VirTra, Inc.
Q1 2017 Earnings Call Transcript

Published: 15 May 2017

[Larry Clark:]

Good day, and welcome to the First Quarter 2017 VirTra Inc. Earnings Webcast. My name is Larry Clark, Investor Relations Counsel for the Company, and I will be moderating the webcast today. By now you should have received a copy of today's press release. If not, it's available on the Company's website at www.VirTra.com. The press release also includes a reconciliation of non-GAAP financial measures used therein. In addition, you can access the Company's first quarter financial report on the website under the corporate section of the website. This webcast is being recorded and will be available for replay for 60 days on the Company's website starting later this afternoon. Before we continue, please take a moment to read the Company's notice regarding forward-looking statements. During this webcast, 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 statements 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 except as required by law. Presenting today for management will be Bob Ferris, Chairman and Chief Executive Officer. Following Bob's remarks, we will review and answer questions that have been received in advance by email as time permits. Now I would like to turn the presentation over to Bob Ferris. Bob?

[Bob Ferris:]

Thank you, Larry. Welcome everyone, and we appreciate you joining us today. I'm going to first provide a brief review of our first quarter results, and then I'm going to discuss our progress on some of our goals and objectives for the year. Afterwards, we will conduct a question-and-answer portion of the webcast. We are pleased to report that VirTra continues to experience solid growth, and this past quarter was no exception. During the first quarter, we generated gross revenues of just over $4.2 million and gross profit of just over $2.4 million. We finished the first quarter with a net income of $402,000. This positive cash flow from operations continues to enhance the strength of our balance sheet. While our first quarter revenue and net income was lower than what we delivered in the first quarter of 2016, it was a challenging comparison. In the first quarter of 2016, we generated total revenue of $6.2 million which was a company record by a wide margin. During that period, a $2.7 million international contract was completed which was a significant driver of our record results. Also as a general rule, we experience a higher than normal revenue quarter, the impact to our bottom line is greater as many of our cost during the quarter are relatively fixed, and the incremental variable margin contribution from a large sale can be high with a significant portion of it flowing through to the bottom line. That's essentially what happened in the first quarter of 2016. From a new sales perspective, the first quarter 2017 was a record for any first quarter in our history where we received contracts totaling $4.9 million. Included in the total was a $2.1 million contract from the Arizona Department of Public Safety that was previously announced on December 19, 2016, but was not officially received by VirTra's production department until 2017. Even if we exclude the order from the state of Arizona we booked approximately $2.8 million in other new orders which by itself would have been a record for the first quarter. We were the sole provider under this award and we will be installing and maintaining multiple units of our industry-leading multi-screen V-300 judgmental use-of-force simulator in seven training academy locations throughout the state. This is important because it is the first step towards the Arizona Department of Public Safety making this training accessible to all law-enforcement agencies and their officers throughout the state. By doing so, many smaller agencies within the state will now have access to our top of the line training simulators whereas they otherwise wouldn’t. It is encouraging to know we are part of the expanding availability of critically important simulation training to law-enforcement officers who otherwise would not have access to such a high quality training tool. In addition to our strong new sales results in the first quarter, we continue to make progress on our other corporate goals and initiatives such as our focus on bolstering our operational infrastructure, working on our new product pipeline and refining our existing products and systems. One area that I highlighted last time was VirTra improving the marketing of our products. Not only do we feel an obligation to generate revenue for our incredibly supported shareholders, we also feel duty to provide the highest level of training possible to help save the lives of those who serve our communities and face real dangers on a daily basis. In support of this effort, we hired two new outside firms and a new employee, all of whom are laser focus on significant improvements in the way we market our products. We have high hopes that these efforts will have a significant positive impact on VirTra in the future and ultimately generate a positive ROI with more trainees experiencing VirTra simulators. As a result of our ongoing investment in our infrastructure and ensuring we provide excellent customer service while growing our customer base, our total operating expenses for the first quarter were $2 million up from $1.7 million in the first quarter of 2016. Please note our recognized revenue in any given quarter is very much dependent on our customer schedules and the ability to have their training facilities ready to receive our equipment. As you can appreciate, even that we do not recognize revenue until our products have been delivered and/or installed, we are often forced to recognize revenue in fiscal periods other and when as sale actually happens. This revenue recognition policy can lead to considerable variation in gross revenue when comparing quarters. That being said, we are encouraged by our strong start to 2017 and we remain determined to deliver continued growth and attractive returns to our shareholders going forward. Roughly 15 years ago we began development and what would become the world's first 300 degree simulator design to closely replicate situations police and military personnel face every day with the potential of life or death consequences. Since then, we've established a successful track record of providing the most effective and realistic judgmental use of force and ballistically accurate marksmanship simulator solutions in the market while building a hard earned reputation for superior customer service. We serve many of the largest and most respected law enforcement agencies in the world and we look forward to working with them for many years to come. In fact during 2017, we have gained more of the top 50 agencies in the United States as new customers than at any other time in our history. Further we are committed to making our training solutions more accessible to an ever greater number of police departments throughout the country and internationally that have not had access yet to our products. As we continue to be a leader in our market, we will also be expanding our simulation technology into additional product and market categories. We are also committed to making our stock more liquid and more accessible to a greater number of shareholders. In support of these initiatives, we continue to push forward on our plans to register with the SEC and to upmost our stock to a national exchange as soon as possible. In conclusion, I remain extremely excited about our future. We have come a long way and achieved much and yet we have much left to do and I believe our best years are in front of us. That concludes my prepared remarks and I would now like to turn the floor back to Larry Clark to moderate the question-and-answer session. Larry, you may proceed.

[Larry Clark:]

Thanks Bob. Similar to our year-end webcast, I will be reading questions that have been previously submitted to us from you or shareholders. In the spirit of transparency and disclosure it’s our intention to answer every question that was submitted unless we believe that by answering it, it would put the company at a competitive disadvantage. With that I'll start with the first question. How do revenues breakdown between system sales, accessories, training and extended warranties or maintenance service?

[Bob Ferris:]

First I recommend to carefully review our most recent financial report containing detailed information on our financial results. The level of detail provided on our quarterly report meets or exceeds the regulatory requirements apply to us. At this time, we don't believe that it adds meaningfully to the understanding of our financial results by further breaking down our revenues into further subcategories. We are mindful of maintaining consistency in our financial reporting and the need for shareholders to compare the progress of VirTra over time as we are reluctant to modify the structure of our financial reports unless doing so we’d be clearly beneficial and would not put us at a competitive disadvantage.

[Larry Clark:]

Thanks Bob. Next question, can you please provide an update of the newly acquired engineering facility both operationally staff count and function?

[Bob Ferris:]

The machine shop has proven to be very valuable and is running at full capacity. The current staff count is four employees. The largest value to VirTra comes from greater control over production focus, speed and quality then if we set work out to third-party machine shops.

[Larry Clark:]

Thanks Bob. Next question, why does the gross profit margin varies so much from quarter-to-quarter?

[Bob Ferris:]

There are differences in gross profit margin based on the exact mix of products and services for a given quarter. High revenue quarters with large contracts tend to benefit from certain scale economies relating to production which can enhance margins. The inverse kind of recurring revenue is lower.

[Larry Clark:]

The next question is that given your record first quarter orders, should we expect year-over-year growth in revenues for the next couple of quarters?

[Bob Ferris:]

While we don't give specific financial guidance for future revenue, it would be natural to assume that revenue for the near-term will be positively impacted by a recent strength in new orders.

[Larry Clark:]

Thanks. Next question, are there any competing technologies using virtual reality that are gaining market share or that are making it more difficult for you to further penetrate your target markets?

[Bob Ferris:]

At this time we are not aware of any competing technologies using virtual reality such as utilizing via our headsets which are gaining market share or making it more difficult on VirTra. Actually I think the enhanced interest in virtual reality has been a good thing for VirTra. This excitement has led some investigate if they are profitable and establish virtual reality companies that solve problems and have established customers. This often uniquely leads them to VirTra some even decide to buy and hold our stock as a result.

[Larry Clark:]

Thank you. Would you please provide an update on your heavy weaponry use of force simulation offerings, as well as your progress on penetrating the military market?

[Bob Ferris:]

Recently VirTra began offering simulator systems for heavy weapons training and we plan to continue to add products for military simulation training needs whether for an allied foreign military or domestic VirTra continues to work hard to expand our simulators to military customers who are interested in comparing VirTra’s products against others in the market and selecting the best option. By the way, we very much welcome any head-to-head training simulator comparison.

[Larry Clark:]

Thank you. Does a company have any plans to buyback back shares and under what market conditions?

[Bob Ferris:]

The Board of Directors monitors the stock price and considers the various options of capital appointment before investing cash and buying back our stock. Current management has been effective at growing the business and the overall stock price, when deploying capital into building the business during the past nine years. If we believe that there are substantial near-term business growth opportunities, the board may decline the buyback shares in order for zero capital for using such opportunities. The board also considers that as our business and our price becomes more valuable, often our stock price will reflect this increase.

[Larry Clark:]

Thank you. Please provide us an update regarding your plans to register with the SEC, and your plans to up list to either NASDAQ or in NYSE.

[Bob Ferris:]

The company has proceeding with the process to officially register with the SEC and also to up list to a national exchange. As we learn more details on the timeline, we will share that information.

[Larry Clark:]

Thank you. What are your plans for institutional investor outreach which may lead to more institutional ownership of the stock and potentially increased trading volume?

[Bob Ferris:]

Our outreach efforts are not focused on institutional investors as they generally are unable to own our stock until we complete the SEC registration process and up list to a national exchange. That being said, we do anticipate expanding our Investor Relations efforts to improve our outreach to potential investors.

[Larry Clark:]

Thank you. Would you mind providing an overview of the IDEX 2017 show and the level of interest at your booth?

[Bob Ferris:]

VirTra continues to exhibit at a number of domestic and international trade shows. We believe that when potential customers are able to witness for themselves the high quality level of our simulators, we often receive the order. In fact, at IDEX 2017, we landed in order at the show, and the show has generated other potential sales leads.

[Larry Clark:]

Thank you, Bob. At this time we have no further questions. So I will turn the call back to you for your closing remarks.

[Bob Ferris:]

Thank you, Larry. In closing, I want to express my appreciation for the support of our employees, customers, investors, and vendors. Our success today is a result of our talented team committed to excellence and committed to staying and improving lives through effective simulation training. At this very moment, nearly 70 of the most talented and passionate professional that I’ve ever known are busy improving our sales, our products and services, and the company itself. We work hard for our families, the shareholders, and especially the men and women who depend on our simulator training systems. It is timely that today is Peace Officers Memorial Day, and May 15 also begins National Peace Week in the U.S. I would ask everyone on the call to take a moment of silence to remember those law enforcement officers and their families who sacrificed so very, very much in the service savers. Thank you for joining our webcast today. We look forward to speaking with you next quarter. Have a great day.