Wrap Technologies, Inc.

Good afternoon. Welcome to Rapp Technologies' third quarter 2022 earnings conference call. Joining me today is our CEO, TJ Kennedy, our CFO, Chris D. Almeida, and our President, Kevin Mullins. Following their prepared remarks, we will open the call for your questions. I would like to remind everyone that this call will be recorded and made available for replay via a link in the Investors Relations section of the company's website at rap.com slash investors. As a reminder to listeners, certain statements made during the call today constitute forward-looking statements and made pursuant to the safe harbor provision 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 would like to turn the call over to our CEO, 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 ending 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, Christy Almeida, 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 multi-year 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 six 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 improved substantially all key profitability metrics, highlighted by a gross record a record gross margin performance and nearly $2 million reduction in operating expenses. The initial momentum we've generated is 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 and orders across multiple police agencies and departments. Internationally, we just announced the largest Bolarap 150 deal in our history, an initial $1.5 million agreement with a very large police agency in the EMEA region, as well as a new sale of Bolarap 150 to a large police agency in South America. These new sales support our thesis that international opportunities, despite the longer sales cycles, have the potential to generate outsized returns that justify our investment in these regions. In August, we announced the extension of the LAPD BOLORAP pilot program, entering large-scale field deployment with 500 BOLORAP 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 the highest quality, cost-effective, and in-the-moment adaptable training to better protect them and their community is RAP 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 investments, financially and operationally. We are proud to be a leader in the market of virtual reality training for law enforcement, corrections, and societal re-ending. Most recently, at the end of October, we had over a dozen key members in attendance at the annual International Association of Chiefs of Police Conference, or IACP, At this conference, we exhibited the Bola Wrap 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 Bola Wrap and Wrap Reality was even higher than expected. Before going any further, I'd now like to turn over the call to Chris to give over our financials.

Thank you, T.J., and good afternoon, everyone. Moving to our financial results for the third quarter. In Q3, we generated net revenues $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 Bolo Wrap 150 from our legacy Bolo Wrap 100. During Q3, we started phasing out the promotional pricing, which is customary in our industry during a product transition. So those impacts to revenue should decline going forward. Gross revenues before such discounts and incentives were $1.9 million. Gross profit improved to a 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 a 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 in 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 of 2022, as well as higher deployment development costs associated with the BOLORAP 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 the 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 9 cents loss per share from a loss of 6 million or 15 cent loss per share in the prior year period. The improvement in net loss was a result of increased sales focus and cost containment efforts 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 to 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 nine months of 2022, we had a 72% increase in device sales as compared to the first nine months of last year. Additionally, cassette sales grew to 25% of total revenue for the first nine months of 2022 as compared to 15% in the prior period. Now let's spend a minute discussing our current outlook. Based on our financial performance to date, as well as information available of today's call, we are reiterating our expectation for sales growth year-over-year in 2022. As supply chain disruptions ease and the transition from the BOLRAP 100 to the BOLRAP 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 of 2024. More importantly, we believe this level of increased BOLARAP uses would 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 Bolo Wrap 100 to the Bolo Wrap 150, as well as the timing of some international sales. However, we recorded 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.