VirTra, Inc.
Q3 2018 Earnings Call Transcript

Published: 14 Nov 2018

[Operator:]

Good afternoon. Welcome to VirTra’s Third Quarter 2018 Earnings Conference Call. My name is Hector and I will be your operator for today’s call. Joining us for today’s presentation are the Company’s Chairman and CEO, Bob Ferris; and CFO, Judy Henry. Following their remarks, we will open up the call for your questions. Before we begin the call, I would like to provide VirTra’s Safe Harbor statement that includes cautions regarding forward-looking statements made during this 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 that this call will be made available for replay via link in the Investor Relations’ section of the Company’s website at www.virtra.com. Now, I would like to turn the call over to VirTra’s Chairman and CEO, Mr. Bob Ferris. Sir, please proceed.

[Bob Ferris:]

Thank you. Good afternoon, everyone, and thank you for joining us today. After the market closed, we issued our financial results for the third quarter of 2018 in a press release. A copy of which is available in the Investor Relations’ section of our website. On our last call, we reported that Q2 was a record quarter for VirTra in nearly every metric. And while we were pleased with our financial results last quarter, we were also cautiously aware that due to the nature of our business not every quarter would be quite as successful from a financial perspective. However, for those of you who have followed our story for some time, these results should not be surprising, nor should they deter from our long-term growth prospects. Rather these results merely reflect the current nature of our business, which we have discussed on prior calls. While our total addressable market is growing and demand for our solutions is increasing, our revenue is not often recognized in a steady quarter-over-quarter format and our financial results particularly our topline can fluctuate considerably at a quarterly granularity. However, when looking at VirTra on an annual basis and backtesting for many years, our financial results to smooth out. In fact from a topline perspective, we have achieved an 18% compounded growth rates since 2014, while our net income has grown 25% annually over the same period. So with that in mind, on an annual basis, we’re still on track to have a solid year. Our nine-month revenues increased 10% to a record $15.5 million from $14.1 million in the first nine months of last year. Our gross profit increased 8% to $10 million in the first nine months of 2018 from $9.3 million in the same period of last year. On top of this, our cash position increased to $7.9 million and our backlog increased by $1.6 million to $6.8 million. Due to our revenue recognition method, it’s also important to keep in mind that the revenue we recognize in each quarter is not always a direct reflection of the operational progress we make in that same quarter. So while we had a slower quarter from a topline perspective, we continue to execute will operationally. The increase in our backlog is encouraging, but in addition to that, we made further progress towards increasing the strength of our products and extending versus competitive advantages. This quarter we accomplished a first and the training simulation industry when we launched the VirTra-Virtual Interactive Coursework Training Academy or V-VICTA, which incorporates carefully crafted curriculum from the world’s top experts to propel the training potential of VirTra simulators to new heights to benefit our customers. Further, we delivered $3.5 million in products and secured a new purchase order from the Department of Homeland Security to develop customized training content for the United States Customs and Border Protection. We also made substantial progress in our cooperation with some of the industry’s most respected authorities in key areas of police training and human performance. Moreover, we incorporated knowledge from these experts into our simulators to expand the breadth and depth of how our simulators can help produce the best trained police of the planet. Now, before I dive into the specifics of our operational progress, like to turn the call over to our CFO, Judy Henry, to walk us through our financial results for the quarter and first nine months of 2018. Afterwards, I’ll jump back on and talk more about our progress this quarter as well as our outlook for the rest of the year. Judy?

[Judy Henry:]

Thank you, Bob, and good afternoon, everyone. Our total revenue for the third quarter of 2018 was $3.5 million. This was a 24% decreased from the $4.7 million of revenue we recognized in Q3 of last year. The decrease in total revenue for the quarter was due to reduce sales of simulators, assessed recent scenarios relative to the third quarter of last year. For the nine months ended September 30, 2018, our total revenue increased 10% to $15.5 million from $14.1 million in the first nine months of last year. The increase in total revenue for the nine-month period ended September 30, 2018 was due a good increase in sales of simulators, accessories, licensing fees, warranties and other services. Our gross profit for the third quarter of 2018 decreased 33% to $2.1 million or 58.8% of revenue from $3.1 million or 66.4% of revenue in the third quarter of 2017. For the first nine months of the year, our gross profit increased 8% to $10 million or 64.8% of total revenue from $9.3 million or 65.7% of total revenue. The gross margin variation for each period resulted from differences in the type of quantity of systems and accessories sold. Our net operating expense for the third quarter of 2018 decreased 15% to $2 million from $2.4 million in Q3 of last year. The decrease in net operating expenses in the quarter was primarily the result of reduced accounting, legal and consultant expenses. For the first nine months of 2018, our net operating expense increased 11% to $7.2 million from $6.4 million in the same period a year ago. The increase for the nine month period was due to increases in general and administrative expenses and impairment loss on investments in TEC, formerly known as Modern Round Entertainment Corp recorded as operating expense and increased professional services including non-recurring legal and public company expenses directly related to the Company’s qualification and SEC registration and NASDAQ listing in March of 2018. Turning to our profitability measures, income from operations for the third quarter of 2018 decreased 89% to $80,000 from $752,000 in Q3 of last year. For the first nine months of 2018, income from operations increased 1% to $2.9 million from $2.8 million in the first nine months of 2017. Our net income for the third quarter of 2018 totaled $61,000 or $0.01 per diluted share. This compares to net income of $742,000 or $0.09 per diluted share in Q3 of last year. We recognized an income tax expense of $36,000 in Q3 of this year, compared to $11,715 in Q3 of last year. For the nine months ended September 30, 2018, our net income totaled $2.1 million or $0.25 per diluted share compared to $2.8 million or $0.33 per diluted share in the comparable period a year ago. We recognized a provision for income tax of $872,000 for the first nine months of 2018 compared to $769,000 in the first nine months of 2017. Our adjusted EBITDA and non-GAAP financial measure decreased 80% in the third quarter of 2018 to $174,000 from $874,000 in third quarter last year. For the first nine months of 2018, our adjusted EBITDA increased 2% to slightly over $3.3 million from $3.3 million in the first nine months of 2017. Turning to our backlog, the company’s backlog consists of bookings or contracts received, for which delivery is scheduled to occur in the future, resulting in revenue to be earned and recognized in future quarters. Backlog includes all products and services including extended warranties. At quarter end, our backlog totaled approximately $6.8 million. Finally, to our balance sheet. At quarter end, we had approximately $7.9 million in cash and cash equivalents, which was up $3 million from $4.9 million at the end of the prior quarter. From a working capital standpoint, we ended the third quarter of 2018 with $9.3 million in working capital, an improvement of $1 million from $8.3 million in working capital at the end of the prior quarter. For additional details of our financial results, please reference our Form 10-Q, which will be filed on Wednesday, November 14. That concludes my prepared remarks. I’ll now turn it back over to Bob.

[Bob Ferris:]

Thanks, Judy. On our last call, I spent a good amount of time discussing the importance of our strategic partnerships. We believe these relationships will help our partners, our customers, as well as strengthen and expand the VirTra brand. We are actively working with our partners, including Haley Strategic and Force Science Institute to expand quality content and further distinguish VirTra and set ourselves apart as the gold standard for the industry. We recognize that it is the efficacy of our products, our reputation, and our massive investment in time and money and immersive simulation training for the past 17 years that help set us apart from our competition. We offer the highest quality and only all encompassing solution to deescalation and use of force training and critical human encounters with life or death consequences. To remain at the top requires constant attention to innovating, evolving and expanding our products remain on the cutting edge of our industry. We require grounding in the present but a keen eye for the future in VirTra, we have a strong history of finding the balance between satisfying current demands while planning for anticipated future trends. And I founded the company in the early ’90s, my goal was to make the most effective simulators possible. Our V-300 simulator is the best in the world and we have built out what is the largest and most comprehensive library of training content on the market for immersive police training. And now we’ve taken what we believe to be the next logical step. In the development of law enforcement training and education by creating V-VICTA, which stands for VirTra-Virtual Interactive Coursework Training Academy. I’m proud to say that V-VICTA has met the exacting standards of the International Association of Directors of Law Enforcement Standards and Training National Certification Program, and consist of five differentiated courses they’re designed to be used in conjunction with our training simulators. The courses consist of contacts and cover concepts, human factors enforcing counter’s, tourniquet application under threat, case are targeting and injured officer handgun manipulation. We’ve been working diligently with our partners to integrate this specific scientific research and adult learning behaviors into these educational materials in order to maximize the impact of the simulation training and value for law enforcement. We believe this new coursework fits in perfectly with the all encompassing nature of our products and as another competitive advantage. With the addition of this nationally accredited coursework, we now have a solution that combines all the benefits of a classroom as simulator and other means of testing to ensure beneficial long-term results for officers and departments that use our products. We’re also involved with changes occurring in the military simulation market. Recently, the U.S. army and the U.S. marines announced their acute focus on futuristic simulation training. VirTra products are very much in line with potential military requirements. In some cases, we will need to modify our current products in order to work on new advanced technology platforms, such AR or Augmented Reality or Mixed Reality. But these modifications are easily made given the way we design our products originally. We actually anticipated growing demand in the space and the need for flexible products. So we precisely built our technology to be modular. We are extremely excited by this news and we think VirTra offers products that are industry leading, well tested and simply a perfect fit for portions of the growing military appetite for effective simulation training. Although we’re garnering interest in new markets and always working to develop new products, our revenue is predominantly generated from the law enforcement market. And we continue to have great success in selling our current line of products to those customers. During the third quarter, we received a new purchase order from the Department of Homeland Security to create new custom training scenarios for the United States Customs and Border Protection valued at $745,000. Purchase now deployed in nearly three dozen major international airports, ports of entry and training facilities across the country. The add on order we received this quarter for custom training content will be distributed to provide officers with more CVP specific training materials. While a minority of our revenues each quarter are recurring, add on orders like this one are good example of how the quality of our products and the relationships we maintain with our customers need to additional revenues beyond initial purchases. Speaking of revenues, I have previously pointed out that our backlog increased to $6.8 million. I’m pleased to report we anticipate recognizing at least 50% of these new bookings by the end of the year, which would keep us on pace for a record year in 2018. In addition to our backlog, our cash position continues to remain strong. We are considering ways of leveraging our excess cash to generate benefits beyond a strong balance sheet. To that end, we are currently exploring potential acquisition opportunities that would uniquely fit with purchase business. We are still in the early phase of this process, but I will immediately share any acquisition information if and when it becomes material. We are also looking to buy back shares of VirTra common stock and we will continue to do so based on what is most optimal given the stock markets – the stock's current price, our cash reserve levels, and the potential return of other uses of the cash. In summary, although Q3 was not as strong as a financial quarter as Q3. The third quarter was still a solid operational quarter VirTra, the quarterly variability and annual track record of our current business is to be expected. So given the strong financial performance in the first half of the year, the backlog we have reported this quarter and the increased strength of our balance sheet, we are optimistic about the remainder of 2018 and beyond. From a high level perspective, the intent of this company remains steadfast. We continue to believe that the best way to drive shareholder value in the long run, its remain focused on our mission of providing it effective high tech products in the most efficient manner possible. The more simulators we deploy, the better we make our products and the more successfully we expand the VirTra name, the safer the first responders will be, the safer the rest of us will be and a greater shareholder value we will create. And with that, we’re ready to open the call for your questions. Operator, please provide the appropriate instructions.

[Operator:]

Thank you. At this time, we will be conducting a question-and-answer session. [Operator Instructions] Our first question comes from the line of Jaeson Schmidt with Lake Street Capital Markets. Please proceed with your question.

[Jaeson Schmidt:]

Hey guys, thanks for taking my questions. Wondering if you could comment if you’ve seen any significant change to your visibility given the change in the macro backdrop over the last three months here?

[Bob Ferris:]

At this point, we have not seen any change to our visibility given the macro backdrop that’s occurring. So I would say no, we’ve not seen any, at least not any negative impact from the macro.

[Jaeson Schmidt:]

Okay, that’s helpful. And regarding your win with Homeland Security, do you expect that to be delivered here in Q4?

[Judy Henry:]

No, that has a future contract date into next year.

[Jaeson Schmidt:]

Okay. And the last one from me, and I’ll jump back into queue. Given your current engagement pipeline, do you envision needing to significantly add to headcount next year to address all of these opportunities?

[Bob Ferris:]

We currently believe our headcount might need some increase depending on exactly what contracts we secure. But that would be based on national contract wins. Our headcount is sitting at about 81 right now and that is currently adequate with the contracts were well under.

[Jaeson Schmidt:]

Okay, that’s helpful. Thanks a lot guys.

[Bob Ferris:]

Thank you.

[Operator:]

[Operator Instructions] Our next question comes from the line of [indiscernible] Private Investor. Please proceed with your question.

[Unidentified Analyst:]

Hey Bob, just a question, can you update us or go into any information on any of the product pipeline coming up maybe?

[Bob Ferris:]

Ralph, we – when it comes to the product pipeline, we really keep that under wraps. So we try that to not give any information until the product is passed all testing internally and is ready for prime time. And so I can’t comment until we’re ready at that point. It’s obviously for really important competitive reasons and also if we signal the type of work we’re doing that can also allow our competitors to make adjustments accordingly. So I can’t say that we have several items in our product pipeline currently, but unfortunately I can’t give you more specifics.

[Unidentified Analyst:]

Okay, great. Thanks.

[Operator:]

At this time, this concludes our question-and-answer session. And I’d like to turn the call back over to Mr. Bob Ferris for closing remarks.

[Bob Ferris:]

Thank you. This is a very exciting time at VirTra and we certainly could not have done it without the support and commitment from our extraordinary employees, customers, partners, and shareholders. I realize many of the people involved with VirTra our veterans and at this time, I want to recognize the fact our country was built upon the tremendous sacrifice of service men and women and their families. I thank you beyond what words can adequately express. I know that every employee at VirTra takes great pride in serving those who serve. I believe our best days are ahead of us and we look forward to updating you on our next call. Thank you and God bless.