Wrap Technologies, Inc. (WRAP) CEO Tom Smith on Q2 2021 Results - Earnings Call Transcript

Wrap Technologies, Inc. (NASDAQ:WRAP) Q2 2021 Earnings Conference Call July 29, 2021 4:30 PM ET

Company Participants

Paul Manley - Vice President of Investor Relations

Tom Smith - Chief Executive Officer & President

Jim Barnes - Chief Financial Officer, Secretary & Treasurer

Glenn Hickman - Chief Operating Officer

Conference Call Participants

Alex Comer - JPMorgan

Paul Manley

Good afternoon and welcome to the Wrap Technologies Second Quarter 2021 Earnings webcast. My name is Paul Manley and I'm Vice President of Investor Relations here at Wrap. We will provide an update on the progress we've made the second quarter of 2021, our growth strategy for the future and how we view our mission to lead the world's policing technology, training and the de-escalation of situations requiring restraint of non-compliant suspects.

Right now I'm in our 11,000 square foot manufacturing facility and headquarters in Tempe, Arizona. This is where we manufacture our products. Here each device and cartridge is assembled, shipped and packaged. The facilities are managed by an amazing group of talented and hardworking and dedicated people who put in the hours of production to ensure that each product functions flawlessly for law enforcement officers in the field. We are extremely grateful for their dedication.

Joining me on the call today are Tom Smith, our President and CEO; Jim Barnes, our Chief Financial Officer. And in addition, I'd like to introduce the newest member of our Executive Team, Glenn Hickman, our Chief Operating Officer who started on July 1.

Following our prepared remarks, we'll conduct a question-and-answer session with Tom and Jim. You may ask a question at any time during the webcast. And to do so, please use the Q&A tab on the bottom of your screen and not the chat button. I'd like to take a moment now to remind you that certain statements made during the call today constitute forward looking statements made pursuant to and 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'd like to turn the call over to you, Tom.

Tom Smith

Thank you, Paul, and good afternoon, everyone. For those of you that are new to our story, thank you for joining us today. As a global leader in pioneering public safety technologies and services, it continues to be a privilege for Wrap Technologies to be on the forefront of driving innovative solutions and training for global law enforcement officers and other agencies. For those of you who have been following us all along, thank you for your support.

I'm pleased to report some exciting foundational and financial growth developments that continue the growth trajectory of the company. We're moving fast and consistently making strong progress on executing our strategy for educating and training and securing sales for our devices and accessories. Everyone at Wrap Technologies remains deeply driven by our unyielding dedication to our mission of providing our technology platform to officers and agencies worldwide.

We live the mission every day. We believe policing is safer and more effective with early intervention and de-escalation solutions. We work hard to ensure we're in the right place at the right time with an unrivaled product suite that is seeing growth in demand. As the agencies on the front lines confirm what we have known all along that our solutions are valuable and can help save lives.

For the quarter, we continue to gain traction with US based police agencies, primarily those with 100 officers or less. These agencies typically have a shorter buying cycle which translates to faster sales since overall orders are generally smaller and have fewer levels of approval. This has served as a significant source of revenue for us as these orders add up in a meaningful way. This is important as we scale our business and enter longer sales cycles with the larger agencies. Our success with agencies of all sizes continues to be bolstered by our steady stream of bodycam videos showing actual body wrap field deployments, which enable officers to see how effective the BolaWrap actually is during real life crisis situations.

Our international business continues to grow despite COVID headwinds. There are still many important countries with ever changing COVID-related travel restrictions, which are limiting our ability to demonstrate the BolaWrap and WRAP Reality, in person, which is the most effective sales way to demonstrate the effectiveness of our products. However, we have adapted to this headwind nicely. We are generating increasingly strong interest in the BolaWrap and WRAP Reality with our unrelenting pursuit of educating and marketing to the industry. As a result, our international team continues to make steady progress.

As a reminder, in these early stages, we do not expect our consolidated revenue ramp to remain linear. We have a number of mid-size and large agencies in various stages of pilot and trial programs. These can take weeks, months, and longer to close. Depending on the timing of the orders for larger agencies, we could see lumpy growth rates from quarter-to-quarter but year-over-year, I believe, our growth will accelerate. We believe Wrap is in the early stages of our revenue ramp with a long runway ahead.

In the US alone, we have only had devices in less than 4% of total agencies, representing a tremendous growth opportunity in a massive addressable market. Another notable area of progression this quarter is our WRAP Reality training platform. Our WRAP Reality library is already robust and our vision is to become a global industry leader for law enforcement virtual reality training.

We are still in the process of building out an extensive and immersive catalog of scenarios for police officers. Importantly, we expect our simulations to go far beyond our products. We expect our library will not only consist of situations involving a BolaWrap, but all the tools available to the officers including verbal commands and any other situation an officer may face, making WRAP Reality more versatile and valuable across the training spectrum.

We believe our approach directly addresses the public demand for police training reform that is at the center of the media, community and government, calls to action. We believe better training solutions are essential tools for better policing. We know training that is accessible and in real-time can help officers prepare for hundreds of potential scenarios without ever leaving their home or precinct.

Allied market research has cited the market opportunity for virtual reality training and simulation is projected to exceed $600 billion by 2027, growing at a compounded annual growth rate of 13.7% from 2020 to 2027, driven in large part by law enforcement and military which are at the heart of our target market. As virtual reality evolves, become the preferred training solution for any situation, I'm confident our WRAP Reality platform is a perfect fit for police officers and the evolving training environment.

I will now move to our operations highlights. We'd like to share some of our notable progress from this quarter. We grew US agencies trained to over 800. That's up 29% from the first quarter and nearly four times our number a year ago. This is an important metric because we believe it serves as a leading indicator for sales orders. For the first time we surpassed $1 million in quarterly sales in the US. Although we expect our top line to grow years into the future, as I mentioned earlier, we do not expect this growth to stay linear. Nevertheless, we are pleased with this newest milestone.

Our growth strategy is driven by two product lines on a single synergistic technology platform, one is the BolaWrap device, the other is our WRAP Reality virtual reality training system. While they are designed to integrate seamlessly both offer exceptional value as a standalone product or service, providing an easy point of entry for new customers with the potential of generating a meaningful recurring revenue stream. We expect that as officers have success with one of our products, this will lead to goodwill and be a generator for the other products.

With the BolaWrap, our approach to growth is through market penetration. We believe the visual appeal of seeing a real life BolaWrap deployment in the field triggers word of mouth and social media attention. Both are proven drivers of spontaneous or referral inquiries and sales. We strategically target a diverse range of agencies from large to small across police, military and private security, which include college and university campuses, as well as spread out geographically, both domestically and internationally. We are in the very early stages of our growth curve. And we think our new agency customers metaphorically as planting seeds that eventually will generate new business referrals from other or similar nearby agencies.

Additionally, we attend or exhibit at major law enforcement conferences and equipment trade shows in the US and several internationally. These provide an excellent opportunity to meet with and demonstrate to hundreds of prospective customers in a short period of time. These conferences and trade shows are now returning to the old normal in-person rather than virtual attendance over the past 17 months.

Our WRAP Reality service is a highly immersive virtual reality training system. We currently have 48 different models in our WRAP Reality library, most of which are centered around in countering and restraining a wide range of non-compliance subjects. One of our biggest differentiators is the 360 degree immersive experience we offer. When combined with our BolaWrap it provides an attractive value proposition for agencies and we're just getting started.

Agencies throughout the US are enhancing training for officers as their collective first step towards police reform. At Wrap, we continue to improve our models to ensure the best and most realistic library for law enforcement training from cadet to retirement. It's also worth noting that we are structuring WRAP Reality as a subscription service, which lowers the cost of entry for agencies while providing a growing stream of revenue recurring for Wrap.

While BolaWrap and WRAP Reality are state of the art, we intend to have continuous innovation and development of our current and potential new devices and services. We are committed to be recognized as the leader in escalation avoidance technology, and training and are aggressively working to develop, upgrade or acquire technologies that provide a synergistic fit to our product's marketing and distribution strategy.

On the subject of new product development, I'm pleased to introduce the newest member of our executive team, our Chief Operating Officer, Glenn Hickman. I met Glenn a little over 10 years ago when we were both a TASER. Glenn had a nine-year career there. Most recently, he is the Vice President of Research and Development, where he led the product launch of six hardware products, doubled the size of the engineering team and established a manufacturing presence in China. Over the past two years, he earned his MBA at Northwestern University and his immediate responsibilities at Wrap will be research and development, operations, engineering, and supply chain management as well as spearheading our new product developments. We could not be more excited to welcome him aboard, Glenn.

Glenn Hickman

Thank you, Tom. Hello, everyone. It's a pleasure to be here. I'm excited to join this elite team of professionals, which I strongly believe will continue to redefine the law enforcement technology landscape. The number one reason I wanted to join this company was that I've recognized it as a time for Wrap. The BolaWrap is revolutionary and the opportunity is massive. With its early track record of effectiveness, now is the time to scale and reach Wrap's fullest potential and I'm excited to be part of that effort. I believe we can achieve this with a disruptive new era of human restraint technology and training.

I started on the 1 July and hit the ground running. Wrap has outstanding team from our management to our frontline manufacturing workers. What I find the best about Wrap is its culture. Everyone always strives to do better than yesterday on every level. With R&D and supply chain, one of my mandates is to ensure that the crew can match or surpass the needs of our customers. And as we scale manufacturing volume, we remain dedicated to delivering the highest levels of quality assurance and quality control. I am delighted to be here and look forward to meeting many of you down the road.

Now I would like to show one of our more recent bodycam videos that we received in June highlighting the early success of the BolaWrap by an agency in Ohio.

[Video Presentation]

Tom Smith

Thank you, Chief Schaefer. Those bodycam videos are just really incredibly powerful for us to be able to show how the BolaWrap is making a difference out there. And the chief really highlights a lot of the points that we talked about. This is on the frontline officers, it's deployed to everyone within the department, because that's our goal, is every frontline officer having access to this to prevent the escalation to those higher levels of force, not just domestically, but around the globe. And obviously, we have a long way to go on that. But that's the ultimate goal is, it's an apprehension tool that can be used early to prevent the escalation of force to higher levels of force and pain compliance tools being used like a taser, like a firearm, or baton or chemical spray.

So these really are great points that the chief highlights. And it's really state things that have made a difference for us over the last six months as we continue to get these bodycams. We continue to talk about full deployment, we continue to talk about how very quickly this tool can pay for itself when it's used early in these interventions. And it really has to be on those frontline officers because they won't have time to wait for somebody to bring it or wait for someone or to go back to the car and get it. So it's really a lot of points that chief makes there that really carry through all the messaging that we're now doing through the Wrap company.

So right now I'd like to turn the call back over to Jim to discuss our financial results and then it will come back and we'll have further discussion after Jim.

Jim Barnes

Thanks, Tom, and welcome aboard Glenn. We had another solid quarter of financial performance. We posted $1.9 million in revenue for the second quarter for 132% growth year-over-year. International revenues represented 43% of second quarter 2021 revenues compared to 65% for the second quarter of 2020. Year-to-date revenue for the first six months of 2021 increased to $3.5 million, a 128% increase over year-to-date 2020. International revenues represented 51% of our 2021 year-to-date revenue compared to 74% for a year-to-date 2020.

As Tom mentioned, I want you to know that travel is still challenged worldwide, and is negatively impacting our international revenues and contributing to the lumpiness we have spoken about over the past several quarters. We expect our international business to be a major part of the growth going forward. And in spite of international challenges, as you can see on the accompanying chart, Q2 of 2021 continues steady revenue increases over the last four quarters.

Our gross margin for Q2 was impacted by the planned line production change. Excluding a onetime non-cash product line expense of $0.7 million, our gross margin was 36% in the second quarter compared to 32% for the comparable prior year quarter. Our goal is to improve gross margins through a combination of new production line efficiencies, scale, and product innovation.

Selling, general and administrative expenses were $6.6 million for Q2 and included $2 million of non-cash share based compensation costs, including some one-time Q2 charges. We expect non-cash compensation allocated to SG&A to approximate $1 million a quarter for the next several quarters, subject to personnel changes and other factors.

In Q2, we also experienced increased demand for domestic demonstrations and training, and SG&A expenses included approximately $850,000 on these vital activities. We believe increased trained agencies, as Tom mentioned before, are a leading indicator of future sales. Research and development expenses of $1.2 million in Q2 of 2021 compared to $0.6 million for Q2 of 2020. We expect research and development expenses to increase somewhat throughout 2021 as we have important initiatives that we believe respond to valuable market opportunities.

During the second quarter, 1.8 million warrants were exercise for $12 million in cash. With $43 million in cash and short term investments on our June 30 balance sheet, our financial position remains exceptionally strong and provides Wrap with ample flexibility. Considering that BolaWrap was only commercialized in 2019, we are satisfied with our global reach and our financial performance. I appreciate the excellent work by our finance team.

With that, I will turn the call back to Tom.

Tom Smith

Thanks, Jim. Now, I'd like to provide you with a few more metrics related to our progress in the second quarter, all as of June 30^th. We had over 2800 officers certified to train their departments, which is up 106% from December 31, 2020 and a nearly three-fold increase year-over-year. We have sold products to 49 states in the United States, and have shipped product into 44 countries.

From a governance perspective, we recently added four new directors with a wide breadth of experience. They are TJ Kennedy, Jeff Murkowski, Kim Sentovich, and Kevin Sherman. We are fortunate to have them join our Board. In addition, we are keeping the best practices of corporate governance by adding an independent Board Chairman, Patrick Kinsella, who was recently named to that post. Scot Cohen continues to be an active member of the Board. I was also elected to the Board in June, bringing my experience of serving as Executive Chairman of TASER's Board for six years.

ESG remains a primary guide for our business practices. We bolstered our ESG efforts in our recent initiatives, including strengthening our relationships with suppliers, continuing our engagement with shareholders through consistent and transparent communication. We joined the United Nations Global Compact, pledging our intent to further incorporate their 10 Principles on human rights, labor, environment and anti-corruption operations and engage in activities that advance its sustainability goals.

We published our code of ethics and launched our diversity and inclusion and anti-harassment training program, which has been completed by the entire company. Wrap is monitoring and reporting our Executive Board and workforce diversity in an effort to continue improving in that area. We continue to make progress towards reducing our environmental impact. And with our purpose, value, strategy and business model in clear alignment, we delivered record financial results and superior stakeholder value.

Before I close, I'd like to reiterate my high degree of confidence that we are on to something special. I know this industry extremely well and I have been intimately involved with building the playbook that delivers scale quickly and can successfully commercialize a new disruptive technology in law enforcement. Wrap Technologies platform is here at the right time to help solve an enormous and highly visible problem.

As always, my final comments are directed to our team. Thank you. Your positive attitude, skills, and hard work are greatly appreciated as we endeavor together to change the world. We are making a difference and the world is paying attention. Right now, I would like to share a video highlighting our activities during our second quarter. After the video, Paul will moderate our question-and-answer session with Jim and me.

[Video Presentation]

Question-and-Answer Session

A - Paul Manley

All right, I hope you enjoyed that video as much as our team loves putting that together. As we now move to the question-and-answer portion of the webcast with Tom and Jim, I'd like to remind you that if you would like to ask a question, please submit it via the Q&A portal and not the chat function.

We're going to start with our three equity analysts who are publishing research on Wrap. Our first analyst will be Jon Hickman from Ladenburg Thalmann. Please go ahead, Jon.

Jon Hickman

Hey, I have three questions to ask you and you can answer them in whatever order you want. Tom, I was wondering if you could tell us anything about LA, if you know if they're getting any use cases, so that they can make any kind of determination in the future? My second question has to do with, could you break down the revenues from the training, the virtual reality stuff versus the BolaWrap activities? And then my last question has to do with, can you give us any more granularity on the link between the training that's going on and actual purchases of BolaWrap equipment? That's it for me, Paul?

Tom Smith

Well, thanks, Jon. And I'll go through those. I'll try and remember them best I can. So the first one was regarding LAPD, LAPD has not put them out on the streets yet. They're still working through some internal issues. And I believe they'll be getting started in August, probably late August or early September. So we don't have any uses there, obviously, because they're going through retraining and replanning. They've had quite a bit of shuffle on staff. So we're talking to them on a very regular basis. And we'll obviously keep everybody informed there. And that one year timeframe, because that's obviously the question that was approved back in May, doesn't begin until they actually get them on the streets and trial. So let's say they start in September, then it would go for one year from September '21 until September '22. So we're still working with them on that. And that's upcoming. What was the next question, Paul?

Paul Manley

The second question Tom was the revenue breakdown between the Bola and the virtual reality at this time?

Tom Smith

Yeah, great question. So right now there's not much revenue, quite frankly, associated with WRAP Reality. Our focus right now is on getting that product integrated, getting it up to speed, we're going to have some more things that are going to be announced on it here. We've got a big trade show called IACP, which is the International Association of Chiefs of Police Conference coming up here in September. So right now we're working with select agencies of various sizes. And obviously Wheaton College to get feedback on the different parts of WRAP Reality that want that we want to improve on and we want to continue to expand.

So right now we've got it in the field with a bunch of these different agencies that obviously, we've announced, and they're working with us to give us feedback on that so that we can focus on making sure that the product is where we want it to be, as we roll it out. And it's again, not going to be just here domestically, we're getting a lot of enquiries for it globally as well, so very excited about that platform. But I would also say, don't expect a lot of revenue for it over the next - even into '22, as we are really ramping it up and the subscription model that will be spread out over multiple years. So there won't be a lot of revenue upfront, like on the BolaWrap. It's a PO-based business right now, where we get a purchase order, and we ship and then we recognize when we ship. WRAP Reality is going to be a subscription model, which means it can be over in certain cases five years on that revenue that gets recognized each quarter over that five year time period. And last question?

Paul Manley

And the last question, I think was, can you talk about how the training. All of the training that we're doing currently, how does that lead to purchases in the police departments and law enforcement?

Tom Smith

Yeah, another great question. And that's really the tip of the spear for us, because these agencies have to go through training, because then those are the experts, the subject matter experts that the Department relies on, to oversee the program. So our relationship, our work with those trainers, getting those officers trained, it really is a key metrics for us as we look forward on the agencies that are going to be adopting this. So we always are going to see that number ahead of the curve in terms of officers being trained, because then once they're trained, then they'll start to move into purchasing.

And as I mentioned, during the video, our goal is to get to full deployment to every officer on the front line. And we really, if you've been following us, you really noticed a change in our messaging, talking a lot about these bodycam videos about the uses. We've learned a lot over the last 18 months or so about where the product is really excelling and getting these smaller agencies to let us use these bodycam videos to show the different scenarios, indoor, outdoor, daytime, nighttime, and really what's coming back is those frontline officers having it accessible. If you have to wait to call for it or if you have to go back to your car, that window of opportunity to use it early in the confrontation is going to pass.

And that's one of the things that we're really focused on now is the focus of these outcomes, getting the frontline officers to use it. That's where it's having the most impact. And those - getting the officers trained with that message is really going to carry it through and you heard a lot of Chiefs in the videos, talk about it. It's an apprehension tool, a lot of them don't even consider it a use of force, it's like handcuffs. And then the other higher level pain compliance tools will be considered use of force.

So as long as we can continue that trend, continue not to be a use of force in the way it's being used, have it being used by those frontline officers, that's really where we're seeing the growth accelerate. And it has led to a change in the inbound inquiries, and that we're seeing more and more qualified inquiries, more and more command staff and purchasing inquiries, especially over the last few months now that we're getting more and more bodycam videos show how it's being used out there in the field.

So with that, I think that was all of Jon's questions. So Paul, we'll go back to you.

Paul Manley

All right. Thank you very much, Jon, for those great questions. Our next set of questions is going come from Alan Klee from Maxim Group. Please go ahead, Alan.

Alan Klee

Yes. Hi, two questions. First question is on margins, you talked about some added costs related to working on improving your manufacturing? Could you maybe go into that a little bit and what you think the opportunity is from that? And the timing of getting that? And then the second question is related to international, if you could just maybe give us a little more detail on where your focus is now, and how you think that market is going to open up for you. Thank you.

Paul Manley

So Jim, why don't you start with the margin?

Jim Barnes

Sure. We are working closely with Glenn and his team to make both product changes, product line changes, and we've made tooling changes. And that was part of the asset adjustment related to those activities. And working with Glenn and his team, our goal is to achieve those greater than 50% margins that we've been talking about. And we expect that to be very near term, not a long term goal. So we're working closely to make those activities happen. And you'll see that in the upcoming quarters.

Tom Smith

And I think the next question was around the international markets. And this new delta variant is obviously causing ups and downs. We are able to get some of our trainers to go visit some of our overseas clients and then we've had them also revert back to doing Zoom demonstrations because the travel borders and the restrictions came into play. And again, I think one of the key factors that been being able to continue the international growth and sales activities has been having these relationships with the distributors that are still able to support the local department.

So international, I'm not changing my opinion on that. I think it's still going to be the majority of our business as we go forward. It's just certainly raised the difficulty level on executing with that strategy because it's, we're not able to go and do a lot of these in person. But we are getting them here and there. Obviously as we can get more and more vaccinations and more and more borders to lift, I believe that's going to accelerate. We are looking at adding some personnel overseas as well, in the second half of the year that are also going to help meet those goals because a lot of times the US restrictions are the hardest in terms of the international travel.

And as I mentioned, we're getting a lot of inquiries around the WRAP Reality as well. So we are pivoting, again to integrating that into the Zoom demonstrations and video demonstrations and participation and the enthusiasm is really still there. It doesn't change my opinion on where I think we're going to be internationally. I just really wish, as all of us do, that this pandemic would let us get back to business as normal so we can start traveling again, because it really is our most effective opportunity. Because it doesn't - it's not only the travel for us to go there, it also presents a big challenge in the actual shipping of the products. There's not as many freight aircraft flying, so trying to get freight shipped overseas, that's been a challenge as well. But we've been successful in navigating that. And the team's done a great job working with our international distributors and our freight forwarders. But I still remain very optimistic on the international market. So Alan, I didn't know if you had any other questions.

Alan Klee

I'm great. Thank you.

Tom Smith

Okay, we'll go back to Paul.

Paul Manley

All right. Great. Thank you very much, Alan. Our last set of questions will come from Greg Gibbous from Northland Capital Markets. Go ahead, Greg.

Greg Gibbous

Great. Hey, Tom, Jim, and Paul, thanks for taking the questions. Congrats on the record sales again. I guess first for me, has the pace, I guess of your product demos with departments changed in any way, either within the quarter or into July? Or maybe how does the number of product demos compare on a year-over-year basis? I guess anything you could share there would be helpful?

Tom Smith

Yeah, great question. So obviously, last year, we've talked about it several times. We did see quite a dip. In fact, a year ago, it went to zero in the month. I believe it was in the month of April. I would tell you right now our demos are kind of back at the same levels that were - they were kind of pre-COVID in Q1 of 2020. And we're still seeing a huge number of requests. I can also say that the quality of the inbound requests that we're getting, has certainly increased. I also mentioned that some of the trade shows that we're attending are now kind of going back to in-person trade shows. There was one called the FBINA Conference that was held in Orlando. And a couple of the folks that I've talked to from that show really made the comment about it. It's probably the best show that we've been to in the last several years, because the quality of attendees, it has changed quite a bit, and the profile of the company because these BolaWrap bodycam videos are really making a difference for people to see it.

But previously it had just been us showing demos in trainings and things where now when you're seeing it being used in a number of different scenarios in the streets. We kind of revamped all of our communications, the marketing and the training to really emphasize what's going on with the bodycams and that frontline officer having it available. I think all of those things have been coming together to continue the momentum. And so I would say to your basic and original long winded answer here¸ it's back to pre-levels that I was seeing before in terms of volume, because the distributors are picking it up as well.

Greg Gibbous

Okay, great. Yeah, that's good to hear. I guess one I wanted to ask too, if you're seeing maybe anything changing in any way on the legislative side of things? I know you've been working with Congress for some time now and just wondering if you could touch on that. And then maybe talk about anything related to grants or federal funding that might support Department's purchases of the BolaWrap?

Tom Smith

Yeah, so we've been working with policegrantshelp.com through a website. We've been getting an enormous number of inquiries for grant funding. And we did get clarification that the Byrne JAG Grant, which is under the Department of Commerce can be used, those funds can be used in purchasing our equipment. And then obviously, we put out a release recently about the House's Appropriations Committee, putting out their report language which referenced, well, a lot of the work that we've been doing over the past year, to make sure we're included in that.

So, I think at the Federal level, there's been a lot of stagnation with Police Reform Bill. Both sides are pretty dug in on some language around the differentiation on qualified immunity. I don't know if they'll ever get past that. But if they do, we've done a very, very good job in talking with a lot of different people on both the House side as well as the Senate side, and the staff in communicating with them, showing our products, and even getting them to attend demonstrations.

You saw one of the representatives in the video, the highlight video where we actually wrapped her and then she actually mentioned this on the House floor during one of her comments around the Police Reform Bill. So I'm very excited about what we've been able to do to make sure for a company at our stage in our growth level with only 500 agencies out of 18,000 that we are engaged in the national conversation and with the members of both the Senate and the Congress, and they've been very, very supportive. And I think that's what's so exciting about being included in that report language that came out.

Greg Gibbous

Okay, great. Yeah. Last one for me, I guess, relating to financials. I know you weren't providing official guidance, but just wanted to ask how you're thinking directionally about profitability, or just EBITDA the expectations, going forward.

Jim Barnes

Well, I'll jump on that one. So right now we're, margins was a question that we talked about before. And I've been asked about that many times. And our goal is to get above 50%. And one of the things with Glenn joining is really getting that operational focus on not only the R&D, the quality enhancements of the products, changing our production equipment, and all those things are going to contribute to that. So obviously, when we and if we can get to that goal is sooner than later. And it's going to have a tremendous impact on our cash flows, as well as on our potential opportunity to get profitability quicker. So our goal in the short term is to really focus on getting those margins up.

Obviously, we're going to, we have a very strong balance sheet so we can use that cash wisely and invest it where we need to. But once those margins come up, that's going to have a huge impact on the company. And then it allows us to really, again, keep fiscal responsibility and looking at where we're investing that cash as we want to grow the company and work on those future generations of the technologies. So I can't give a specific yet on profitability but I can say that the margins are our short term focus, because that's going to have the quickest and most immediate impact on what we're going to see in terms of the cash.

Greg Gibbous

Okay, sure. Great. Thanks, guys.

Paul Manley

Thank you very much, Greg. And thank you very - to all three of you for your support of Wrap Technologies, over the time that you've covered us. Now, we're going to go on to the submitted questions that have come through the Q&A portal. We do have a fair amount of questions that have already have been answered by the three analysts. But we'll start here and we'll start with the first one. The first one coming in, says, can you discuss in a little bit more detail, the House Appropriations Committee Report and the police reform language in it and why that is a benefit to Wrap?

A - Tom Smith

Yeah, and I think Greg, we have talked about that briefly. And again, I think the biggest thing to note here is that the report language is kind of what starts the ball rolling. So that is the recommendation that comes out of the Appropriations Committee. And being included in that with that sentence of saying, 'humane remote restraint is great for us,' because that's obviously what we're doing. It's language that we work with. Obviously, they're never going to include the name of a company specifically, so getting that generality in there, the discussion around virtual reality training, the conversations we're having are very effective. So by being included in that Report, as they now come back for appropriations language and approvals in the actual Bills, we're in involved in that.

So if we had not been a part of that, it would have been a lot bigger hurdle to try and get included. So I think that can't be overlooked, as the work that we've done over the last year with the members of Congress and with the members of Senate to make sure that we were included in that. It was just - it was great to see it in there. And make sure that we're part of that conversation going forward when they start to allocate the funds.

Paul Manley

All right, great. Thank you, Tom. Another one that has come in, actually a few of them. Can you further elaborate an ESG and why is it important for you as a company, and also for the investing community?

Tom Smith

Sir, so earlier this year, we went through our ISO certification, our ISO 9001:2015. And this was a natural roll in for ESG, that it just really becomes ingrained in our culture, which is extremely important to me and the members of the company, because we all are here almost all the time, during the day. And as we go through our ESG process, having it included in becoming just involved and incorporated into the culture is that much better for us. We want to make sure we're good corporate citizens, obviously, they are [asking] there the social aspects. There's probably no bigger impact than, any other company can have in trying to stop people from getting hurt or from preventing people from having force used on them excessively or in the wrong manner, or in pain compliance situations.

And looking at the BolaWrap device having that impact, you watched that video that we played out, if defines how that individual wanted the police to shoot and kill him. He even used the term, 'I wanted suicide by cop,' he wanted it to happen, they were able to use the BolaWrap and that was not that next viral video. So then when you couple that together with the environmental and the governance, it's really the things again, that we're focused on, it's we're reaching out to partners to really help us with it, making sure environmentally just across the board that it's really ingrained in our corporate culture.

And so we're really excited about it. And we do expect to have a report or our first letter out on it in the next couple of weeks with more details on all the different initiatives and even getting approved through the UN. That was another accomplishment. So we're very excited about the way we're proceeding as an organization. So it's making a huge impact, very few companies get to change the world and then we're also making sure we're doing it as good corporate sponsors and partners with our ESG initiatives.

Paul Manley

All right, great. Thank you, Tom. We've had a lot of questions come in about gross margins. I think we already hit on that earlier in our conversation. So I will skip over that one unless you want to add anything. But a lot of questions coming in about COVID and we briefly did discuss that. And any further comments, you can talk about the effects on our business and are we seeing any improvement? So I think we should answer that one Tom.

Tom Smith

Certainly and we did touch on it, that it's presented a lot of hurdles and a lot of challenges, more so in our international markets. Because right, when you think it's going to get better, then all of a sudden, this delta variant shows up and change the restrictions, so we're constantly having to monitor what each country is deciding, whether they're allowing people to come or not. But again, through our distributors and that relationship and that network, we've been able to continue the growth there, we've been able to continue to support them. It's - domestically, it certainly is at ease because we've been able to continue our in-person demonstrations, our in-person trainings. As I said earlier, those have gotten back to kind of pre-COVID levels domestically. Just internationally, but I think, again, the team's done a great job. We've got a great distribution network out there that's continuing that progress. So it's - it is something that we obviously keep an eye on and watch daily, as does everybody and try to navigate that. And I think the team's done a really good job with that.

Paul Manley

Great, thanks, Tom. And speaking of distribution networks, I get this question asked a lot on a weekly basis. How big is our sales force and what does your distribution network look like?

Tom Smith

Yeah, so one of the things I've done before, at my previous job, at TASER, we had about 500 [ph] people in the field. And we used a distribution network and grew that to over 100 million. So we're using kind of the same format here, we have 14 distributors domestically. And those 14 distributors are like putting another 100 people out on the ground roughly, with boots on the ground, talking to all those small agencies. Because again, out of those 18,000 agencies, over 80% of them are less than 100 officers so it's a great that our distributors have those relationships with them, because it would be very high cost for us to have a direct salesperson having to go call on agencies that are 10, 20, 30, 40 officers. But by using our distributors and those partnerships, we can do these now more regionally focused, we can have more conversations through Zoom or through our distributors doing it on their own, which is just, it's an exponential number to our team.

So we've got about, a couple of dozen between sales, marketing, domestic and the international. And then internationally, it does work a little bit differently, because our distributors are much more on an exclusive basis. Typically, those decisions internationally are made at the ministerial level rather than here we have 18,000 chiefs, that's 18,000 decision makers. So there are two different programs there but we're really excited with our partners. Again with the 14 domestic distributors, and then a couple of dozen folks between our sales marketing, internal sales, that does a lot of telephonic support. And then our outside sales, that are the boots on the ground going and visiting with these agencies during the in-person demonstrations and attending the trade shows.

Paul Manley

Alright, thank you, Tom. A lot of questions coming in on the VR training. We have talked about a little bit, but how big is the market you see for Wrap? And then speaking of sales, can you further discuss kind of what you're doing to get the police departments to buy the system?

Tom Smith

So, great questions. It's going to be a huge market. But again, if you look at law enforcement in general, they do not change quickly. Again, even on the weapon side of the company, with the BolaWrap, that technology is the latest technology that was introduced. The last one that came to market was taser, over 20 years ago. And so when you look at training, there have been enhancements in training. But overall, in general, in law enforcement, when they have budget cuts, that's usually the first thing that gets cut is training budgets. And they also train very similar to the way they did you know, 50 years ago.

So we're now bringing a technology to training that's really going to make a difference, it's much more immersive, we can show much a huge cost benefit. So we can do stuff in the virtual reality training in 30 minutes, that may take two hours in a classroom setting. The officers are going to be much more comfortable with the content. And especially with the generational change of the younger officers coming in that are familiar more with the gaming platforms, they're going to be more adapt to take on the virtual reality immersive training.

So it's going to take time, it's not something that's going to happen overnight but I think the opportunity to be involved in it. And some of the people and the partners that we're talking with about this is really an exciting opportunity. I can't give you how big it is. I'm just giving some references to some other market studies. But the response we're getting right now with the officers and the agencies that are using our equipment are really validating all the beliefs that we have in this. And the feedback has been tremendous that we are really getting positive feedback from these agencies that want to use this and want to see this going forward.

So very, very exciting market. I don't want to set very high expectations on the revenue as we roll it out, because we want to get it right. We want to work with the agencies to make sure it's meeting their needs because if it's great and they don't use it, then it's of no benefit. So we've got to make sure that it's great and they're using it and it meets their needs. And that's what we're really focused on to make sure that when we do really turn the gas up on getting that rolled out, that it's going to meet the needs and get the - those subscription models going for us.

Paul Manley

Perfect. Thank you, Tom. Maybe one for Jim coming in here. SG&A, a slight increase in the quarter, do you expect this to continue? Yes, no? And why?

Jim Barnes

Yeah, we had addressed that in the prepared remarks that our SG&A was $6.6 million for the quarter. And $2 million of that was non-cash stock compensation expense. And we expect that to go down by about $ 1 million in the next couple of quarters. So you're talking about a $1 million reduction there. And there were some non-recurring costs in Q2, for example, the annual shareholder meetings. So we expect those numbers to stay fairly flat through the balance of 2021. And we wouldn't see a huge increase in the SG&A line as we move forward.

Paul Manley

All right, great. Thanks, Jim. And just in the interest of time and keeping this in within about 60 minutes, I think I'll do two more questions here. The second to last one, you have about, $0.7 million in backlog right now. When do you expect this to ship and also be recognized as revenue?

Jim Barnes

Well, our backlog is basically a quarter end situation. We expect to ship that backlog in Q3. And we typically fill orders pretty much as they come in. We manufacture products in the United States. We don't have at this point really long lead times in fulfilling orders. So we expect backlog to vary quite a bit, mainly because it's a quarter-end type situation. And we don't look at it as an indicator of sales at this point. It may change later on when you have more recurring revenue from WRAP Reality. But right now, it's not an indicator that we look at that closely.

Paul Manley

Great, thank you, Jim. And I like this one. We've had a few of these come in. For the rest of the year, in the second half of 2021 and into 2022 and beyond, what are you most excited about at Wrap Technologies?

Tom Smith

There's a bunch of stuff I'm really excited about. First of all, is the team that we're building. Getting Glenn on Board was really exciting for us, because it's really, again, going back to that margin focus, we've talked about it. We're starting to make a lot of progress in that area that I think that everyone's going to get to see, especially in the second half of the year and into '20 and '22. It's really - it really is a goal of us to get over that 50% margin. And that again, is going to have a big impact on the financials for us.

So having Glenn in here working full time with the staff and just the whole team that we're building, and the execution that we're seeing, and again, with the BolaWrap seeing these field uses come in. And the bodycams are really showing that the belief that we have and what this is going to do for policing is making a difference. And having conversations with the community leaders, again, even the elected officials, and all the media coverage that we're getting, we've talked about it, but it is making a difference.

And it's really, really exciting to be able to see the hard work paying off with these bodycams showing the use and then that's leading to even more increase and more officers coming in and saying. “Hey, I really need to learn about this.” Again, so it's upgrading the quality of the inquiries that we're getting. They're not just, to use the term, tire kickers looking at - trying to learn something about this. Now a lot of the conversations are, we're looking at wanting to get this started in our - use with our agency and our officers. How do we do that, and who can we talk to as references? So that just continues to, to go forth.

So I'm super excited about that. Again, the team that we're building, the products that we're coming out with, the roadmap, this platform that we're creating, there's no better time for it. Between the BolaWrap family of products on the one side and the devices matching up with our WRAP Reality training on the other side, it's the same customer that we're talking to. So it's not only the equipment, we're putting in the hands of the police to make a difference for them. It's going to be enhancing the training that's going to cover.

And again, not only BolaWrap, but all the tools that they have available to them to try and prevent that escalation on use of force, to try and help them on their communications and conversations. Because, we've - I've talked to many, many people that have said, in a lot of cases, a hairdresser gets more training in an annual case than police. And we need to change that.

And we're going to change that through technology, we're going to change that through the program that we're putting together. And it's really again, easy for people to point out the problems. This company and everybody associated with it, we're using technology to provide solutions to those problems. And that's very, very satisfying.

So, super excited about what we're - where we're going, what's ahead for us in the second half of this year and really rolling into 2022. And it's the continued execution on what we've been doing to-date, that it is getting us the validation that what we've been talking about, the conversations we're having, it's working. And that's where the bodycams validate, that the conversations with the agencies validate that and we really appreciate the support from our investment community. And again, having the strong balance sheet to be able to do that and invest that wisely and even press the envelope on how much quicker we can bring these technologies to market, so a lot of things that I'm really excited about for the next 18 months.

Paul Manley

That's great Tom. Thank you. Jim, Tom, thank you very much. I think that's a great one to end on. Thank you to everybody who did submit a question, if I did not get to your question, please e-mail me at [e-mail] and I'll get back to you as soon as I can. Now, I will turn the call back over to our CEO, Tom Smith.

Tom Smith

And again, thanks, Paul. And thank you, everyone for joining us this afternoon. We really do have a unique an exceptional product and services platform that only continues to get better. We will continue to add industry leading talent at our management and our board levels. And in terms of both timing and marketplace demand, we have a historic opportunity now and for the next several years with which to radically change the world of law enforcement for the better and solve these really difficult problems that our communities are facing. And we are deeply driven to continue to make fast progress towards achieving our goal of positioning the BolaWrap and WRAP Reality is the industry's ubiquitous technology platform.

So again, I'd like to thank everybody. Wish you all to have a great evening and we look forward to providing you with our next update. So take care, stay safe and be healthy. Talk to you soon.