WRAP Q3 2019 Earnings Call
Operator: Good afternoon, ladies and gentlemen and welcome to the Wrap Technologies Third Quarter 2019 Conference Call. At this time, all participants are in a listen-only mode. After the speaker presentation, there will be a question-and-answer session. [Operator Instructions]. As a reminder, this call is being recorded. Before we get started, will be referring to the press release file today that details the company's third quarter 2019 results that can be downloaded from the company's events and presentation page at www.wraptechnologies.com. Finally, a recording of the call will be available on the same events and presentations section of the company's website later this evening. Please be aware that some of the comments made during this call may include forward-looking statements within the meaning of the Federal Securities Laws. Statements about the company's beliefs and expectations, containing words such as may, will, could, believe, expect, anticipate, and similar expressions constitute forward-looking statements. These statements involve risk and uncertainties regarding the company's operations and future results that could cause Wrap Technologies results to differ materially from the management's current expectations. The company encourages you to review the Safe Harbor statements and risk factors contained in today's press release, and then the company's filings with the Securities and Exchange Commission, including without limitation, the company's most recent quarterly report on Form 10-Q, and report on Form 10-K, and other periodic reports which identify specific risk factors that may cause actual results or events to differ materially from those described and forward-looking statements. The company does not undertake to publicly update or revise any forward-looking statements after the date of this conference call. The company also notes that on this call, they will be discussing certain non-GAAP operational metrics, such as backlog, number of trainers, agencies, and distributors. The company is providing that information as a supplement to information prepared in accordance with accounting principles generally accepted in the United States or GAAP. And now, I'll turn the call over to David Norris, the company's Chief Executive Officer.
David Norris: Thank you, operator. It's great talking with everybody, again. I'm going to give a quick overview of our progress from last quarter. And then our CFO, Jim Barnes, will run through some financial numbers before our President, Tom Smith, and I will give a business update after which as the operator stated, we'll take some questions. Before we begin, I'd like to take a moment to acknowledge -- thank The Wrap Technologies' team whose passion and hard work and collaboration with law enforcement, and really beginning to change how law enforcement and the community interact has been unprecedented. The tools that we brought to work with, those with medical crisis have already begun making a big difference, and I'm sincerely grateful for their efforts. This is our second quarterly call since joining the NASDAQ marketplace, and we're very pleased to report significant progress; some of which was highlighted in the press release we filed maybe an hour earlier -- an hour ago earlier today. At a high level, if we look at Q3 revenues, they've increased over 300% -- 350% from Q2 revenues; this is in large part because we launched our first real commercialized product in May this year. A few departments have started ordering, and their second orders, which is big for us; one of the metrics we'll be tracking as we go forward will be what we call full deployment which is -- some department will order few devices and then later when they are very pleased with it, they will come and fully outfit their department, and we're starting to see some of that today. Also a few departments -- a number of departments actually are starting to report back to us what we're calling internally green line successes, meaning they had an opportunity to use the device, they pulled out the device, and we're able to successfully de-escalate the encounter when they put the green line on the individual's arms or legs, most police departments consider this a success because this tool is meant to actually de-escalate encounters. As a reminder, we've done demonstrations in 45 states, about 110 agencies have our device as of the end of last month; I believe 4 agencies are waiting for a training, meaning, they have devices but we need to train them before they can put them out in the field. And we have over 450 officers that are trained to operate or to carry our device and utilize it in the field. So quotes are up for us both, domestically and internationally. I will add though that, this is still very new, so I can't really give any guidance and the number of quotes and the pipeline, and what that pipeline of order pull-through will look like but we're hoping to get more insight into that in the near future. I believe we also mentioned that we just attended the IACP, International Chief of Police Conference in Chicago last week; we had our own booth there, and this was our second attendance. I believe there is roughly 30,000 members, about 16,000 attendees to this conference from 80 different countries. This year in the booth we were joined not only by our team, The Wrap Technologies team, but also by distributors and trainers as well. Really looking at the conference as a whole, there were -- there was a number of booths that were the basic items, lights for cars, flashlight, things that you'd put on the belts, guns. And then, the largest booths were really for infrastructure items like new software for 911, dispatch, record-keeping, body camera tracking. Probably the second largest booth at the show were around training, and those were companies that you could look up easily today that are in that space. Those companies, almost all of them came to us and asked if they could start having access to our BolaWrap, so they could incorporate that into their training package. So departments that use their training today can start virtually or visually incorporate our product into that training, which means we are definitely gaining traction. I would say, and I may be slightly biased; but BolaWrap was the most significant new tool shown for the belt of a law enforcement officer. At the entire conference, the traffic that we saw at our booth was maybe 400% higher than the traffic we saw last year. The discussions that we were having with law enforcement were much deeper; they were about training, they were about uses, we had one exciting Chief of Police from Southern California area come to our booth and tell us BolaWrap saved a life this week and explained what happened, and that was very exciting for all of us. And more exciting; that is the uses that we are starting to see on the field, the product is working exactly as designed, it's deploying and wrapping the way it was meant to. We also saw a number of community representatives come to our booth who liked the concept of our product of not inducing pain to gain compliance. And then also, we had a significant increase over last year of federal agencies wanting to talk about our product and demonstrate our product. As I looked at the high level market overview; last year there was several large departments in the U.S. specifically that were looking at a number of less lethal products and they were going through a process to decide which they should continue down the path and task [ph]. In all of those cases so far we have -- I would say won that opportunity, and so we are now moving to the next level of testing with some of the larger departments in the United States. It's clear that law enforcement is very eager to have a standoff restraint device that does not rely on pain compliance, essentially something that works for the law enforcement officer on the street and when I talked about 'worked' that really means the effectiveness of the product itself, and then how many used cases is there where our product would be effective. In the end, if you look at our company, we produced a great product, what we deliver is product quality and training, and in many cases we don't -- we never actually meet the end officer that will carry our device. So what we need to do is make sure we've got a very high quality product that meets their needs, consistently operates, and then training that; when we train the trainers at a police department, sheriff department or federal agency, that training then can be easily passed down by them to their own people into the -- in the street. Another thing that we're trying to do is the uses that we've had today have all been what I would call rather violent encounters; what we're trying to do, and that's because many of our devices in the hand of SWAT or supervisors. As we move forward, you'll see a big push for us to start moving down to the line level officers so that it can be used in much lower level encounters. From a big picture, the -- on the company positioning, we have significant brand awareness, it's rare now that I talked to an officer that haven't heard of BolaWrap; so considering we're in the 2-year old range as a company to have this kind of market penetration is almost unprecedented. We have no competition right now in this low level of force area. The only one thing that we are learning is that number of departments are starting to classify our product almost to the level of handcuffs, which means they don't always track or do a use of force report when our product is used; so it's not always possible for us to find out every usage. In the end that's good for us because we want them considering this a very low level of force because it allows them to use it often but it also makes it more difficult to track uses. Our market strategy here is simple; we're internal, we often say singles or what win the World Series. Singles for us are selling into smaller U.S. department -- of the almost 23,000 police, sheriff and federal agency in the United States; I guess under half of those are 10 officers, 10 sworn-officers on the street or less, so those small orders are going to continue to be our bread and butter. The home run orders for us will be international and a couple of U.S. departments. U.S. departments tend to be much more methodical will move slower, but -- so we'll see -- our expectations will see some of the larger orders coming from international before we see them from the U.S. And then, from a retailer perspective -- not a retailer perspective but from a shareholder perspective, when we look at our shareholder list, a year ago we had roughly 800 shareholders, today we have roughly 6,000 shareholders; the majority of those shareholders are small and from the conversations we are having as we do demonstrations and training, a large percentage of those are law enforcement which gives us a great deal of confidence in our product as they see the opportunities and what that could mean for them in their job, in their daily duty, as well as for us as a company, Wrap Technologies. Clearly, we are feeling positive about our performance, momentum and all the areas of the company, and we'll provide some additional details. Before we do that, Jim Barnes, our CFO, will give you more detail on our financial results.
James Barnes: Thank you, David and good afternoon, everyone. Our detailed operating results are set forth in the press release filed today, and our quarterly report on Form 10-Q also filed today. We are in the very early stage of addressing a large worldwide target market for our remote restraint product and accessories. Our $12.5 million June 2019 follow-on public offering allowed us dance tapping [ph] to broaden our strategy to simultaneously address both domestic and international markets. Third quarter revenues increased from a mix of agency distributor and the international order fulfillment. With the move to the larger Tempe, Arizona facility, we are building production for larger product shipments that we expect in future periods. Revenues were $268,000 for the third quarter, and $446,000 for the first nine months of 2019. Quarter three revenues increased 350% over quarter two revenues. There were minimal comparable year revenues as we commenced limited product sales in late-2018. At the end of Q3, we had 238,000 of customer deposits and a backlog of orders of approximately 1.3 million, expected to be delivered over the next nine months. Distributor and customer orders for future deliveries are generally subject to modification, rescheduling, or in some instances cancellation in the normal course of business. We expect to fulfill smaller orders timely, and we do not yet have enough insight into timing and nature of large international and domestic orders to determine how periodic backlog will relate to future revenues. Gross profit margin was 41% for the third quarter, and 43% for the first nine months of 2019. We rely on both, direct and distributor sales, both domestically and internationally, and changes in sales channel max can significantly impact product margins. Other factors impact margins including product updates, raw material and component changes, and warranty costs. Due to the startup nature of our sales and production activities we do not believe historical margins should be relied on as an indicator of future margins. The move to our larger facility in Tempe may also impact margins, again, dependent on volume and mix. SG&A cost for the third quarter $1.9 million compared to $0.7 million during the year ago quarter. We rapidly expanded our sales, training and support activities to support our planned growth. SG&A cost for the nine months ended September 30, 2019 were $4.5 million compared to $1.6 million for the prior comparable period. In the near-term, we expect to expand comparable levels of resources on the marketing and selling of our products, training distributors and customers, and supporting our operations. R&D costs for the third quarter were $730,000 compared to $168,000 during the year ago quarter. Research and development costs for the nine months ended September 30, 2019 were $1.6 million compared to $458,000 for the prior comparable period. We expect our R&D cost will vary depending on specific research projects, and levels of internal and external staffing and prototype costs. The GAAP net loss for the third quarter was $2.4 million or $0.08 per share compared to $834,000 or $0.04 cents per share during the prior year's third quarter. The net loss for the nine months was $5.8 million or $0.20 per share, compared to $2 million or $0.09 per share. The net loss for each nine month period has included approximately $1.1 million and $323,000 respectively of non-cash stock-based compensation expenses. We ended the third quarter with $19.2 million in cash, and cash equivalents and working capital of $20.1 million. We have minimal debt, stockholders equity was $20.7 million at quarter end. For a more detailed analysis of our financial results, please read reference our Form 10-Q filed today. David, over to you.
David Norris: Thank you, Jim. So before I pass it to our President, Tom Smith; I thought I'd hit it because you mentioned Jim on the new facility we have, the 11,000 square foot facility. Within that facility we've built a dedicated training room to where we can train products, we can host usually active duty law enforcement to come in, we train them and then they're able to go out and train other departments, as is essentially contractors for us. We also use that facility to -- for not only meetings but for demonstrations, as well as local and other departments come to the Tempe, Arizona area. We also use that for warehousing, shipping, and assembling. At a high level, our assembly today on the one-line one-shift 4-days a week, 10-hour a day operation; we can develop 10,800 cart or devices a year, and 43,200 cartridges per year. If we go to two shifts, we're living these exact same lines, we can do double that number; so 21,600 devices a year; 86,400 cartridges a year. And then we can go significantly beyond that if we add second shifts, or a second shift and multiple lines. So our capacity within this operation, this facility is quite significant. We also -- once we start getting better insight into our orders, we'll be able to start outsourcing more of our volume; so that will again increase the capacity that we have in this building today. We've also -- as I mentioned, the trainers, most of them active duty law enforcement, that we train within this facility -- we call them master instructors, and they trained instructors and law enforcement agencies; today we have 23 of those, and we are growing that count significantly. The training component of our product is critical and while we don't blend it with sales, there is clearly a high correlation with training a department and them successfully using our product. Today, I believe 95 agencies have been trained and about 450 officers that can carry the product in the field have been certified. Last thing I wanted to comment on is, we also have an engineering within this facility. We recently hired Scott Cloak [Ph], who was our VP of Design Engineering, he will be helping us develop our next-generation of BolaWraps, our BolaWrap 200 product, which will function similarly but incorporates even more of the asks of law enforcement today. And with that said, I'd like to turn it over to Tom Smith, our President.
Tom Smith: Thank you, David. Good afternoon, everybody. We're continuing to work on our domestic and our international sales, and to-date, we've demonstrated to over about 170 agencies or so domestically. The demonstration when asked usually lasts anywhere between 90 minutes and 2.5 hours, that encompasses a PowerPoint along with a live demonstration. We got some very positive coverage including a very large Reuters article during this quarter that was actually attending one of these demonstrations, so they got to see the PowerPoint information that was presented to the -- through the command staff along with the wrappings and live demonstrations that we do. In addition to the 170 agencies that we've done demonstrations for, we have 110 agencies and 20 distributors that have taken delivery of the BolaWrap; so that number continues to increase. We also completed all of the training of the distributors, and the significant note during the quarter is we added about 90 people in those distributors companies that are now out doing demonstrations. And in fact, during the IACP trade show, a number of those distributors came by our booth, spent time in our booth and showed us videos of them doing their demonstrations and wrapping agencies and chiefs within their territories. So again, it's expanding our reach by working cooperatively with us. We now have exclusive distribution agreements with 11 district domestic distributors representing 45 states; so that's getting us very well in place to cover almost the entire country, we've got just a handful of states left. Internationally, we have 15 exclusive distributors representing 25 different countries, and a handful of other distributors that are still going through the process of looking for licensing and validation on whether we're going to select them or not. And we have shipped product over 13 countries. I personally did several demonstrations in various parts of the world this past quarter, and again, that agency or that demonstration process internationally as allowing these officers to get their hands on the product to see how it works, they understand it's very simple. And to David's point earlier, the fact that they can use this similar to handcuffs and kind of throw handcuffs on somebody from a distance shows me the belief that there's going to be a lot of international use and those are really where those big bluebirds are because they are very, very large agencies, we're trying to determine the time and the effort it's going to take to get them to advance to purchases; what we're trying to get into a timeframe and a process right now that we can work with and be able to report back. So obviously, very excited with where we're at. David mentioned the numbers on the IACP, the Chiefs of Police trade show. In November in about three weeks we're actually attending another international trade show called Milipol, that actually is about twice the size of the IACP show, it has a very, very large international component; there is over 1,000 distributors, nearly 30,000 visitors from 151 countries attended the previous time this show was held two years ago. So we'll have a very good booth presence there, another virtual reality experience in the booth during that training, we're very, very excited about -- again, that international exposure, and that's falling right in-line with the demand that we continue to see on a daily basis. And the great social media presence that we have is also driving a lot of users to reach out to us, gather more information and to push forward. So we're obviously excited, feeling very good about what the progress has that's been made, and a lot of the hard work that still continues to go, the blocking and tackling. And with that, I'll turn it back over to David.
David Norris: Thank you, Tom. I'll close by saying, we're extremely positive about our position in this unique market space that we've really created. We believe that we're in the early innings of broad customer adoption of our restraint solution. We'll continue to focus on building customer relationships and judge our success by the level of success that our customers have, and more effectively and safely engaging with our communities. Thank you very much. And operator, we can turn it over for questions now.
Operator: [Operator Instructions] Our first question comes from Neal Goldman of Goldman Capital Management. Your line is open.
Neal Goldman: Yes. Tom, why don't you give us the size of the opportunity in the international market? And then also, can you compare it to your experience at TASER [ph]? Where are we in terms of starting to penetrate versus where you are at present [ph]?
Tom Smith: Sure. Thanks, Neal. So obviously, in the U.S. the number is 800,000 officers, 18,000 different agencies; as David mentioned, half of those are less than 10 men. Internationally, that market is 10 to 12 times the size of the domestic market, some of the countries we're dealing with right now have officers that -- 300,000 men in those departments, and they're in the point right now where they've gone through some of the demonstrations, they've seen the product, they're currently working on implementation for test and evaluation programs, which obviously is the exciting next step for us because that lets the officers in those countries start to use it and see how it's going to fit for them and to work into their business. And as a comparison to where I was at previously, this is much faster, much quicker response than we had then; it took years to get to this point previously, whereas this time around it's -- they are actually pushing us to get there quicker, to start the demonstrations quicker. Even in some of our domestic agencies, they are going to unprecedented lengths that they've never done before, to get these out on the streets and to push to get the results as quick as they can so that they can go back and get budgets and funding and start putting them out there. So I think the opportunities are extremely large internationally, but trying to nail down the exact timing of those is going to be the challenge but from what I'm seeing right now, they are moving very, very quickly, a lot faster than I even had anticipated.
Neal Goldman: Okay. Also, you gave the production capability out of the new facility; what kind of sales do we need of instruments and then the wraps to get the cash flow breakeven?
David Norris: I'm getting the shaking of the head from our CFO; so I don't believe that I can answer that directly. But I can tell you that the -- I think I'm okay with this Tim; if we hit the volume numbers that we can do today with one shift at our current staffing capacity in 2020, that would take us past breakeven.
Neal Goldman: Okay, that's all for me. Thanks a lot, guys, and good luck. Bye.
Operator: Thank you. Our next question comes from [indiscernible]. Your line is open.
Unidentified Analyst: Thanks for taking the questions. Are we still following your product for $1,395 [ph] or that's still the retail list price?
Tom Smith: That is the retail list price for one unit.
Unidentified Analyst: Okay. And how does that compare to the other non-lethal constraint [ph] devices out there?
Tom Smith: We're on the low-end of what else is out there. Obviously, if you're looking at handcuffs, those are $30 to $50. So…
Unidentified Analyst: No, I'm talking about rubber bullets or the Taser, but that's really non-lethal, but it may be to insert into that category?
Tom Smith: Yes, we're -- we feel we're very well priced where we're located right now in the low-end of where those other items are.
Unidentified Analyst: Okay, because you know, they also have zip-ties. What do they pay for zip-tie these days?
Tom Smith: I'm not in a zip-tie business, so I'm not sure but you can get those pretty cheaply at Home Depot.
Unidentified Analyst: Well, yes, but that's -- I mean, you put them in the law enforcement hands, it's got to be 5 times that. Anyways, have Taser had a price increase of the product, is that true?
Tom Smith: Again, I'm not familiar with what they're doing over there but the prices have traditionally been higher with the product feature sets that they brought out, like the multiple shot and the connectivity systems. But again, we feel very good about where we're at with our price, and it's comparable to where the Tasers came out back in the early 2000s.
Unidentified Analyst: Okay. And let's go to production for a few minutes here. Number one, the BolaWarp 100, how many of those did you have deployed in the field that you have to replace?
David Norris: So the prototypes that we had in the field, you'd have to give me some room on these numbers; but we had a few hundred that we had in the field and we've -- majority of those were given to departments for free-of-charge. And now we've upgraded those to the newer device, and in many cases, now they are purchasing those devices. I believe there is -- I can't give you an exact number off the top of my head, but there is less than 100 of the old device deployed, and we are actively upgrading those. Because in the end, our long-term success as a company depends on the officer in the field being very, very happy with the results of using our product. So we need the best product possible in their hands.
Unidentified Analyst: Absolutely, I agree. Your new facility, I would assume your efficiencies depend greatly on volume?
David Norris: Yes, they do, it's -- and the predictability of that volume. We've gone through us one of the tougher phases of -- I'd say, any startup organization, which is; finalizing and making a manufacturable commercialized product and we have passed that. Our bigger struggles today are being able to accurately anticipate volumes and level load our product, we've got good numbers around tech-time or work instructions, and our labor force seem to be very solid, it's getting a good insight into the upcoming volumes. It's clear by some of the upcoming tests that we'll probably talk more about it at our Q4 calls that the numbers are going to be lumpy.
Unidentified Analyst: Well, that was worse that way with a startup. You -- on the call, you mentioned out-sorting -- outsourcing volume; did I hear that correct?
David Norris: Yes. So as we get much better insight into the product that we have, we'll be able to start taking smaller sub-assemblies and have them outsourced. For example; the plastic itself has screws that go in and we embed basically a piece of brass in the other side of the plastic, that can all be done with the plastic manufacturer but we -- that will be an additional expense, and it's not -- it doesn't pay-off until our volume start growing. But as they grow, we'll be able to start outsourcing some of that which will make us much more efficient in-house.
Unidentified Analyst: Okay. I only have a couple of more questions, I don't want to dominate the Q&A. The -- with that I forgot what it -- what is the -- the product going into the field, is it 85%, 90% reliable or it doesn't come back or is it 99% reliable?
David Norris: So we've had product come back but typically, I'll give an example, I won't tell where Tom did this but it came back because it was thrown across the parking lot, and then we will -- we brought it back, we replaced the plastic; but it's -- the reliability of the product seems to be very good, we've sent the product out to a very high-end lifecycle test company who did significant testing on the barbs, on the pellets themselves, on the Kevlar cord that included dunking their water, the cord in the water deploying the device after that seeing how well it will wrap, shooting it hundreds and hundreds of times in rapid succession, rapidly taking up to 170 degrees Fahrenheit and then dropping it in a very short period of time to minus 27-28 degrees, then deploying it. So, it's -- we've been in salt fog [ph] testing; so we've done a lot of outside external testing and in large part because the military and some of the larger law enforcement departments demand it. With that we feel very comfortable with where we are in product quality today.
Unidentified Analyst: Okay. Wrongful lawsuit settlements for aggressive force by police departments; I would assume those numbers are growing on the average cost of a settlement. Can you give us any color to that?
David Norris: I would say right now we're not a part of any of those, and from my history, we have teamed up with some legal experts in that field; so that if and when that day may come we're ready for it. And right now I -- that's -- the courts are really driving the use of force and kind of pushing all the pain compliance tools up to a higher level, which is just helping create that niche for us to fit into very nicely.
Unidentified Analyst: Yes. I'm considering the opportunity is created for you because those costs are going up and they see you as a way to alleviate those costs.
David Norris: It's really across the board. I can tell you many -- a number of the demonstrations that Mike Ross [ph] and his team that have done in the U.S. at the insurance companies -- city management has participated in that, and then sometimes they've actually pushed for the demonstration themselves. The law enforcement -- today there is many avenues as the obvious cost to the city, to the taxpayer, to the community; but today -- law enforcement that used to be that they would get restricted to a desk, then it moved to the next level where they can be personally held liable. Today law enforcement officers can go to jail for misuse of force, so the scrutiny that is put on them is unprecedented, and that's driving a desire for a tool like this.
Unidentified Analyst: Okay. That goes also, I asked the question [indiscernible]; how much push from the insurance companies to use something like this to hopefully, reduce the amount of money they have to pay out for settlements that -- departments that aren't self-insured? Could you give us any color on what's happened over the last quarter to today?
David Norris: Yes. All I can tell you is just that they clearly see that opportunity as well, and that's why they help us get into departments to show the product.
Unidentified Analyst: So they are an influencer, potentially?
David Norris: Some departments. It seems to be -- Tom, correct me, if I'm wrong. It seems to be less of self-insured departments and more the smaller departments that have insurance companies.
Tom Smith: Yes, the risk management pools [ph].
Unidentified Analyst: Okay, last question. Your executive management team; do you have any weak spots or places that you need to add or want to add?
David Norris: From our team?
Unidentified Analyst: Yes.
David Norris: I'm extremely pleased with what we've been able to accomplish with the team today. But clearly, as we grow and we add revenue, then there are a couple of spots that we'll probably fill out. But I'm very pleased with the team we have today, we've been able to implement all of our infrastructure systems, from our financial systems to our CRM systems, to manufacturing systems, to training management systems; we put in in the manufacturing side, all the necessary work instructions, that -- we're able to ship even dangerous goods across -- to any place in the world, basically where we're allowed to. So, I'm very pleased with what we've done on what I'd say a lean staff today. And as we grow, we'll continue to build out, but there is no glaring empty spots today.
Unidentified Analyst: Okay, very good. Thank you very much. Sorry, for so many questions. Thank you.
David Norris: No problem.
Tom Smith: Thank you.
Operator: Thank you. Our next question comes from Jonathan Levinson [ph] of Levinson Capital. Your question, please.
Unidentified Analyst: Hi, congrats on the quarter. So how many orders from departments have you received this quarter? And sort of -- because I'm looking at the revenue, and -- how much of that is distributor versus departments?
Tom Smith: We're going to be giving that -- those numbers specifically as we get to the fourth quarter. We can't comment right now on the specifics, but obviously, we're just excited with the trend on revenue increasing right now.
David Norris: I may be able to say just that, the distributor orders are in the beginning of the quarter; we're more essentially filling their inventory and we're starting to get those follow-on orders [indiscernible] to police departments.
Unidentified Analyst: So that revenue is all distributor revenue?
David Norris: No, the majority of that revenue -- I'm not sure if I can actually say majority, but a great deal of it is ending up with the end-user. There were some initial stocking orders from distributors, but none of them were large enough to dramatically skew that number.
Unidentified Analyst: And with the gross margin, how much -- so, could you break down the gross margin after the distributor gets the product?
David Norris: So our target, even selling through distribution; our target -- that we're targeting is to get to 50% and slightly above; we're not there today in large part because as we burden the sale of the product with -- I'd say lumpy manufacturing because our orders are not completely consistent today, and then as well as the cost of the building and all that labor; it is higher than that but our target is to -- as soon as we hit more saving [ph] state manufacturing to be in the 50% range.
Unidentified Analyst: Okay. And are you looking at any automation technologies?
David Norris: Yes, we're looking at a number of different automation opportunities from winding the Kevlar core that goes in the device to not having to screw the device together. But all of those require capital, so we're going to wait till we start seeing more predictable volumes before we invest in it.
Unidentified Analyst: And what kind of capital expense would that be -- the cost for those technologies?
David Norris: I can't give you the exact numbers.
Unidentified Analyst: Can you give me roughly? Multi-million dollar investment or…
David Norris: I would say less than $1 million by a significant amount.
Unidentified Analyst: Okay. And what's the biggest pushback you're hearing from investors?
David Norris: From investors?
Unidentified Analyst: I see that you guys have a short interest of 13%; what are those guys saying?
David Norris: Actually, I've never had the opportunity to talk to them, so I honestly don't know. I -- in the end, it's our job to make sure we're adequately communicating in the market what we're really doing, and the positive direction we're going to. I can tell you from the law enforcement community and our product itself, we're getting astoundingly positive responses. But I don't have any insight into why it's being shorted? I wish I did because I'm just curious as well.
Unidentified Analyst: Maybe we should do something to find out, obviously, a lot of times it doesn't make sense. So, I mean it's the public market. So…
David Norris: I can continue to tell the team that we need to focus on the things that we can control with this cost around this business, the quality of the product that we put out and ultimately the training that we deliver, and those are what we can control more than anything else, and so we focus on that.
Unidentified Analyst: I think gross margin has been a big concern. So…
David Norris: Actually, that helps. Good you shared that, I didn't know.
Unidentified Analyst: So getting back to the gross margin, you were saying 50% is the target where you guys could get?
David Norris: Yes. And I think to get there on the device, I think will be easier than it will be to get there on the carters [ph], the -- most of the -- I'd say secret sauce of this is built into that cartridge, and additionally, that's where the majority of our IP protection is.
Unidentified Analyst: Okay. Now the gross margin for the 50% that's mixed between cartridge and launcher or…
David Norris: I blended that number, I answered but it's -- the target is roughly the same for both.
Unidentified Analyst: Okay. And that's after the cut…
David Norris: To be clear we're further off for the device and we have the cartridge, so our focus will be on improving the cartridges.
Unidentified Analyst: And this will be net after the distributor cut?
David Norris: Yes. I believe the rest were significantly better than that.
Unidentified Analyst: Okay. How much are you giving up by using distributors?
David Norris: I don't think we're answering that. And it's case by case too, not all distributors are of the same amount; and the international and domestic are different as well.
Unidentified Analyst: So it seems like -- you said, quarter-to-quarter it's going to be lumpy revenue?
David Norris: I think that what you'll see is the -- what I call the single Cs; smaller man departments, they are able to make decisions much quicker. So these base heads have probably $5,000 to $10,000 orders; we think those are going to be predictable, and we look at those as kind of our bread and butter orders. And the larger orders which I'll define in the U.S. being a large U.S. department or internationally, a large international test, will be lumpy. Today, to have visibility into that is somewhat difficult but when you look at a U.S. department, there is -- the majority of them are not large compared to the size of a standard international department, meaning multiple-fold difference. So what would be a large -- mid-sized department entire rollout in the U.S. is just -- is an order size for a test in many other countries because they don't have so many police departments, it's just a few large ones.
Unidentified Analyst: Okay. The other question; did you see a patriot one at the show you were at in Chicago?
David Norris: I did, I walked by and saw their booth, yes. And I have a pretty good idea what they do.
Unidentified Analyst: Okay. Yes, I've been involved with them before. I feel like it's similar sales cycle in terms of -- just government is slow; so -- they make total sense but…
David Norris: When you look at this space, and again, this is my -- clearly not facts, and this probably falls under the Safe Harbor whether for them or others that are selling larger infrastructure technology; I think that their sales cycle will be slower than ours. Ours is more of an adoption at the line level officer use, so it's the line level officer who gets more comfortable using our product, and in most cases that will be dependent on the training, they've got, the quality of the product, but also seeing other officers use it successfully; that's really going to be the catapult for the tipping point for our BolaWrap product.
Unidentified Analyst: Okay. Is there any opportunity to digitally integrate the product so when it's launched someone's notified; headquarters notified?
David Norris: Yes, there is a lot of opportunity to do that and there is also opportunities with current technology out there too as you remove up from a holster to notified dispatch; so there is a lot of opportunities going forward that are out there.
Unidentified Analyst: Okay. And, what's the best way to predict when these sales cycles are going to close?
David Norris: I think that…
Unidentified Analyst: You know, when we're going to get purchases?
David Norris: I think you'll see that as -- I think we'll all see that as time passes and we get -- gain more and more quotes, more and more orders, we'll start being able to put a predictability to the -- to those of what that pull-through will be; and at that time we'll be able to have more predictability of the orders.
Unidentified Analyst: It's probably going to be [Technical Difficulty] if we start getting some solid initial sales?
David Norris: I'm not -- Jonathan, you're on a cell phone? You keep breaking up, sorry.
Unidentified Analyst: Yes, I'm on a cell phone. Could you hear me now?
David Norris: Yes. Maybe -- probably we should move on. Let somebody else asking question; we've got about 10 more minutes left.
Unidentified Analyst: Alright, thanks again. And congrats on the quarter.
David Norris: Thank you very much. You take care.
Unidentified Analyst: You too.
Tom Smith: And if I -- this is Tom, if I can jump in. We had a couple of people sending some emails with a couple of questions. Matt Joyce asked, when will the BolaWarp be available for the general public to purchase? Our reminder that the BolaWrap is a firearm right now, so with our firearm transfer laws and the current classifications that were in, this -- the current generation of the device will just be for law enforcement security and for an international. We also had a question from Laura Shipmen [ph] asking about when a presentation is made to the police, what has been the sales success rate for the presentation? And, that's a great question, that's the one we're actually modeling right now and tracking through our CRM; so that as we go around and do these demonstrations and the trainings that we'll be able to give information in future calls on what those rates are because equally, I'll be interested to see what if they didn't move forward, what was the decision point on that, as well. And then, one of the last questions we have was from Jesse Hernandez asking about designing an effective from the quick holster with retention system? We're currently working with several different companies right now to design holsters, our operations primarily focused on the device but obviously, the key to the success of the system is going to be with these officers carrying it on their belt; so that's going to be a key component. And there is a lot of holster manufacturers out there with a ton of experience in this space, so we have an initiative right now working with those companies to develop different holstering ways to carry the BolaWrap device. So with that, I'll turn it over to David to wrap up the call. And look forward to talking to you soon.
David Norris: Perfect, actually. Thank you very much. And again, as the operator stated, this call will be recorded and you'll have access to it on the website. And thank you very much for your questions, and for joining us in our second quarterly call. And we look forward to talking to everyone, again.
Operator: This concludes our Q&A session. If your question was not taken, you may contact Wrap Tech's Investor Relations team at ir@wraptechnologies.com. You may now disconnect your lines at this time. Thank you for your participation.