didn’t announce that sooner, and that’s a 6-figure order. And that’s included in Q3 results to $1.5 million that was a Q4 order was in October. And so that will be part of Q4 results.
Greg Gibas
Great. I guess just last one for me. Just regarding your liquidity position, do you think you have sufficient liquidity to bridge that gap to generating cash based on your outlook?
TJ Kennedy
We do.
Chris DeAlmeida
Yeah, based on our outlook right now, we do feel that given where we project sales growth to be in the current cash we have on hand that that would be sufficient for us going forward.
Greg Gibas
Okay, great. I’ll pass it on.
Operator
Thank you, Greg. Our next question comes from Allen Klee with Maxim Group. Please go ahead.
Allen Klee
Okay, thank you. Just following up on the question on the 2 big orders, is it reasonable to assume that both of them you recognize all the revenue in the quarter that you’ve received in one quarter?
Chris DeAlmeida
Yeah, that’s correct, Allen. So the South America order like TJ mentioned, actually happened in the third quarter. So that was fully recognized in the third quarter. The larger EMEA order happened, we received it, and it occurred in October. So that will be part of Q4 revenue and through recognized in the fourth quarter.
Allen Klee
Okay, great. I think, I heard you say your goal is to keep the operating expenses below $5 million. Is that still a goal once we get into next year, where you kind of normally at the beginning of the year, expenses kind of go up and sales commission like just sales related costs tend to be a little more variable. So just trying to see how long of a goal is, is that? Thank you.
Chris DeAlmeida
Yeah, absolutely. That is our stated goal. But we will keep OpEx costs below $5 million kind of in the foreseeable future. We – that will grow over time, as sales grow, but we’re going to be very conscious about how we do that. So at this point, we want to keep costs low. We do believe going into next year, we will be able to achieve that. I mean, there’s some seasonality, as we mentioned, just in cost structure overall, but at least on an average basis, we think will be below the 5 – at or below the $5 million mark in 2023.
And then, look, I mean, we’ll see ourselves take off. I mean, clearly, we’re being very aggressive in our sales approach. We want to see sales grow and build. And so that could lead to some additional costs. But like I said, we’ll keep a very tight lid on that, and very conscious about how we expand our costs going forward.
Allen Klee
Great. And my last question is, are you still dealing with travel restrictions for internationals to try to accelerate international sales? Or have you found that that’s gotten better or expect that to get better?
TJ Kennedy
We have found that it has improved. There are some regions of the world where there’s still more restrictions, but they are much better here in Q4 of this year versus even 4 to 6 months ago. So we’ve seen a major improvement. And we expect that to stay fairly open based upon the knowledge we have right now.
Allen Klee
Thank you very much.
Operator
Thank you, Allen. We now have two questions that we’ve received from investors. I will read those now. Question number one, when may professional security agencies be allowed to work with this technology?
TJ Kennedy
Currently, right now, in the U.S., law enforcement agencies are able to leverage BolaWrap and those that have different departments that work for those law enforcement agencies, but not private or professional security today. We’re working on ways to improve that in the future and have engaged a number of avenues long-term to try to improve that and allow that to open up much broader. But as of right now, it’s still focused on law enforcement in the U.S.
Operator
And question number two, what factors is Wrap looking at to drive revenue growth?
TJ Kennedy
On the main factors for us is really building that repeatable domestic and international sales. And we’re continuing to do that through our improvements in the strategic roadmap. Another element for us was building a customer success organization that is focused on our existing agencies today, and really making sure we’re supporting them as they grow to more full deployment across the agencies and help grow with them every step of that way. And so we believe that that support and actually implementing a customer success organization will help us grow more intrinsically from our existing base of customers, while we’re continuing to add built new domestic and international customers.
Operator
Thank you, TJ. At this time, that concludes our question-and-answer session. Thank you for joining us today for our third quarter 2022 earnings conference call. You may now disconnect.
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