WRAP TECHNOLOGIES, INC. Q3 FY2022 earnings call

TJ Kennedy:

• Discussed the implementation of the multiyear strategic roadmap, improvement in key profitability metrics, 36% domestic revenue increase, international sales including a $1.5 million EMEA deal and a South America sale, extension of the LAPD BolaWrap Pilot Program, launch of Wrap Reality ADAPT, and participation in the IACP conference.

Chris DeAlmeida:

• Went over financial results including net revenues, gross profit, SG&A and R&D expense reductions, operating expenses decrease, net loss improvement, and balance sheet strength.

Kevin Mullins:

• Talked about the revamped go-to-market strategy including the creation of a new customer success team, dedicated inside sales team with regionalized approach, review of distributors, and enhancements to training programs like Wrap Reality ADAPT.

In the third quarter, net revenues were $1.7 million, a 6% decrease year-over-year due to timing of international sales. Gross profit improved to $900,000 (54% of net revenue), a 28% year-over-year increase. SG&A expense decreased 23% to $3.6 million, R&D expense decreased 40% to $1.2 million. Operating expenses decreased 28% to $4.8 million. Net loss improved 35% to $3.9 million. Domestic revenue had a 36% increase year-over-year. Cassette sales grew to 25% of total revenue for the first 9 months of 2022 compared to 15% in the prior year period.

• Reiterate sales growth year-over-year in 2022.
• Anticipate sequential increased sales in Q4 and 2023.
• Target quarterly cash flow break-even by Q4 2023 and profitability by Q4 2024.
• Aim for 50% gross margin again in Q4.

Q: Hey, thanks for taking the questions, TJ, Chris, Kevin and Kelsey. Congrats on the record order as well.

A: Thank you.

Q: 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?

A: I think, it’s a little bit of both. 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.

Q: I was just wondering, when you expect and maybe get more definitive results, when that trial ends, or just anything more inclusively regarding the LAPD trial?

A: 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.

Q: 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?

A: 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.

Q: Just regarding your liquidity position, do you think you have sufficient liquidity to bridge that gap to generating cash based on your outlook?

A: We do.

Q: 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?

A: Yeah, that’s correct, 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.

Q: 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?

A: 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.

Q: 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?

A: 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.

Q: When may professional security agencies be allowed to work with this technology?

A: 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.

Q: What factors is Wrap looking at to drive revenue growth?

A: 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.