Good afternoon and welcome to Wrap Technologies Third Quarter 2020 Conference Call. My name is Paul Manley and I'm Vice President of Investor Relations for Wrap. Like we did last quarter, we will be incorporating video highlights into our multimedia presentation. With that was overwhelmingly positive last quarter and we are happy to continue this format. We are looking to be cutting edge and forward thinking in everything we do at Wrap and having an interactive earnings call is another example of this. Joining me on today's call are Tom Smith, our Interim Chief Executive Officer, and Jim Barnes, our Chief Financial Officer. Following our prepared remarks, we will have a Q&A session. [Operator Instructions] 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 Litigation Reform 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. Those risks and uncertainties are described in our earnings press release issued earlier today 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 these forward-looking statements. With that, please let me turn the call to Tom Smith.

Thank you, Paul, and thank you, everyone, for joining us today. Before we go into our quarterly results, I'd like to address a couple of important items right away. First off, on behalf of the entire Wrap team, we wish health and safety to everyone connected with our company, in particular, our customer base is comprised of police agencies across the globe. With COVID and the level of widespread demonstrations rioting we have faced in 2020 this year has been remarkable. We have seen a significant uptick in the level of time and attention our customer prospects give us to learn how the BolaWrap and help them do their jobs more efficiently and safely. Regarding COVID, like all other companies, we continue to navigate the pandemic as well as possible. Our company has remained healthy and I am proud to note that due to all of the actions we have taken to date, we have had limited instances of exposure within any of our facilities. The most significant COVID related setback we have had is limitation in domestic and international travel. Technology is a helpful alternative and has kept us moving forward. But there is nothing like experiencing an in-person Wrap to understand how good our product is and to deliver product demonstrations and sales calls in person. We do expect these travel headwinds to continue for the foreseeable future, but hopefully dissipate through 2021. Next, as you know, I've been named Interim CEO, I want to thank our Executive Chairman, Scott Cohen, and the rest of the board for their trust in giving me the opportunity to lead our company. My excitement starts and finishes with Wrap. We are a special company that finds itself at a very pivotal time in law enforcement and history. The discussion around use…

Good afternoon, our detailed operating results can be found in the earnings press release issued today and on our Form 10-Q filed a short time ago. My thanks to our finance team to help complete our financial reporting process as timely as we do. Let me now highlight a few financial details. Our revenues for Q3 were a record $1,7,000 million. For the first nine months revenues were $2,529,000 representing a 467% increase from the same period of 2019. COVID-19 restrictions substantially curtailed sales in April and May, and we believe this negatively impacted our sales this year. Our gross margin in Q3 was in line with immediately preceding quarter at 32%. As we are still growing our business and scaling production, historic margins should not be relied upon as an indicator of future margins. Like most companies, COVID has made it very challenging to accurately forecast many of our line items near-term, especially gross margin. However, based on recent product changes and new manufacturing initiatives, we believe that our target of over 40% margins will soon be achievable. Our balance sheet remains exceptionally strong, 91% of our total assets of $49 million is comprised of cash, cash equivalents and short-term investments. Together, we will refer to these all as cash on this webcast. We grew this cash balance from $35.4 million at the end of the second quarter to $45.1 million at the end of the third quarter. The increase is primarily due to 2.7 million of warrants exercised in the third quarter, providing gross proceeds of $14.2 million. So far in October, we have received $359,000 for more exercises. We have some warrants that expire tomorrow, so there is a possibility that we may generate additional cash yet this month. The new item on the balance sheet in…

Thank you, Jim, and nice work to you and your team. At this point, I'd like to give you a business review of the third quarter as we had several noteworthy accomplishments. Again, our first quarter with over $1 million in revenue and over $45 million in cash and equivalents on the balance sheet. We have trained over 100 agencies just in the third quarter. We grew from over 100 agencies to now over 240 agencies with the BolaWrap and shipped to 35 countries, which is up from 29 in Q2. We now have 1,100 officers at over three 300 agencies certified to train their departments. Trained officers within agencies is a top precursor to sales activities for us. This training time is a sign of investment from the agency, as well as now having a subject matter expert from the department as they implement our technology. During the quarter, the Los Angeles Police Department provided a publicly available update on their test and evaluation program. We have a very good relationship with the agency and continue to work closely with LAPD as their request to continue their program was unanimously approved and reported by the L.A. Times without change. As we have stated before, we do not expect to know the next steps until the trial ends in 2021. The use of the BolaWrap comes with several facets. First, there's a verbal warning from the officer that the BolaWrap could be used. Next is a green line laser compliance resulting from the subject scene, a line laser on them and no longer resisting. This is very similar to the red dot compliance from CEW being pointed but not fired. When the BolaWrap is discharged along with a tether wrapping around the subject, the sound from the BolaWrap is distracting…

I really hope you enjoyed that video as we now move to the question-and-answers with Tom and Jim. Thanks to everyone who have already submitted a question, we have lots of great questions and lots of similar questions. [Operator Instruction] Our first question will come from Jon Hickman, our analyst from Ladenburg Thalmann. John, go ahead.

I have this first question is for Tom. Give us a little more detail about the CEO change.

Sure. So obviously, there's been a lot of attention for us in the Washington DC area. And in conversations with Marc and the board, we felt it was time for Marc to move to the Chief Government Affairs Officer role and focus really in the DC area. And with my background, there's nobody better to resume and be the interim CEO as we work on focusing on manufacturing efficiencies and deliver. So it was done again where Marc's going to be working with us in the lobbying side. And I'm going to be focusing on the sales and the operations side of the company.

I saw one of Marc's strength was the manufacturing and engineering side. Are you still going to take make use of that?

Yes, we have done a lot of implementation on our manufacturing efficiencies, but again, right now we felt it was optimal with what's going on in this country, with the political environment, with the folks at the national level, pretty much every level. I mean, look at what's going on in Philadelphia that it was with his wife, White House fellowship background, with his military connections. There's not very many White House fellows that are running around out there. So, again, in consultation with them, the board myself, we felt that this was the right focus for the company to move Marc to that role and for me to focus on the manufacturing efficiency enhancements that he's doing and the team that he's building. I will continue to build on the engineering team that we brought in as well.

A couple of other quick questions. How many agencies did you say are using the device?

So right now we're over 245 agencies that are using it. That's up from, I believe, around 180 last quarter. So that's a great jump. And we were up to 25 countries from 29 last quarter. And again, I want to emphasize that's what COVID and no international travel so very excited about, where we're continuing to see growth. And even in October, again, another uptick even in our domestic sales that we'll be talking about very soon.

And then I didn't quite catch this call, but you said that you were seeing increases in new and recurring and replacement shipments. What time period did you say that was?

Yes, so we saw that through the quarter we continuing to see that in October where we're seeing agencies come back with multiple orders, we're seeing it on the international front, the domestic front. So we're seeing growth and continued expansion with our current customers, as well as with us adding new customers.

Okay. So is there a way for you guys to track the use, you just are kind of at the mercy of the agencies?

Well, we work very closely with our distributors and with the agencies, so there's a lot of communication that goes back and forth. It's a complex process, even for a small agency, but obviously a larger agency is even more complex between mayor, city council commissions, all those facets that come through there. So, we get a lot of questions about the ratio of the cartridges to the devices. And I will tell you, our recommendation, minimum recommendation when they're looking at getting started is for six cartridges per device. And where that comes from is that the officer will use at least two in their training. They'll typically carry three in the field, meaning one in the device in a holster with two extra, and then they have an extra cartridge to use for their recurrent training. So as we look at the opportunities as it goes forward, obviously those will change because they'll get skewed with something like the Indonesian order. And they came in with an extremely large order for cartridges right out of the gate. But as we get into 2021 next year, we're going to be able to get that more aligned to be able to give you more clarity. But right now, that's kind of the minimum is kind of that six to one as they get started. And obviously we're seeing it higher than that as well.

One last question for me. There is a pretty significant jump in operating expenses from Q2 to Q3. Can you elaborate on that?

Sure. We will continue to invest in our sales operations, our manufacturing operations, our engineering and just continuing to invest in the company. We did some voluntary upgrades. That was an expense to enhance the product, even some of them that were in the field, that we took the money to do the right thing and get those things upgraded. So, again, we've got an incredibly strong balance sheet and that affords us the ability to continue to invest, and invest well in the company so that we're making sure that we're making the right steps. And again, very exciting for our first quarter to have over a million in revenue. And again, the response we're getting from the market even that already in October has been extremely positive.

Should we expect similar expansion in OpEx for the next couple of quarters?

I think you will see in that. I think we've continued to build our engineering team. We added lot of engineers during this quarter. We're going to obviously with Marc focusing on government affairs, we're going to bring in some more operations personnel. I'm hoping at some point it's going to allow us to really start traveling internationally again. We're looking at some international expansion already with our own personnel. So we're very excited about where we're going and that I don't think we want to sit and hold back on those investments because now is the time to seize the moment, go after this market, continue to see it again first quarter with a million in revenue. So we're going to continue to use that that war chest that we have to make the right investments to grow the company.

Jon, thank you very much for those great questions and your support. Our next questions will be from Greg Gibbous from Northland Capital Markets. Greg go ahead.

Previously shared, it sounds like a lot of your discussions with the LAPD continue to go very well. I guess, the department recently extending that trial not too long ago. Do you think that there's a concern maybe that the LAPD would potentially extend that trial again, just given the limited uses during the pandemic? And I guess is there anything else you can share in terms of feedback from the LAPD?

Yes, great question. And obviously, it's gotten a lot of attention around that particular agency. But we really -- the short answer is we don't know what LAPD is going to do. We were obviously very pleased and excited to see the unanimous vote by the commission to continue doing exactly what they're doing. They made the report public. That's their own data, their own interpretation of that data. We have people there just last week were there on a very regular basis, working very, very closely with them. But again, these were unprecedented times with police reform, discussions with the rioting, the protests that are going on. The Dodgers just won the World Series, which caused a lot of protest, a lot of riots in the streets. So, the police departments are having to respond to a lot of things that are out of the norm. So, I can't tell you one way or the other, but I can tell you we're very comfortable with the progress that we're making with LAPD. We're very comfortable with our relationship, our communications, and we'll continue to support them in any way that they decide. But right now, we know they're continuing that trial through early 2021. And again, they even put that out in a press release for us last month. So we've got a great relationship there. And obviously we're very hopeful.

Great. Good to hear. I know you don't have too much data surrounding the customer adoption yet, but you've made it clear that, you've increased the number of department demonstrations in the quarter. So, I guess I was just wondering if anything changed has changed, maybe the rate at which departments are making purchases or field trials just following demonstrations.

Yes, and we reference that that the So, uptick that we've seen in October has been really exciting, it's even going better than I thought. And again, with COVID and these police reform and we have this election that's coming up next week, that is really garnering all kinds of attention. And then you, it's still really a tinderbox out there. I mean, look at what just happened in Philadelphia earlier this week. It's tragic incidents and then it leads to all kinds of rioting. The Dodgers win the series. They're seeing protests. So it's really, again, unprecedented. But we're very, very pleased, very pleased with the growth opportunities we're seeing, with the department adoption rates and our demonstrations. I mean, we trained 100 departments in this quarter alone. That means, more officers that are subject matter experts. That means, again, more reorders and those things in the more new expansions of orders. So, I mean, that's newer a lot that's more than a department on a day during the quarter that was getting trained during the third quarter when we were seeing things slow down at the end of summer school. Nobody knew what was going to happen with school and travel and all those things. So I'm very excited and pleased with the progress we're seeing and we continue to see even already in this short time within the fourth quarter.

Great. And it sounds like, once again, a lot of international sales was kind of what you saw, but, how ordered demand kind of credit the best. I know it's still kind of a small percentage of sales. But, roughly like it is a tough question. But roughly what percentage of, I guess, domestic police departments do you think you've got to provide a demonstration for? Or maybe at least what meaning are we in terms of getting the BolaWrap awareness in front of those departments across the nation?

So it's a real tough guess. I mean, let me give you another way of looking at it. So we've trained roughly 100 agencies during this quarter. I think we're over 300 agencies trained now and we're over 1100 instructors trained. And just like LAPD is an example, they trained 1,100 officers. So we are in a very, very rough estimate figure that we have roughly 10,000 officers have been exposed or seen the BolaWrap, and that's out of 900,000. So clearly, that leaves us with a big opportunity out there. We've done some surveys that we're going to be coming out with data where very few people still know about us. I mean, we're doing a lot of marketing, a lot of effort, but we still have a long way to go on making people aware of our product. But once we do get people aware of the product, the percentage of people that want to see the police using that product source and again, we'll be getting that data out very soon. But that was the data we ran across nationally in the urban -- with the urban voters. And again, it's showing we are real well known yet, which means there's great opportunity for us. But once people do know us, they really approve of what they see and what they learn about the BolaWrap.

And then just last one for me, I think we talked about this last quarter, but just to check in here regarding any potential changes I've noticed from dialog from customers in the quarter, maybe relative to the last couple of quarters. Has anything changed that you're relating to budget concerns from departments or anything else you picked up?

No, I haven't really seen anything on the budget, but I have seen again, is that uptick where agencies that we were talking to, let's say even a year ago or attended demonstrations a year ago, they're back out contacting us again. So for me, that's a very, very positive sign. It's back to that blocking and tackling. And quite honestly, there's never been more precedented pressure on police for reform, from all of the protests, from BLM, from all the riots, from the defunding communications. And at the end of the day, police I've said this before, they're not Stallworth's of change. They don't change quickly. And that's why I'm very excited about seeing the trends that I'm seeing that they continue with the adoption of this. They're going to still need the equipment. We need those police officers in our communities and they need tools like this. Again, it's the only one out there that doesn't hurt. Somebody had asked us about competition. There is no other competition. We're very well protected with our intellectual property. So very, very happy with where we're at and the trajectory we're on. And I expect that trajectory to continue to the right.

All right, thank you very much, Greg, for your questions and your support as well. We've had a lot of questions coming in on the Q&A tab's. I've tried to summarize a lot of them. A lot of them are very similar. I'm just going to start-off. The first question says here you have a lot of cash. You have 45 million in the bank. What are your plans of use of cash?

So, as I said before, and I'll say I don't know if Jim has any comment on it, but I want to see us continue to invest. Not many companies have the balance sheet that we do with very minimal long term debt. We're going to invest and continue to invest in the business. We're investing in research and development. And that gives us the ability to really go out there and take advantage again of this unprecedented time to see them seize that moment and get involved in Washington, D.C. Luckily, this election is going to be behind us on Tuesday. So, hopefully we can really start to make some more progress there with the military, with the federal agencies and a lot of those grant funds that are required and necessary for law enforcement. We're going to use those dollars wisely. We're going to use them to invest in the right things for the company. And again, that's going to be in the international market as well. So, that's a key opportunity for us. The majority of our business, as we've said, we expect that to continue to be the majority of our business over the next 12 to 24 months. And that more just gives us the opportunity to not have to pull back right now, but to continue to march into investing into the market, investing into getting our demos and our trainings that are the things that we know we're going to grow and lead to the adoption. And again, that's what we're seeing right now in October already. And we'll be putting some information out on that there in the not too distant future.

All right, thank you, Tom. Another good question, what are some of the biggest pushback we have received from police departments, both large and small, as well as some of the international countries?

Well, I think right now, obviously, one of the biggest is cultivate internationally they can't travel. You're seeing in Europe spikes. And there they're going through shutdowns again. But at the same time, as you saw during our highlight video there on television in Spain. We finally got to travel and get down to Colombia recently. We've seen demonstrations in Estonia, of all places. We're continuing to see market progress in Asia, in Europe, in the Middle East. So, I think when you look at the things that are a challenge, it's COVID keeping us from traveling. And then domestically, it's obviously they've got their hands full with the riots and the protests that are going on and trying to sort through all the interest from the community groups, the information that they want to see. I've participated recently in a panel in New York or this discussion about reimagining policing. How do they want to do that? And as I've said then, and I'll say it again, it's easy to point out the problems. Wrap is a company that's focused on the solutions. We're providing tools that are going to make a difference. And as they talk about police reform and less use of force and less injury to suspects, officers, communities, this is a tool that allows them to do that. And as we look at training and implementation of the training and the policies, those are the things that we're going to continue to focus on and continue to invest in. And that's what's going to drive us forward. And that's what I'm going to make sure that we're staying focused on as an organization.

All right, thank you, Tom. Looks like we might have one for Jim here. Gross margins came in the low 32%. What is your near term and long-term goals for gross margins?

On near term, we think we can get above 40%, we have initiatives underway right now to both reduce our labor costs and improve our line efficiency and also to reduce the cost of materials. So those will drive margins going forward. Our margins are affected a bit by the mix, in the product mix. Cartridges right now have a lower gross margin than devices. We expect that to improve over the next several quarters as well.

Jim, I guess maybe on a follow up to this and can you break down the sales between devices due to breakdown the sales between devices and cartridges? Also, can you break down the sales between domestic and international?

I think we've spoken to a number of times that international business right now is the majority of our sales. We expect that to be the same as Tom said in the next 12 to 24 months. We really don't breakout that total except that year-end. And we'll do that at the end of this fiscal year. And next year we'll look at breaking that out more frequently. The mix between cartridges and devices also varies quite a bit right now, because of our lower sales figures, although we're growing every quarter and we'll see those numbers breakout probably next year as well. But generally it's a little bit higher on devices and cartridges overall. But quarter three was a higher cartridge mix because of the Indonesian order.

Maybe this one's for Tom. We've said that the international market is 12 times larger than the United States or the domestic market is. What's the sales process like domestically versus international? Is the process the same?

No, they're very different processes. Again, here you go 18,000 chiefs to 18,000 decision makers, that's 18,000 agency city councils and everything else where when you go overseas, it's typically one or two agencies for the entire country. Indonesia is our example that we talked about before. It's 30,000 and 40,000 officers in one agency that covers the country. So it's consolidated decision process. And it does take longer because obviously the dollars are going to be bigger when you're talking about implementation for an agency that's one third of the size of the entire U.S. market. And again, so they are very, very different. And they do go through a similar process, though. They go through training, they go through demonstrations. They do have to look at budgets. And again, that's why I said before the next 12 months, I expect that to continue to see the international markets being the majority of our business. And again, if you look internationally, typically a lot of those are law enforcement officers aren't even armed. So they're looking for a tool like the BolaWrap that's going to give them that opportunity to stop somebody because they're facing similar problems. They just maybe handle it a little bit differently. And it's done at a national level, rather a state, local or even municipal level here in the United States.

All right, thank you, Tom. We've had a lot of questions come in about the effects of delivery of orders and orders coming in due to the impact of COVID. I guess we've already talked about that a little bit. Is there anything else, Tom or Jim, that you would want to talk about the impact of COVID on our business right now?

I think, again, the impact is just on the international front, we finally got somebody down to Colombia and I'll tell you, it took quite an effort. You have to get the COVID task within 96 hours of the departure of the flight, the airline at the last minute change which test they were going to accept to be able to travel. So the first week got scrubbed. We had to go back, redo the tests, finally get somebody down there. So it's definitely a challenge. And now you're seeing more lockdowns come on the international travel and there is more demand for the product internationally, but those travel headwinds are certainly impacting us. And we're pivoting we're using technology, we're using Zoom. We're translating all our materials into those foreign languages. But to say that it's not impacting us, I just can't say that. And we are doing the best to make sure that we're getting those agencies to continue to go forward. And I think this is one of the things if I look back at my insane travel schedule last year to get to 20 plus countries in my first six months, that's paying those dividends now because we've got great distributors that are trained that are able to handle this locally and do the demos. You're seeing some of those videos. You saw it in Colombia, you saw it in Estonia. You saw our distributor in Spain go on what is the largest nightly show across the entire country and do the demonstration there with the host. So the things that we're doing, the techniques, the tools that we're implementing are working and they're working for the distributors. And again, it's those relationships that we've had, the processes that we know that that's what's really going to continue to grow. So I still am optimistic about the international sales and expect it to continue to march forward despite the COVID challenges.

All right. Thanks, Tom. We have a few questions coming in about the class action litigation. Can you give us a couple of the questions say, can you just summarize the status of the class action lawsuit?

Sure. And obviously, everyone sees the number of press releases that are coming out every day. And just like you see them on television, if you've had a hernia surgery or if you round up, these guys are out advertising. They have 60 days from when the original class action suit was filed to try and attract personnel, to join our customer to join their lawsuit. There's a long way to go on this. We've had obviously conversations with our counsel that this is something that just going to go on for months, if not years. The thing I can say is we don't comment about ongoing litigation. We do find the merits baseless. We are going to defend ourselves vigorously because, again, I just find the merits baseless. And our attorneys are really not going to let us say much more than that. But you will continue to see these press releases come out until sometime in late November when that original time frame expires. Then there's procedural things that happen in the courts and everything else with the attorneys that I'm not privy to. So I rely on them. My focus is on running the business, growing the business, getting the domestic sales to go, continuing the international sales to go. Counsel is going to deal with that. Our insurance is going to deal with that. Our insurance is going to deal with that. So while it's something that obviously we have to pay attention to, my focus is going to be on running the business and letting the attorneys focus on dealing with the lawsuits.

We've had a few questions here. Tom, are there and Jim, are there any additional hires? Obviously there's a change in the C suite here. Are there any additional hires in executive management or upper management that you need to fill in the next upcoming months or quarters?

Good question, I would say not right now. We're obviously going to be looking at areas where we want to continue to focus on very comfortable. Marc and I just talked today, so I'm very comfortable about his continued involvement in a while. He's focusing on government affairs. And again, the team that we've got in place, that is the number of engineers, the number of operations efficiencies that we're continuing to implement. Jim mentioned earlier our margin. We're continuing to focus on growing that. So the blocking and tackling right here in our building in Tempe, we're going to continue that. The investments, the balance sheet gives us the opportunity to do that and make sure we're doing the right steps. We don't need to panic because we've got plenty of financial resources to be able to do this right and continue again to focus on growing the business. Domestic international operations are continuing to go. So I'm very confident in where we're going as an organization.

All right, thank you, Tom. In the interest of time, I'll do a couple more questions here. And if I don't get to your questions today, please reach out to me. And my information will be on the at the end of the call here. So second to last question. It says, are there any competitive products that are out there and what kind of patent protection do you have on the BolaWrap, I guess, Tom or Jim? Go ahead.

So I'll start and I mentioned it before, we don't have any competitive products directly competitive. There's nothing else out there like us in the domestic market. And that's one of the reasons that we really see this. This is the only tool that does not rely on pain compliance. And then Jim's done a great job working with council on our patent. So I'll let Jim comment on the patents.

And we're continuing to file patents almost weekly. We're working with the engineering team. We document everything and that we talked about in council almost daily to keep adding to our patent portfolio. And we're making sure that we cover it was and we're working very hard to continue to upgrade our patent status on the BolaWrap and on all the improvements that you're going to see over the next 12 months in the device and the cartridges and everything that we're doing with our engineering team. I'm really excited about the engineering team that Tom has been instrumental in attracting. We have some really talented people on board right now.

All right. Both, I guess we'll get to today, you clearly have just the great BolaWrap device, you have any additional products that you will be rolling out in the future?

Yes, great question. We talked previously about the armor, the Wrap Armor is going to be launching our website in the very near future. We're also looking at some other opportunities to utilize our current distribution channels to bring technology to law enforcement. So the company is Wrap Technologies. We are looking at other technologies to work on. So as you've heard numerous times with our engineering department, we're looking at new opportunities for our products and for new products as we go forward and new technologies to bring out to law enforcement. So before I turn this back to Paul to close, I just again want to say I'm very excited to take the helm. I'm very excited about our opportunity to continue to be motivated every day I live and breathe. We're at domestic international. I got the chance to do this. A Taser. I've seen where we can go with this and I believe we're going to do that more with BolaWrap in the future. And and the team that we're building here is fantastic. And I just couldn't be more excited about BolaWrap. And again, I appreciate and thank everyone for taking your time with us today. And I'll turn it over to Paul for our closing remarks.

Well, thank you both, Tom and Jim, and to all the Wrap employees that are making this happen and thank you to everyone who's joined the call today. We've had great attendance and we look forward to finishing 2020 very strong and keeping this momentum going into 2021. Thank you all for your interest in Wrap Technologies and our solution. And I hope that you and your family stay safe and healthy. Have a great evening.