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spk00: Good afternoon and welcome to the WRAP Technologies fourth quarter 2021 earnings conference call. My name is Paul Manley and I'm Vice President of Investor Relations. Today we'll provide a report on our progress and performance during the fourth quarter and full year and an update on our strategy and the executive search process. Joining me on the call today are Wayne Walker, Chairman of our Board of Directors, and Jim Barnes, our Chief Financial Officer. I'd like to take a moment now to remind you that certain statements made during the call today constitute forward-looking statements made to pursuant within the meaning of the safe harbor provisions of the Private Securities and 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 in our filings with the SEC. The forward-looking statements made today are as of the date of this call, and we do not undertake any obligation to update the forward-looking statements. With that, I'll turn the call over to you, Wayne.
spk02: Thank you, Paul, and good afternoon, everyone. I want to start by thanking our entire team at RAP for helping the organization take a significant step forward during fiscal year 2021. We invested heavily in research and development to increase innovation, expand our product portfolio, and lay a foundation for long-term value creation. Perhaps the biggest output of the year was the fourth quarter introduction of our next-generation BOLARAB 150, which is the first upgrade in our original BOLARAB 100 device. The launch of the BOLOGRAP 150 was an important achievement for us and a sign that RAP is executing and maturing as an enterprise. Thanks to intense innovation, we enhanced many features based on feedback from law enforcement officers using our products in the field. The updates we applied to the BOLOGRAP 150 include, one, switching to electronic development and deployment from mechanical. Two, reducing discharge steps down to two steps from three. Three, incorporating an LED indicator to indicate when a device is ready. Four, increasing battery life and power retention. Five, improving durability and water resistance, and sixth, making it smaller and lighter with an enhanced grip. We are excited about the level of engagement and interest in the BOLRA 150, and we believe many customers held off on orders in recent months awaiting this next generation. We will talk more about customer demand in a few moments. As many of you know, Our other main product is RAP Reality. We continue to raise awareness for the product during Q4, including across domestic and international markets. The RAP Reality training platform is very comprehensive, and we feel it can help us make virtual reality a new training tool for law enforcement. To demonstrate the benefits to prospective customers, we have been presenting an interactive simulation-based learning model. This model is especially intuitive for a new generation of recruits entering police academies now. But neither is too complicated nor cumbersome for seasoned officers. We look forward to continuing to introduce RAP Reality to more customers in Q1 as part of our productive diversification push. Let me now turn to a high level of our results. We grew fourth quarter sales by 74 percent. We achieved this growth despite operating in a supply-constrained environment and with many customers awaiting our next-generation BOLARAB 150. During Q4, we also saw our trained law enforcement agencies increase to 940, representing growth of 109% from the end of 2020. Our certified officer instructors also increased to 3,250, representing 139% growth from the end of 2020. We believe these are positive indicators of future growth prospects. Turning to the full year, we grew sales to $7.7 million, representing 96% growth. While we are not taking any victory laps, These are solid results that the company can build on in the coming year and beyond. This now brings us to what may be the key points of today's call, RAP's go-forward strategy and executive search process. When the company announced its leadership transition in late January, the Board emphasized RAP has significant opportunities to grow and scale as the addressable market for public safety technologies and services continues expanding. This statement holds just as true today as the addressable market for public safety technologies and services crosses $60 billion. Over the past several weeks, the Board has focused on two parallel tracks to help establish a stable, lasting foundation for innovation, growth, and shareholder value creation. First and foremost, we have been considering the best strategy for seizing broader market share. We know the evolving social, political, and regulatory climates are creating new and expanding needs for our customers. The Board believes The best path forward is for RAP to build on its existing foundation by diversifying the company's mix of products and services beyond just the BOLA RAP and RAP reality. We want the pursuit of recurring revenue stream opportunities to be a priority for the next management team. But at the same time, we recognize RAP needs to be adept at pivoting from innovating to commercializing to distributing products and services. We know that diversification cannot come at the expense of executing on the rollout of the BOLA RAB 150. This is why we are in the process of searching for leaders who can implement a multifaceted growth strategy. The second area of focus of the board has been working with a top search firm to identify the right chief executive officer to turn the aforementioned vision into an actionable, measurable operating plan. We are searching for a leader that has the experience and skills aligned to our needs and opportunities. We are at an advanced stage And we look forward to announcing the appointment of our next CEO in due course. With that, I will now turn the call over to Jim Barnes to discuss our financial results in greater detail.
spk01: Thanks, Wayne. Good afternoon, everyone. I'll move straight into discussing the financial highlights for 2021 and the fourth quarter. First, we generated record quarterly revenue of 2.4 million in the fourth quarter of 2021. That represented 73% growth over Q4 2020. Revenues for the full year were 7.7 million, a 96% increase over revenues of 3.9 million in 2020. International revenues represented 60% of 2021 compared to 64% for 2020. Domestic revenues grew by 120% over the prior year with positive momentum driven in part by BOLORAP success stories documented on body cam footage. While market penetration is still small with significant room for growth in a large addressable market, we believe BOLORAP and our related virtual reality training product is making and can continue to make a difference in modern, safer policing. International revenues grew by 83% in 2021, but we believe growth was negatively impacted by pandemic-related travel restrictions, severely restricting our ability to demo and train distributors and customers in 2020 and 2021. International pandemic-related restrictions are lessening in 2022, but it may take time to schedule and build momentum. We also cannot predict at this time the impact recent geopolitical conflicts and sanctions will have on our international operations. We have consistently flagged that our revenue growth could be lumpy as we balance pandemic travel restrictions and limitations and now face uncertainties related to international conflicts. Our international business tends to be large national law enforcement agencies as the end user, and they are especially sensitive to geopolitical events. We are focused on managing our business for continued growth, especially with the late 2021 launch of the new BOLORAP 150. Our gross margin for the fourth quarter was 30%, compared to 33% for Q4 of 2020. The reduced margin was primarily the result of product mix from international orders announced in October and January, as our cartridges generally have a lower margin than devices. In the second quarter, we incurred a planned product line exit expense of $747,000, preparing for the BOLORAP 150 launch. This affected 2021 margins, which were 35% without that one-time charge. This is comparable to 34% reported for the prior year. We expect the Model 150 will have higher margins that will be realized during 2022 after a start-up period and after phase-out of the Model 100 and as our volumes grows. We invested significant costs and efforts in 2021 to automate BOLARAP 150 production, and we are pleased with the progress led by our Chief Operating Officer, Glenn Hickman. But margins are difficult to predict due to the product transition and the effects of sales channel and product mix. We also face global supply chain risks and challenges that can affect margins and impact operations. While we assemble product in Tempe, we rely on global suppliers. While most of our components are small and can be air freighted without undue cost impact, we do face availability and price risk since the Model 150 includes electronic components, laser, and battery materials. We are at risk of and have faced shortages and unexpected delays of key components. We have also seen price increases of certain components. Price changes and shortages can increase costs and delay production. We also, from time to time, may need to design around certain components that can further delay production and require development time and costs. All these factors can impact future results. R&D expense was 6.2 million for 2021 compared to 2.8 million for the prior year. R&D expense was $1.9 million for Q4 2021. We invested significant costs to develop and launch the BOLORAP 150 in late 2021. We continue to improve and upgrade our products to respond to the market. We expect R&D costs to be less in 2022 due to the completion of BOLORAP 150 development and management cost containment efforts. However, future R&D costs may fluctuate due to the timing of important initiatives or new opportunities. SG&A expense was $20.3 million in 2021 and included $4.6 million of non-cash share-based compensation costs. Our main SG&A investments are focused on sales, demonstrations, training, and product awareness efforts targeting our worldwide customer base. We expect these costs to remain stable overall, but our focus in 2022 will be more on direct sales-related activities with less requirement for product promotional and awareness costs. During 2021, we invested in growing our sales and support organization to support worldwide sales growth. During 2021, we incurred significant public company and class action defense costs aggregating $3.3 million. Our motion to dismiss the meritless class action case filed in 2020 was granted in November 2021 and represented a clear rejection of the baseless allegations made regarding management, our products, and our performance. We expect public company-related costs and overall SG&A costs to decrease in 2022 as part of our cost containment efforts. Our balance sheet remains strong with approximately $35 million of cash and short-term investments to support our growth needs. I would like to thank our entire team that contributed to our 2021 growth. With that, I will turn the call back over to Wayne.
spk02: The past few months have obviously been a period of change and transition at RAP, but amidst the uncertainty, our team has maintained its focus and produced strong results. We also now have clear priorities for the early part of fiscal year 2022. One, identifying a highly qualified chief executive officer. Two, adding new talent to our executive leadership team. Three, empowering new management to develop and put out a clear strategic plan. Four, shifting our emphasis from intense R&D to sell that distribution of the BOLIBRAP 150. And five, expanding training programs and relationships across domestic and international markets. We look forward to providing updates on these priorities in the coming weeks and months. With respect to our outlook, we expect to achieve top-line growth in fiscal 2022. We feel like there is a strong pent-up demand for the BOLA RAP 150. However, geopolitical headwinds and supply chain issues could make quarterly sales choppier than we otherwise would like. Bigger picture and in closing, we are incredibly optimistic about RAP's long-term potential now that the board has assessed the company's strategy and started a search for a new CEO. We firmly believe that the right growth focus plan and the right management team can help RAP be an increasingly important player in our $60 billion addressable market. The steps we're now taking will hopefully be the catalyst for strong value creation quarters and years down the road. Thank you for your time today. and for your ongoing interest in RAP.
spk00: Thank you, Wayne, and thank you, everyone, for joining our call today. Due to our CEO transition, we will not be doing a formal Q&A session this quarter. If you do have any follow-up questions, please do not hesitate to email me at pmanley at rap.com, and I will respond in a timely manner. Have a great evening.
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