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Edited Transcript of VTSID earnings conference call or presentation 13-Aug-19 8:30pm GMT

Q2 2019 VirTra Inc Earnings Call

Tempe Aug 20, 2019 (Thomson StreetEvents) -- Edited Transcript of VirTra Inc earnings conference call or presentation Tuesday, August 13, 2019 at 8:30:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Judy A. Henry

VirTra, Inc. - CFO, Secretary & Treasurer

* Robert D. Ferris

VirTra, Inc. - CEO, President & Chairman of the Board

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Conference Call Participants

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* Jaeson Allen Min Schmidt

Lake Street Capital Markets, LLC, Research Division - Senior Research Analyst

* Joshua Diamond

Maxim Group LLC, Research Division - Equity Research Summer Analyst

* William Tennent Gibson

Roth Capital Partners, LLC, Research Division - MD & Senior Research Analyst

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Presentation

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Operator [1]

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Good afternoon and welcome to VirTra's Second Quarter 2019 Earnings Conference Call. My name is Tom, and I'll be your operator for today's call. Joining us for today's presentation are the company's Chairman and CEO, Bob Ferris; and the CFO, Judy Henry. (Operator Instructions)

Before we begin the call, I would like to provide VirTra's safe harbor statement that includes cautions regarding forward-looking statements made during the call. During this presentation, management may discuss financial projections, information or expectations about the company's products and services or markets or otherwise make statements about the future which are forward looking and subject to a number of risks and uncertainties that could cause actual results to differ materially from the statements made. The company does not undertake any obligation to update them as required by law.

Finally, I would like to remind everyone on this call that there will be a replay via a link in the Investor Relations section of the company's website at www.virtra.com.

Now I'd like to turn the call over to VirTra's Chairman and CEO, Mr. Bob Ferris. Sir, please proceed.

One moment, ladies and gentlemen. We have experienced just a minor -- just one moment, please.

(technical difficulty)

Mr. Ferris, you may begin.

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Robert D. Ferris, VirTra, Inc. - CEO, President & Chairman of the Board [2]

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Sorry about the technical difficulties. Good afternoon, everyone, and thank you for joining us today. After the market close, we issued our financial results for the second quarter of 2019 in a press release, a copy of which is available in the Investor Relations section of our website.

As those of you who have followed our story know, our goal at VirTra is to both grow the business and improve and save lives by providing the very best and most effective simulation training possible. The recent horrific shootings underscore just how imperative it is to decisively and quickly end such threats for the safety of all. The idea that better training for more personnel can ultimately save lives and be a profitable business is at the core of why VirTra exists.

At the start of this year, we implemented a number of new strategic initiatives which we believe will not only improve our end users' ability to effectively de-escalate and appropriately respond to potentially life-threatening situations but will also help propel VirTra to the next level as a business. These changes include bolstering our technological capabilities, expanding and diversifying our products and services to create more stable and consistent revenue streams and further expanding our presence in the military market.

In the second quarter of 2019, we made substantial operational progress implementing many of these structural changes, which we believe will have material and positive impacts on our customers and our business over the next several quarters and years. In fact, we are encouraged by ever-improving technology available to our engineers while customers seem more and more open to computerized solutions for many of their training needs.

As we stated in previous quarters, it is common to witness fluctuations in our financial results between quarters both positive and negative. This lumpiness is an inherent result of the traditional hardware sales model that we have utilized since 2004 and only recently expanded upon with a new subscription option. Thanks to the unmatched quality of our market-leading products and our excellent staff, we've achieved 14 years of revenue growth and currently have a strong sales pipeline.

Our innovative products, our team, our drive, these variables are within our control, and they are among the many things that we are constantly working to improve. It is the reason that we have added new patented simulated weapon capabilities by acquiring key assets from Tiberius Technologies and expanded our product offering by introducing driving simulators. It is the reason that we continue to strengthen the staff of our sales and marketing team. It is the reason that we have completed a record number of product demos and trade shows this year.

However, when it comes to the revenue recognition equation, there is, unfortunately, a major variable over which we have little control, when our customers choose to schedule the delivery of the products they have ordered. Because we can only recognize revenues when product is physically delivered to a customer, the timing of product deliveries, which again is at the discretion of the customer, has a major impact on revenue recognition.

It is rather common for customers to place an order with VirTra and then delay the delivery of that order. Over the years, we have seen instances in which customers purchase our simulators after securing proper funding but then delay delivery because they have not yet constructed the room for the new simulator. We have also seen delays because a customer staff requires a specific date to work within their busy schedule.

That being said, it's worth noting that customers' time preferences can swing both directions. Occasionally, customers will request delivery of a large amount of equipment all at once, as was the case in the second quarter of 2018. In these instances, VirTra has proven capable of handling large surges in demand even on short notice.

Generally speaking, for our proprietary products, we perform manufacturing and assembly in-house. We are, therefore, uniquely able to scale our manufacturing capability to quickly meet the needs and timing requests of our customers.

Our flexibility and scaling efforts were tested a little over a year ago when we received various normal orders plus a large $4.6 million order consisting of 49 simulators and accessories from one of our federal customers. We recognized $4.2 million in revenue from this 1 order in the second quarter of 2018. It made up a substantial portion of our revenues in that -- in the quarter and is the primary reason we reported a record quarter last year. In addition to the monetary benefits this order generated for our business, it also demonstrated that we have the personnel, the technical know-how and the necessary infrastructure to deliver on large contracts when expedited delivery is requested by a customer.

In stark contrast to the large and expedited orders we witnessed a year ago, we experienced several delays from customers in the second quarter of this year. I'd like to stress that lower recognized revenue is not due to a lack of capacity to manufacture and deliver product. Rather, it is mainly a result of VirTra delivering when it is best for the customer.

Unfortunately, a large order we witnessed a year ago combined with the delays requested by customers this quarter have resulted in a substantial swing of our financial performance when compared on a year-over-year basis. The good news is that despite the unfortunate timing of product installs with multiple customer deployments, our sales of new products remains healthy.

In fact, I'm pleased to report our backlog increased to approximately $10.1 million, which is a record for VirTra. In addition, we expanded our presence in Southern California with recent contract wins, including Santa Ana, Anaheim and Inglewood police departments as well as the Orange County Probation Department. You can read about the details of these orders in the corresponding press release.

However, what I would like to highlight here is that when it comes to training for public safety, agencies will often demo the top companies in our field to determine what is the best solution. These wins were a direct result of our focus on certified curriculum, realistic training content, high-fidelity simulators and a reputation for excellent customer service.

These agencies thoroughly vetted alternative solutions and found the best solution for the safety of the public and the officers themselves was VirTra. As a result, we were able to displace a competitor, and now VirTra is the brand that dominates this part of the country. Our hope is to repeat the success in other areas around the nation and in other countries.

Though we are encouraged by the demand in the marketplace for equipment purchases, we do recognize that there is a need to both mitigate volatility and provide more insight into our future performance. Also, moving from equipment sales to recurring revenue is often beneficial for the overall health of the business.

For these reasons, we introduced the industry's only subscription-based law enforcement training program, known as STEP, to the market about 6 months ago. With the STEP program, agencies can access VirTra's unique certified simulation training on a subscription basis rather than being required to purchase our equipment outright. The concept is that the subscription model enables a larger number of agencies to utilize VirTra's industry-leading products, thereby increasing our total addressable market.

Now we spent a great deal of time consulting with experts in developing this program prior to its launch. But the reality is that whenever you release a new innovation in a market there's always some uncertainty. I'm pleased to report that so far we have secured multiple STEP contracts for both police and military agencies.

We will not be releasing any detailed metrics at this time, but I can report that the initial response and reviews from customers have been very positive. And perhaps even more encouraging, many of these contracts are with new customers who likely would have been unable to procure our industry-leading simulators had they been required to purchase them out right.

However, please bear in mind that STEP is still a new program for VirTra and for the market. We strongly believe that by increasing our recurring revenue through a profitable subscription offering there is a substantial opportunity to make our business more predictable, less volatile and more diversified in the long run. We will continue to monitor the developments of this program closely and look forward to providing more updates as they materialize.

Now before I dive into more specifics of the operational progress we've made since the beginning of the year, I'd like to turn the call over to our CFO, Judy Henry, to walk us through our financial results for the quarter. Afterwards, I'll jump back on to talk more about our progress and provide further updates. Judy?

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Judy A. Henry, VirTra, Inc. - CFO, Secretary & Treasurer [3]

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Thank you, Bob, and good afternoon, everyone. Our total revenue for the second quarter of 2019 was $3.1 million. This was a 65% decrease from the $8.7 million of revenue we recognized in Q2 of last year. For the 6 months ended June 30, 2019, our total revenue decreased 49% to $6.1 million from $12 million in the first 6 months of last year. The decrease in revenues for the 3 and 6 months ending June 30, 2019, was the result of a reduction in the number of simulators and accessories completed and delivered compared to the same period in 2018. For the 3 and 6 months ending June 30, 2018, recognized revenues included the $4.2 million from the large federal simulator and accessory order that was originally valued at $4.6 million in addition to all the other customer revenues.

Our gross profit for the second quarter of 2019 decreased 74% to $1.5 million or 49.6% of revenue from $5.7 million or 66% of revenue in the second quarter of 2018. For the first 6 months of the year, our gross profit decreased 59% to $3.3 million or 54.3% of total revenue from $8 million or 66.7% of total revenue. In both periods, the decrease in gross profit was primarily due to differences in the product mix and the quantity of systems, accessories and services sold.

Our net operating expense for the second quarter of 2019 decreased 14% to $2.4 million from $2.8 million in Q2 of last year. For the first 6 months of 2019, our net operating expense decreased 11% to $4.7 million from $5.2 million in the same period a year ago. The decrease in operating expense for both periods was due to reduced selling, general and administrative expenses, costs for labor, benefits, professional services and public company expense.

Turning to our profitability measures. Loss from operations for the second quarter of 2019 was $883,000 compared to income from operations of $3 million in Q2 of last year. For the first 6 months of 2019, loss from operations was $1.3 million compared to income from operations of $2.8 million in the first 6 months of 2018.

Our net loss for the second quarter of 2019 totaled $634,000 or negative $0.08 per diluted share. This compares to net income of $2.1 million or $0.26 per diluted share in Q2 of last year. As a result of the net loss and other deferred tax adjustments, we recognized an income tax benefit of $217,000 in Q2 for a total tax benefit of $324,000 in the first 6 months of 2019. For the 6 months ended June 30, 2019, our net loss totaled $947,000 or negative $0.12 per diluted share compared to $2 million or $0.25 per diluted share in the comparable period a year ago.

Our adjusted EBITDA loss, a non-GAAP financial measure, was $604,000 in the second quarter of 2019 compared to a positive adjusted EBITDA of $3.2 million in Q2 last year. For the first 6 months of 2019, our adjusted EBITDA loss was $883,000 compared to a positive adjusted EBITDA of $3.1 million in the first 6 months of 2018.

Turning to our bookings and backlog. We define bookings as the total of newly signed contracts and purchase orders received within a defined period. For the 3 months ended June 30, 2019, we received bookings totaling $4.1 million. We define backlog as the accumulation of bookings from signed contracts and purchase orders that are not started or remained uncompleted and cannot be recognized as revenue until delivered in a future quarter. Backlog also includes extended warranty agreements and STEP agreements that are deferred revenue recognized on a straight-line basis over the life of each respective agreement. As of June 30, 2019, our backlog was $10.1 million.

And finally, to our balance sheet. At quarter end, we had approximately $3.3 million in cash and cash equivalents of certificates of deposit, which was down from $4.6 million at the end of the prior quarter. From a working capital standpoint, we ended the second quarter of 2019 with $4.8 million in working capital, a decrease from $6.8 million in working capital at the end of the period ended December 31, 2018. For additional details of our financial results, please reference our 10-Q, which was filed earlier today. That concludes my prepared remarks.

I'll now turn it back to Bob.

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Robert D. Ferris, VirTra, Inc. - CEO, President & Chairman of the Board [4]

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Thanks, Judy. One of the key objectives we outlined for 2019 was to expand our footprint in the military market. As part of that initiative, we have attended and spoken at conferences and participated in several product demonstrations with military officials. In order to help us better navigate this market, we engaged a highly regarded business development consultant, retired Colonel Joe O'Connell. Joe's background in both the military and the private sector make him uniquely qualified to assist VirTra in gaining new business within the military market.

Since we engaged his services, he's been incredibly helpful in assisting us explore new channels which otherwise would have been challenging for us to navigate independently. He's a great resource and a highly respected expert in the field, and we're proud to have him as a member of the VirTra team. We are optimistic that the combination of Joe's assistance and our market-leading products will bear fruit, and we will continue to provide updates on our progress in this market as it materializes.

As part of our business expansion initiatives, in March of this year, we added driving simulators to our product suite. Similar to the enhancements we made to our recoil kits, the introduction of driving simulators was part of our goal to strengthen our technological capabilities to expand our customer base and add to our revenue streams. Though this may seem like a departure from firearms simulators, we view police driving simulators as a natural complement to our business. We designed these new simulators to provide law enforcement with a safe and reliable environment in which to practice and absorb new skills.

Effective simulation training is our core competency. By introducing driving simulators, we have opened the doors to new revenue as well as created instances for cross-selling with current customers. As you already know, in the first quarter, we received an initial $1.9 million order for driving simulators from the Department of State for the Republic of Mexico. I am pleased to report that the first of these state-of-the-art driving simulators are being installed now and are receiving very positive reviews. We are scheduled to complete this order in 2019.

And just last month, we received our second and third orders for driving simulators for which we have not yet issued a press release but that we are announcing today. These new orders also fall under the indefinite delivery, indefinite quantity, or IDIQ, contract we have had in place with the Department of State. As with prior orders, the simulators will be delivered to the Department of State and are expected to be donated to Pakistan in support of U.S. foreign assistance programs. The 2 newly ordered driving simulators are valued at approximately $782,000, that is the 2 newly ordered contracts. Of course, these orders will not be reflected in our financial results until delivered.

Similar to STEP, our driving simulators are new to the market. It will take time to fully scale and become a material component of our revenues. But given the demand we've already seen in the market, the positive reviews and our existing client base of agencies seeking high-quality training, we believe there is good reason to feel encouraged by this program's potential to add value to VirTra and our customers.

Though financially, the second quarter did not finish the way we would have liked, we ultimately believe there is great cause for optimism as we are now entering our busiest season of the year with a record backlog, strong pipeline, new product lines and the largest sales and marketing activities we've seen in our company's history.

And with that, we're ready to open the call for your questions. Operator, please provide the appropriate instructions.

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Questions and Answers

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Operator [1]

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(Operator Instructions) We'll take our first question from Jaeson Schmidt with Lake Street.

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Jaeson Allen Min Schmidt, Lake Street Capital Markets, LLC, Research Division - Senior Research Analyst [2]

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Just curious if you could comment on how customer reception has been for the STEP program and both feedback from current customers and potentially new customers.

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Robert D. Ferris, VirTra, Inc. - CEO, President & Chairman of the Board [3]

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Yes. Thanks, Jaeson, for the question. So the feedback that we've been hearing is that customers are finding it easier to go from interest in VirTra products to actually getting a contract completed and getting product scheduled for delivery for them. So it seems like by avoiding equipment purchase in some instances, customers are finding it easier to get approvals through and obtain our equipment. So generally, we're hearing that as main feedback for certain customers.

Now there are some customers that already received grant money or already had gone through the process for equipment purchase, and that was one reason we wanted to do both subscription program and maintain the ability to sell to customers who want to just purchase equipment outright because sometimes they are set up for outright purchase. But we're finding that some customers that have interest in VirTra are finding that STEP gives them an expeditious way to obtain VirTra product.

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Jaeson Allen Min Schmidt, Lake Street Capital Markets, LLC, Research Division - Senior Research Analyst [4]

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Okay. That's helpful. And congrats on the additional orders for the driving simulators. Wondering if you could comment on why you're seeing some early success in the market and why you're winning against some of your competitors in that space.

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Robert D. Ferris, VirTra, Inc. - CEO, President & Chairman of the Board [5]

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Yes. I think that there's -- that in that space there's a potential for innovation. It -- some of these systems have been out in the market for many years, and I think VirTra having the latest software technology in this space is helpful. And because our development on this is the most recent of any company in that space, we're able to leverage the very latest in the technology realm from 3D graphics to other capabilities.

We haven't gone into full disclosure on what the technological features are that we feel are competitive for that product, but I do think that also sometimes it's having the right product at the right time, and we're certainly encouraged by the success of it so far.

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Operator [6]

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We'll take our next question from Allen Klee with Maxim Group.

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Joshua Diamond, Maxim Group LLC, Research Division - Equity Research Summer Analyst [7]

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This is Josh Diamond actually calling on behalf of Allen at Maxim Group. So I first wanted to ask you guys about gross margin. And I know that revenue fell largely because of when it is recognized with your customers. So I was wondering if you guys could explain a little bit why it fell 17% and kind of where you expect it to go by the end of the year.

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Judy A. Henry, VirTra, Inc. - CFO, Secretary & Treasurer [8]

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Do you want me to...

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Robert D. Ferris, VirTra, Inc. - CEO, President & Chairman of the Board [9]

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Yes, go.

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Judy A. Henry, VirTra, Inc. - CFO, Secretary & Treasurer [10]

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Thanks for the question, Josh. A lot of it has to do with the mix of the products, the various systems, the type of systems, the accessories and what type of contract that it is being purchased under. Obviously, we have a great variety between federal and state and commercial. And so it really just relates to the combination of those factors. Fortunately, this quarter several things came into play, including the more competitive contracts that had a little bit lower margin and then some of the products that went out that had a little bit lower margin.

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Joshua Diamond, Maxim Group LLC, Research Division - Equity Research Summer Analyst [11]

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Got it. Great. And kind of a follow-up to that is, do you guys have any programs to kind -- to help expedite the process of your customers installing your product or partnerships to make installing it or constructing rooms around it any easier for them?

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Robert D. Ferris, VirTra, Inc. - CEO, President & Chairman of the Board [12]

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So yes, we do. And in fact, one of the key aspects for VirTra in installing is early contact with the customer. We don't right now have any plans to be involved in room construction and to assist in that area. So that is one area that we really can't help in, and that has to do with the kind of bonding that's required and general contracting law that we really don't want to get involved with.

So in that area, we are not working. But in other areas, we do coordinate with customers to try to expedite installs. And sometimes that works out, and the customer is actually willing to get the equipment on time or early. And then other times, the customer actually needs to postpone delivery for a variety of reasons.

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Joshua Diamond, Maxim Group LLC, Research Division - Equity Research Summer Analyst [13]

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Great. And with your recent increase in backlog, do you guys expect to see most of that come to fruition at the end of this year or next year or it's hard to tell at the moment?

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Judy A. Henry, VirTra, Inc. - CFO, Secretary & Treasurer [14]

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Well, of course, we have a forecast about that, and we say we expect the majority of it to come in this year, but there is always an unknown factor with the customers' schedule. And so that's always the caveat. It's going to flow over into 2020 for sure. But at this point, we think we should see 50% or more.

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Operator [15]

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We'll go next to William Gibson with Roth Capital Partners.

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William Tennent Gibson, Roth Capital Partners, LLC, Research Division - MD & Senior Research Analyst [16]

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First, a housekeeping question, Judy. When you put a STEP order in bookings and backlog, is it the whole future cash flow over the life of a contract? Or how is that treated?

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Judy A. Henry, VirTra, Inc. - CFO, Secretary & Treasurer [17]

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There are certain -- well, thanks, Bill, for the question. There are certain components that we get to recognize right away such as installation and shipping. And then the remainder of the contract that is for the subscription base is recognized over the life of the contract, simple straight-line amortization.

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William Tennent Gibson, Roth Capital Partners, LLC, Research Division - MD & Senior Research Analyst [18]

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And so is that total in the backlog?

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Judy A. Henry, VirTra, Inc. - CFO, Secretary & Treasurer [19]

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Yes, it is. Yes, the backlog includes all the deferred revenues.

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William Tennent Gibson, Roth Capital Partners, LLC, Research Division - MD & Senior Research Analyst [20]

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Okay. And Bob, you mentioned the effort to grow the military business. Are there contracts coming up this year that you have a shot at?

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Robert D. Ferris, VirTra, Inc. - CEO, President & Chairman of the Board [21]

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So thanks for the question. We are very carefully monitoring the military area. We do think that there are some contracts that may occur. It is not set in stone though what contracts and what areas will be occurring for the remainder of 2019. Certainly, we're starting to get more visibility on where the opportunities are in the military space based on our current client mix -- I'm sorry, our current product mix.

So we do have our eyes on various potential contracts, but we -- there is not one specific contract that is released right now for bid that I can point to and say that's one that we're going after and we're going to win. We are certainly looking at what opportunities are evolving in that market. And they're giving new information out sometimes weekly in that market.

There seems to be a lot of activity in the military market, more than we've seen over the past 15 years really. And it seems to be that the military is looking at innovative, newer ways to do simulation training and focused on point of need training. That would be actually shipping equipment to a warfighter and having them do sort of their own training rather than going to a centralized large training facility. That's a paradigm shift.

In that paradigm shift, we're seeing potential opportunities for a variety of companies, but specifics are in short supply right now as both the Army and the Marines are 2 groups that both seem to be looking at changing their paradigm or actually doing things different than they have in years past. And so VirTra is trying to be in a position to make sure we can present the products that might work well and fit well with what the military is wanting. And certainly, the new consultant is helping us in doing that work. We're encouraged that there may be some opportunity for VirTra in this process based on what we're seeing.

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Operator [22]

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And at this time, there are no further questions. Mr. Ferris, I'd like to turn the call back over to you for any closing remarks.

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Robert D. Ferris, VirTra, Inc. - CEO, President & Chairman of the Board [23]

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Okay. Well, thank you very much, and thanks, everyone, for listening to the call today. This is a very exciting time at VirTra, and we certainly would not be where we are today without the support and commitment from our extraordinary employees, customers, shareholders and partners. I believe our very best days are ahead of us, and we look forward to updating you on our next call. Thank you, and God bless.

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Operator [24]

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Thank you, ladies and gentlemen, for joining us today for VirTra's Second Quarter 2019 Conference Call. You may now disconnect.