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spk03: Good afternoon and welcome to the WRAP Technologies first quarter 2022 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 first quarter and an update on our key priorities and strategy. On today's call, I'm excited to introduce our newly appointed CEO, TJ Kennedy, and our new president, Kevin Mullins. We are also joined by 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. These forward-looking statements made today are as the date of this call, and we do not undertake any obligation to update the forward-looking statements. I will now turn the call over to you, TJ.
spk02: Thank you, Paul, and good afternoon, everyone. To start off, I'm incredibly excited to be here on my first earnings call as RAP CEO. I want to give some perspective as to why I decided to take the job. As you may know, I joined the board of directors in 2021. Since joining the board, I've been incredibly impressed by the company's mission driven culture and the mission critical business we are building. There is a unique opportunity to fill a white space in our addressable market that is growing significantly as demand for safer, more efficient restraint and de-escalation solutions increases throughout the world. As a former law enforcement officer who worked in the field, I can tell you that our key solutions, the BOLA RAP 150 and RAP Reality, have the potential to make significant positive changes in the landscape for modern policing, military, and in security. What's more is that we have built a team of incredibly talented individuals that are driven by our mission and have a diverse set of backgrounds that span engineering, product development, technology, sales and marketing, among others. As we look ahead, continuing to recruit top tier talent remains a major priority. That said, I want to take a moment to address our first quarter financial results, which our CFO Jim Barnes will discuss in further detail later in the call. Our team was able to build momentum with revenues growing year over year, despite significant supply chain headwinds. It is important to keep in mind that RAP was operating without permanent leadership for the majority of the first quarter. The appointments of myself as CEO and Kevin Mullins as president represent a critical milestone for RAP as we move into the next phase of the company's life cycle. The two of us have a shared vision for accelerating sales of the BOLA RAP 150 in the near term and diversifying RAP's suite of solutions, including RAP Reality and other services for global law enforcement over the long term. Over the next 90 days, Kevin and I will assess every facet of the business to take inventory of what is working well and what can be improved upon. We will be engaging our employees, our customers, and distributors throughout this process. Specifically, we want to look closely at our go-to-market strategies for the BOLA RAP 150 and RAP Reality. We want to devise a plan for doubling down on the BOLA RAP 150 as our key product and understand how we can drive sales growth both domestically and internationally. We want to assess how to expand brand awareness and demand for RAP Reality. We want to identify potential synergistic technologies and channel partnerships, and we want to explore ways to expand and maximize existing customer relationships, as well as generating new ones through an improved customer success function. At the end of these 90 days, we expect to develop and release a strategic roadmap that will ultimately support enhanced sales, increased innovation and diversification, and long-term value creation. I'd like to now give Kevin the opportunity to briefly introduce himself before Jim discusses our financial results for the quarter. Kevin?
spk00: Thank you, TJ, and good afternoon, everyone. I've spent my career taking public safety technology companies from concept to growth to profitability, and I'm incredibly excited to be working with the team at RAP to see what we can accomplish together. I'm already confident in the future of RAP, given the early success of the BOLA RAP 150 And I am incredibly excited to lead RAP into the next phase of commercializing and distributing our products. Now that the company has a permanent leadership team and is committed to running and growing the business over the long term, we expect to capture a significant market share while delivering enhanced value to all stakeholders in the quarters and the years to come. With that, I will turn it over to Jim to discuss our financial results.
spk01: Thanks, Kevin. Good afternoon, everyone. I'll move straight into discussing the financial highlights for the first quarter. First, we generated net revenues of $1.6 million in the first quarter of 2022. That represented 4% growth over Q1 2021. This is in spite of $0.4 million in promotional discounts and incentives, primarily related to converting customers to the new generation BOLORAP 150. Gross revenues before such discounts was $1.99 million. Q1 2021 only had nominal discounts of $4,000, so gross revenues for the prior year quarter were $1.5 million. We expect customer product conversion discounts, customary in this industry, to decline after Q2. International revenues represented 26% of Q1 2022 net revenues compared to 61% for the same period in 2021. Domestic revenues grew by 95% over the prior year, continuing positive momentum seen in recent quarters driven in part by BoloWrap success stories documented on body cam footage. While our market penetration is still very small, with significant room for growth, in a large total addressable market. We believe BOLORAP and our related virtual reality training solution are making and can continue to make an important difference in modern, safer policing. International pandemic-related restrictions are lessening in 2022, but it may take time to schedule face-to-face interactions and build our 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, especially international revenues, as we balance pandemic travel restrictions 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 may be especially sensitive to geopolitical events. We are focused on managing our business for continued growth, especially with the launch of the new BOLORAP 150. Our gross margin for the first quarter was 42% compared to 39% for Q1 of 2021. In the most recent quarter, gross margin was significantly impacted by the 0.4 million of previously noted discounts. We continue to face global supply chain risks and challenges that can affect margins and impact operations. While we assemble product in Tempe, we rely on many global suppliers. We are at risk of and have faced shortages and unspected delays of key components. We have also experienced 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. We incurred product promotional costs of $215,000 in the first quarter, related primarily to the cost of demonstration and training products delivered to law enforcement agencies. This is a decline from the prior year as our expanded product and brand awareness reduces the need for demonstration products. R&D expense was $1.5 million for Q1 2022. The increase in cost compared to the prior year was a result of increased headcount primarily associated with new product development, as well as outside consulting costs related to finalizing development and testing of the model BOLORAP 150. We also invest resources to improve our virtual reality software. We expect R&D costs to remain at comparable Q1 levels for the balance of 2022. SG&A expense was 4.6 million in the first quarter, representing a reduction from the prior year first quarter. Non-cash share-based compensation increased 292,000, primarily as a result of termination and severance accelerations. SG&A compensation increases included a $300,000 severance expense offset by cost containment efforts resulting in a net $110,000 increase in cash compensation costs. We expect SG&A expenses for the balance of 2022 to remain below the prior year due to active cost containment efforts. Overall, our net loss was $5.4 million for Q1 2022, the same as Q1 2021, and representing a net loss of $0.13 per share. Our balance sheet remains strong with approximately $30 million of cash and short-term investments to support our growth needs. With that, I will turn the call back over to TJ.
spk02: I'd like to reiterate how excited both Kevin and I are to be leading WRAP into the next chapter of what we believe will be an incredible growth story. As previously stated, over the next 90 days, we will work to deliver a clear growth-focused strategic plan that will detail the following key priorities. How we will shift our emphasis from intense R&D to sales growth and distribution of the BOLA WRAP 150. Ways to expand awareness and demand for WRAP reality. potential synergistic technologies and channel partnerships, and expanding training programs and relationships across domestic and international markets. We look forward to sharing this plan with you in Q3 of this year. With respect to our outlook, we continue to expect to achieve top-line growth in fiscal year 2022, especially as we raise awareness of the BOLA RAP 150 and RAP Reality. However, it's important to highlight that geopolitical headwinds and supply chain issues remain obstacles for us. I will now turn the call back over to Paul to facilitate the Q&A.
spk03: Thank you, TJ. We will now be taking questions from our three sell-side analysts who are currently writing research on WRAP technologies. Thank you each for your continued support. Our first set of questions will come from Greg Gibbous from Northland Capital Markets. Please go ahead, Greg.
spk06: Hey, thanks, Paul. Thanks, TJ and Kevin. Thanks for taking the questions. You know, I guess first from maybe a high level, you know, in what ways would you kind of improve the business versus, you know, the previous leadership team? Would it be kind of adjusting some of the sales efforts or the go-to-market strategy? Any thoughts on changing the strategy there?
spk02: Thanks, Greg, and great to talk to you today. We are laser focused on creating a strategic roadmap to guide the business over the next few years. Specifically, this roadmap will include documenting our repeatable domestic and international sales efforts and overall our go-to-market strategy. So we're really going to be looking at that roadmap by talking to our distributors, talking to our entire team, and talking to our customers as the real guide for us going forward and to document this as our strategy and then put out some key milestones for you to measure us going forward.
spk06: got it and um you know when we do kind of think about your guys's outlook um could you maybe talk about the type of or how strong your order visibility is for maybe the the the next three quarters of the year and um you know how maybe your backlog stacks up and you know any thoughts on i guess instating guidance at some point um you know depending on how your visibility is
spk02: Right now, we are not looking to provide any immediate guidance. One thing we definitely have is our international orders are what I would refer to as lumpy. There are some large opportunities that take a long time to come to fruition, but when they do, they're very large orders. They're typically national police forces. I will say we have very good pipeline visibility in our CRM tool. We have been digging in, both Kevin and I, over the last two weeks to both our domestic and our international pipeline, and I'm quite pleased with all the data we've been receiving from the team. But I would like to dig into it even further and just really focus on what drives our repeatable domestic and international sales. And they are quite different to some degree as far as how they come to completion inside the business. And in the future, we'll have more predictability. But I do believe with the international type of business we have, there will certainly be lumpiness to it still going forward.
spk06: Okay, got it. You know, I guess last one kind of on the financial side for Jim. You know, how do you kind of envision supply chain logistics issues maybe impacting margins and kind of costs, expenses going forward from here?
spk01: Well, we've looked at the impact on price changes on our margins, and we believe we have enough space in there to account for that. So we still expect our margins to to increase during the year. Our goal, as we've stated several times, is to be well above 50%. We still think that is achievable even with these supply chain headwinds that we're facing. So we're managing that very aggressively and working through all the issues, but we believe our goal is still attainable and that we'll see improved margins over the next few quarters.
spk06: Got it. Thank you. I'll pass it on.
spk03: Great. Thank you, Greg. Next will be Alan Klee from the Maxim Group. Please go ahead, Alan.
spk04: Yes. Hi. Could you talk a little about the status of your large city trials? And I know there's LAPD and if there's any others and when you hope to get some feedback from that and what those opportunities could be?
spk02: Sure, kind of a two-fold answer. One, we are currently in a number of cities that are designated as metropolitan by the Major City Chiefs Association, as well as a number of counties that are part of the Major County Sheriff's Association. And we certainly love to continue to grow those larger agency deployments that are out there. Specifically, you mentioned LAPD, and they have received new 150 devices. They will be training their officers to carry those in some specific precincts. And then after that training is complete, we anticipate they'll be doing evaluation for about a year. So that's continuing to move forward. But very much we're focused on getting additional new departments in. You know, we'll be continuing to talk to as many of those departments as we can, both to get initial sales of Ebola RAP 150 to them, as well as RAP Reality in some cases, and to continue to grow that out across the departments. These departments are often quite large, and they start in one particular area. And, you know, obviously our goal will be to continue to expand once we're in there and they see the the value that they're getting from our two solutions.
spk04: Thank you. Can you provide any qualitative commentary on the mix And how the relative mix between BOLA wrap cartridges and basically between BOLA wrap and cartridges, if it was more weighted this quarter towards one versus the other versus what you've historically done?
spk01: I'm sorry. The last quarter of last year, we indicated there was a large cartridge order, so it may was more balanced in Q1 of 2022. So it's a continued balance of devices and cassettes, as we call it, with the BoloRap 150. And we continue that balance, we expect, throughout the year. So it wasn't weighted one way or another. We do not break out those specific revenues at this time until we grow a little bit larger, and then you'll see the breakout on that. But it was a balanced mix this quarter.
spk04: Thank you. And then just how do you think, to the extent you were going to add some new offerings in the future, either organically or through M&A, just generically, what would make sense?
spk02: So Alan, RAP Reality currently has two capabilities. You know, one is a law enforcement version and one is a community reentry version. We really, you know, haven't exploited or leveraged that second part completely yet. So that's one of the products we actually already have, but there's some unique capabilities. We also would like to look at additional virtual reality scenarios, whether it's for corrections to expand the amount of scenarios we have that focus on those working in the corrections system. So those are areas where we can expand even with the RAP Reality product as we have today. Obviously on the BOLA RAP 150 side, we have a roadmap for that product and for its long-term usage, and we're going to continue to invest and drive our BOLA RAP capability. As far as other solutions that we could serve, we're always going to look for things that are synergistic and the right companies to partner with. I will say this will be an area that over the next 90 days, you know, we will be looking at as part of that strategic roadmap. to find the best ways for us to be able to go to market. We certainly use a lot of distributors today, and there are other partnerships that we could have that could help accelerate sales. And so we'll be looking at those models and what can work best for us as we go forward.
spk04: Okay, thank you so much.
spk03: Thank you very much, Alan. Finally, we'll have John Hickman from Landberg Thalmann. Please go ahead, John.
spk05: Hi. I guess this is a question for Jim. When you say that SG&E is going to be below last year, do you mean that as a total number or quarter by quarter the number is going to be lower?
spk01: Yeah, overall it will be lower. As you look at last year, it was a bit lumpy quarter to quarter. So, we do anticipate that it will be lower overall.
spk05: Okay. So, lower than last year. Okay. You made a comment about geopolitical headwinds. So are we to assume that that means that what's going on in Ukraine is affecting police purchase orders around the world?
spk01: Well, we currently have delivered product to 53 countries. So a lot of these are in that region or a few of these are in that region. So we anticipate that you know, we could get some pushback from some of those countries. We don't talk about specific countries, but 53 countries does cover quite a bit of the globe. So it does have an impact on some orders that we're looking at in the European theater. So it is something that could impact. We're hoping that the impact won't be large, but it is something that we're focused on and we pay attention to. And it has delayed some meetings and so forth because we're close to some of those regions with some of our distributors and customers. So it can have an impact. We don't know exactly what that's going to be, but we do pay attention to it.
spk05: Okay. Thanks. That's it for me.
spk03: Okay, great. Thank you, John. And thanks to each of you, our three analysts, for your great questions today and also for your continued support. With that, I'd like to turn the call back over to TJ for his closing thoughts.
spk02: Thank you, Paul. In closing, Kevin and I could not be more excited to be part of this amazing RAP team. There is so much potential with the BOLA RAP 150 and RAP reality and the ability to save lives and even save the careers of the law enforcement personnel that we serve. I hope you felt the excitement and heard the optimism for our future from our call this afternoon. We have a tremendous group of employees who all share the passion to innovate for public safety and deliver for our customers and the citizens that they serve. I look forward to sharing our strategic roadmap for RAP technologies in Q3. There is a tremendous amount of work to be done, but RAP's future is very bright. Thank you for your time today and for your continued interest in RAP. Have a great evening.
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