VirTra, Inc. (VTSI) Q3 2017 Earnings Report, Transcript and Summary

Good day, ladies and gentlemen, and welcome to the VirTra Third Quarter 2017 Earnings Conference Call. All lines have been placed on a listen-only mode, and the floor will be open for questions and comments following the presentation. [Operator Instructions] At this time, it is my pleasure to turn the floor over to your host, Brett Mass, of Hayden IR. Sir, the floor is yours.

Thank you, Operator. I would like to welcome everyone to VirTra's third quarter 2017 earnings call. Hosting the call today are Bob Ferris, Chairman and Chief Executive Officer; and Judy Henry, Chief Financial Officer. By now you should have received a copy of today's press release. If not, it's available in the company's Web site at www.virtra.com. The press release also includes reconciliation of non-GAAP financial measures used herein. In addition, you can access the Company's third quarter financial report on the Corporate section of the Web site under Company Reports tab. This webcast is being recorded and will be available for replay 60 days on the Company's Web site starting later this afternoon. Before I turn the call over to management, 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 are forward-looking and subject to risks and uncertainties that could cause actual results to differ materially from the statements made. The Company does not undertake any obligation to update these forward-looking statements except as required by law. Following the prepared remarks and similar to previous webcasts, management will review and answer questions that have been received in advanced by email as time permits. I would now like to turn the call over to Bob Ferris. Bob, the floor is yours.

Thanks, Brett. Good morning and welcome to VirTra's third quarter 2017 earnings call. Thank you all for joining us. The third quarter was another quarter with significant accomplishments for VirTra. Highlights include continued strong financial results, multiple new business wins, operational improvements which set the stage for future improvements, media and tradeshow appearances that are increasing our exposure and raising our profile, strengthening our corporate governance with the addition of an independent Board of Directors member, and we submitted our application for listing on the NASDAQ exchange. I'm pleased to report that market demand for our solutions is robust, and we continue to improve our capabilities in order to meet the growing demand, deliver on our customer commitments, and provide returns for our shareholders. In addition, we continue to be honored to serve the law enforcement and military communities, and believe that our overarching mission is to provide the world's most effective training simulator, giving them the tools and skills to save lives, both to public and their own. Our company and our products were recently featured in an article published by Forbs Magazine that highlighted the increasing use and life-like experience of virtual reality for a number of applications, including law enforcement training. In the author words, "The explosion of virtual reality training is being driven by its unique ability to replicate scenarios that would be difficult, if not impossible, to do in real life." As this concept takes hold and multi-screen simulators become the standard in our industry, I'm increasingly optimistic about our growth opportunities in 2018 and beyond. Specifically, our current results prove this out. During the third quarter, we generated total revenue of $4.7 million, up 54% from the year-ago quarter, and gross profit of $3.1 million for gross margin of more than 66% of revenue consistent with the elevated margins we have been delivering all year long. Net income for the third quarter was $742,000, up from the net loss of $10,000 in the year-ago quarter. Just as important, we have generated positive cash flow from operations of $2.5 million year-to-date, and continue to maintain a strong balance sheet, with essentially no debt. New business sales were healthy during the third quarter with multiple contract wins, with new customers that expand our installation footprint, both domestically and internationally. We signed contracts totaling more than $2.6 million with the United States Department of Homeland Security for the U.S. Customs and Border Protection. The contracts include the sale of multiple virtual training systems and accessories for just over $2 million with renewal of the simulator service contracts totaling more than $600,000. Our V-300 judgmental use of four simulators will now be located at 35 major international airports, ports of entry and training facilities across the country. With more than 60,000 employees, U.S. Customs and Border Protection is one of the world's largest law enforcement organizations and their officers interact with more than a million of people per day. Our high quality immersive training systems help prepare those officers to handle incredibly stressful situations they could face at any moment while teaching the escalation skills in a safe controlled and cost effective manner. We also signed contracts worth more than $750,000 in total with three law enforcement agencies in Australia, the Australian Border Force, New South Wales Police Department and South Australia Police Department. Together, the new contracts include the sale of multiple virtual training systems and accessories including two V-ST PRO systems; we offer PRO training service and warranty contracts. VirTra is by far the dominant brand for police training simulators throughout all Australia, having been selected by essentially every law enforcement agency that utilizes simulation training. At the St. Louis County Police Department, we installed a VirTra V-300 simulator to train local law enforcement and de-escalation a split second decision making in life threatening situations. Increasingly, agencies and area governments like St. Louis County are recognizing the tremendous advantages that our training systems provide an attorney to our technology to prepare their law enforcement personnel to make better decisions in life threatening situations that can involve lethal force. We continue to be encouraged by the momentum we are building in both domestic and international markets. Our [indiscernible] those in October provided us with the prospect rich environment to showcase our products and actively engage with potential customers through hands-on demonstrations and face to face interactions, our sales and sales support teams were able to reach a large number of potential customers in the short amount of time. In fact this quarter, VirTra exhibited at a record number of events in a single quarter including AUSA, IECP and ICMA Trade Shows along with four product demonstrations in three separate international countries and different continents. The financial results, the new wins and media attention is in large part a reflection of the investments we have made in growing and enhancing our sales and marketing function. Recently, we have added five professionals to our sales organization significantly broadening our reach. We have been systematically growing our marketing function, expanding our trade show activity and increasing our use of demonstrations with decision makers all with the goal of broadening our exposure within the industry and the investment community. In addition, our consistently improving financial results have enabled us to take actions that streamline our capital structure and transition us for an up listing to the Nasdaq capital market. During the third quarter, we repurchased more than 34,000 shares of common stock and completed a Block Share and Warrant Redemption transaction with Modern Round at discounted prices to streamline our capital structure and eliminate work overhang on our stock. From a leadership and governance perspective, we made two significant moves during the third quarter. First with shareholder approval, we added a third independent director, Mr. Jim Richardson to the board which increased the composition from four to five directors. Jim Richardson is equal parts exceptional engineer and brilliant businessmen with a rare track record of growing a virtual reality and simulation company from nothing into a major supplier of VR technology and eventually selling the company recently for $125 million in cash. The addition enriches board oversight demonstrates our continued commitment to strong corporate governance and meets the Nasdaq corporate governance requirements for listing. Jim will also serve on the audit in compensation committees and will share the nominating and corporate governance committee. Second, Judy Henry was promoted from Controller to Chief Financial Officer in August of this year. Judy has over 25 years of experience in finance and accounting holding positions as Chief Financial Officer, Director of Financing Controller for a Public, Private and Municipal Corporations and the technology accounting venture capital and real estate sectors. Judy is intimately familiar with our company so certain transition in her new role has been seamless. Operationally we achieved ISO 9001:2015 quality compliance for the machine shop we acquired in August of 2016. The shop produces the recoil kits and magazine components use in conjunction with our systems. This certification demonstrates our commitment to delivering high quality products and solutions and the results of our efforts over the past year to improve fixturing, tooling and processes in our machine shop to make products more efficient, improved workflow and improve component reliability while decreasing costs. I would now like to turn the call over to Judy Henry, our CFO to review the quarterly and year-to-date results. Judy?

Thank you, Bob. Revenues for the third quarter of 2017 were $4.7 million up 54% compared to $3 million for the corresponding period in 2016. The increase was driven by additional sales of simulators, accessories, warranties and other services. Gross profit for the third quarter of 2017 was $3.1 million or 66% of revenues compared to $1.7 million or 56% of revenues for the corresponding period last year. This increase is gross profit margin was primarily due to the reduction in material Cost and the sales mix of higher margin products that include training, service and warrantee sales. Net operating expense was $2.4 million in the third quarter of 2017 compared to $1.7 million last year. The year-over-year increase in operating expenses was driven by expanding Staffing levels annual increase within payroll and benefits for current staff sales and marketing expansion increases in non-recurring public company related onetime cost new research and development work and IT infrastructure upgrades. It is important to note however that net operating expenses as a percent of revenue decreased from 56% last year to 50% this year. Income from operations for the third quarter of 2017 was 752,000 or 16% of revenues compared to a loss from operations of 4,000 for the corresponding period last year. Net income for the third quarter of 2017 was $742,000 or $0.05 and $0.04 per basic and a little share respectively, compared to a net loss of 10,000 or $0.00 per basic and diluted share in the third quarter of 2016. The increase in net income was due to increases in revenue and gross profit partially offset by increases in operating expenses. The diluted weighted average shares outstanding increase from a loss position of $15.8 million shares in the third quarter of last year to $16.7 million in the third quarter of this year. Adjusted EBITDA for the third quarter of 2017 was 874,000 compared to 93,000 in the third quarter of 2016. The increase was primarily a result of significantly higher net income. Shifting to a year-to-date results, revenues for the first nine months of 2017 increased to $14.1 million, up 12% from $12.6 million during the same period last year, the year-over-year increase was due to additional sales of simulators, accessories, warranties and other services. Gross profit for the first nine months of 2017 was $9.3 million or 66% of revenues compared to $7.8 million or 62% of revenues in the comparable period last year. Net income for the first nine months of 2017 was $2.8 million or $0.18 and $0.17 for basic and diluted shares respectively compared to $2.4 million or $0.15 and $0.14 per basic and diluted shares respectively in the comparable period last year. Adjusted EBITDA for the first nine months of 2017 was $3.3 million compared to $2.7 million in the same period last year. A dilutive weighted average shares outstanding were approximately $16.8 million for the first nine months of 2017 compared to $17.1 million for the first nine months of 2016. Turning to the balance sheet, as of September 30, 2017 the company had approximately $5.1 million in cash and cash equivalents compared to $3.7 million at December 31, 2016. The company has essentially no outstanding debt as of September 30, 2017. In 2016, the board of directors authorized the repurchase of up to a million of our common stock through December 31, 2017 through the end of the third quarter, we have repurchased 41,878 shares at a cost of approximately $96,000. Subsequent to quarter end, we repurchased an additional 5056 shares at a cost of approximately $15,000 and suspended our repurchase program indefinitely due to our pending Reg A plus offering of common stock as Bob discussed. I'll now turn the call back over to you, Bob.

Thank you, Judy. Similar to our two previous quarterly webcasts, I will read questions that have been previously submitted to us from our shareholders in this period of transparency and exposures, it's my intention to answer every question that's been submitted and once we believe that by answering it, it would put the company at a competitive disadvantage. We will also take questions from callers as well on this earnings call. I'll begin with a few questions that have already been read. Question one, what is the expected timeframe for the completion of the raise in NASDAQ listing? We continue to expect that the raise in NASDAQ listing could occur before the end of this year. Next question, at what price will you be doing or not doing the raise? The price range target for the raise is between $3 and $4 per share. For the purpose of illustrations in our application with the SEC, we used the price of $3.50 which is the average between $3 and $4. Next question is the listing raise happen at the same time? Answer, yes the listing on NASDAQ and the raise would happen at the same time. Next question, will you continue the buyback after the raise into the future? Answer, the process of VirTra buying back our stock could resume after the Reg A process completed based on the decision by the board of directors. At this time, we will begin taking actually live calls.

Operator, please open the call for questions.

[Operator Instructions] Okay, we have aquestion that came in from Ryan Parker. Please state your question.

Hey, Bob, how are you doing?

Hello, I'm doing well, how are you?

Doing great. Quick question, can you give us insight on the recent announcement with Haley?

Sure. So, recently Haley Strategic did a grand opening, and they are a well-known group that provides training for a variety of folks, including civilians. And they do a lot of training with use of force with marksmanship, with those sort of things. So yes, Haley decided to work with VirTra on providing a simulation component for their training, and Haley is -- they're known as being one of the top folks in the industry for marksmanship and tactical training. We are very honored that they selected our company and our products to work with, and we are very excited about that relationship. They are often pushing the envelope of human performance. And I think we're going to learn a lot from them, and I think that engagement with them is going to be mutually beneficial.

Okay. Next question, the gross margins are originally strong over the first nine months of the year relative to last year, [indiscernible] to be normal you believe?

Well, as we said, those larger margins has been a result of various product mixes, and we are -- we do not have a certainty that those higher margins are permitted.

Okay. Another question I had is do you had any idea of what the intention is of the funds raised in the Reg A plus financing?

I'm sorry. Say that question again.

What is the intention of the use of the funds raised in the Reg A plus financing at this time?

Yes. So, the use of proceeds for the Reg A is a combination of things. The general idea behind it is to significantly increase our overall business size by increasing our total addressable market, and that being done through increases in research and development, expansion of product line, increase in sales and marketing activities. And then potentially also some would be used for working capital and general sales and marketing activity. Our projected use of proceeds in the Reg A include various breakdowns based on if we receive 50% of the shares sold up to 100%, and they're broken down on Page 21 of the Reg A, but I'll just summarize it for you, if you like -- would you like me to go through that or…

I can check later unless it's really short.

There is a series that's broken down in a five different area of components where we're expecting to deploy the funds, but really I think that key takeaway is the deployment of the funds is to take a strong company and make it stronger to take us to the next level as we enter the NASDAQ.

Okay. Are you potentially looking at an acquisition or organically expanding the product line?

Well, so lot of it is organic growth on the use of -- our expected use of proceeds would be organic growth, but we are certainly open to strategic acquisitions as part of the whole process of uplisting [ph] the NASDAQ, but the current use of proceeds allocation is not for an acquisition.

Okay, and would have potentially use the funds be to build simulators and then lease them out?

That would be one of many areas that we could deploy revenue -- I'm sorry; that we could deploy capital to expand our market reach, so that would be one of various things that could be potential when you get into the details of the actual deployment of the funds.

Wonderful. One last question; what was, Judy -- what was the amount of the one-time charges in the quarter for [indiscernible] public company related charges?

We don't have that broken out in detail in any of the reports, but it was a significant amount if you can imagine for the legal accounting and application fees.

Okay.

Are there…

Okay, those are all my questions. Appreciate it. Thank you.

All right, thanks so much. Appreciate you calling in.

[Operator Instructions] Okay. Our next question comes from Jim Pointer [ph]. Please state your question.

Bob, good morning.

Good morning. How are you doing?

Doing well. [Indiscernible] tries to listen, I think I can quote that you said two things; that market demand is robust and that multi-screen simulators seem to be becoming the norm in the industry. And if I got those right, can you add just color on what that could or should do to sales going forward and margins?

Well. Yes, I think that obviously a healthy market for our type of products is ultimately good for VirTra. But it does appear that the demand for multi-screen systems is growing I think it's gotten to be more commonplace certainly every location can decide for themselves on whether they use a smaller, simpler simulator or if they use a more immersive potentially more effective simulator. But I think that with the news coverage related to many different police decisions on use of force that it puts a fine point on the importance of quality, training and providing officers with proper preparation for incredibly stressful situations. Now I would add that VirTra some of our we have technology and techniques and in our system one of those is of course thread fire that device that provides unique stress during training and so I think that any movement in the market towards higher realism and higher quality for training simulation is very bullish on for VirTra. As far is outlooks Obviously we don't give predictions on gross revenue and or net income but we have had a very good track record over the last decade of growing both of those and so we are always trying to adjust to the market to competition et cetera to insure the very best for shareholders. And we've been honored to have shareholders such as yourself I know you by name Jim not a lot of shareholders have the long term view they you do. I'm curious when did you first acquire shares in VirTra, do you recall what year it was.

I don't know but it's surprise to say you're correct it's been a long run and it's just I'm granted from year to year if you're getting things to the point that they're out right now because it was a modest start as it as you would expect?

We've been very blessed.

The Forbes article to me is kind of the start of a media watershed because of its sheer size and circulation has that generated additional, national media inquiries of recent?

I do agree. I think every major media article that VirTra attracts does help it attracts future ones, so we are the CNN, Anderson Cooper did a great piece on VirTra I mean I think that was a very good moment for our company and the Forbes is a great moment for our company. I do you think there is a building of credibility between those. And I would like to add it to that note that moving to NASDAQ which is our hope in our plan to get done before the end of this year. Also I think is going to help with major media and overall attention paid VirTra. So I think all of those things worked together and work in tandem and then on top of that so, VirTra has been able to have some very good financial results even though we're high tech virtual reality company. There's not always high expectations for extremely sound financial practices that VirTra I believe is a bit of a vanguard in that regard and we've been very diligent and trying to properly manage the growth of the business so yes, I appreciate my comment and I would like nothing more than to see VirTra received more national media attention I mean get the word out that there is a higher standard in training. There is a better way for officers to train versus not doing anything relation training or doing rather rudimentary simulation training and that's not appropriate when you're talking about use of force being applied. They need the very best trained possible in my humble opinion.

Thank you, Bob. Operator, you move on to the next question.

Thanks so much.

Our next question comes from Jim Jacob. Please state your question.

First congratulations Bob on a great quarter.

Thank you.

We've shared in the past that with many law enforcement agencies. They have some degree of resistance because they don't have the funds nor do they have the footprint is there anything that VirTra is doing creatively to sort of solve those or work with a potential law enforcement agency to handle those issues?

Yes, great question. So I'll start with the footprint question VirTra does one thing we do with that is have various types of simulators available and then we also have various configurations of those simulators, so we also have portable simulators available all the way up to a 180 degrees, so we provide a lot of options to try to fit in the various rooms and different configurations. We also have an engineer who is on staff and dedicated to helping configure, locate our system for various locations, so we have a very proud track record of finding a way to fit in all sorts of rooms that many people initially thought we could not fit into but that is an important factor and we're looking at new ways of overcoming those issues when people have space limitations. We do find many times if there's a will there's a way. Even if that means moving chairs out of the way in a classroom to allow for stimulator to be set up to then move back to chairs its worthy effort. We found many people who once they experienced the simulator for themselves experienced the amazing content that we have the training objectives that are embedded in every scenario that we create. We saw in many times they realize that it's worth the effort to make room for the space. Regarding budgetary constraints we are very much actively pursuing methods and way that we could overcome those objections and how we can get our equipment into an ever increasing number of agencies that sometimes have limited budget constraints, so Very good there are extremely top of mind for us.

Would it make sense and I think I've mentioned this to you in the past have actually maybe doing a beta test and opening up a regional facility and determining how many dollars you would need and have different agencies just come in and maybe for a week. They come to Phoenix if you did the beta test in Phoenix and attract law enforcement agencies from all over the Southwest that didn't have the footprint, that didn't have the major budget but could maybe spend 10,000 or 15,000 in a week to send a number of law enforcement agents?

So we are exploring that kind of idea and also variations on that and what at the point that we feel very comfortable with a model that we anticipate would work well for all groups involved. Then at that point we would announced any reason but I wouldn't be able to give without to stepping our hand to our competitors I wouldn't be able to give you any more information on that.

No, I feel comfortable at least that you're thinking about it and that's in discussions?

All right. Thank you very much.

You're welcome. Continue on.

Thanks.

Okay.

[Operator Instructions] Okay. We have a question from Ralph [indiscernible]. Please state your question.

Hey, Bob, great quarter.

Thank you.

My question is -- if you can answer this; how much of the $2.6 million contract of the department orders which was actually fulfilled and completed in Q3?

Yes, we have not disclosed that information publicly; I'm sorry.

Okay, thank you.

Okay. Our next question comes from Charles Landis. Please state your question.

Good morning, Bob. Is there a timeline for completion of the registration?

The completion of the registration is ultimately up to the SEC, so we have timely responded to their comments and it is currently pending but could be had it at any time.

All right, thank you and next question is regarding the increased employees versus the building size. Now, is that working out or limitations you foresee?

Currently we are -- it's working out fine. So at this point we are okay with the buildings that's were in but we may need to do some adjustments to better accommodate the employees and or have a certain employees work from home at times but right now we feel we're still able to have higher productivity out of the increased staff.

All right, thank you, and why did you tell us about this scenario production is there quantitative to your goal; you're looking for, monthly or annually or something?

When it comes to our content production what we're looking for is nothing less than when the world's most effective best training content that any instructor would be proud to show and use to educate either cadets or refreshing training for active personnel and that they would be very happy with the training points that are contained. So we are - we want high quality content to be produced and we want a lot of it.

But is there numeric number you might share as far as the increasing the scenarios?

No, we do have internal objectives but those two fluctuates from quarter-to-quarter based on the needs of the company. So sometimes we're focused on we have various types of software that require content to be created, so sometimes we're focused on the one software we have is called V-Author, sometimes we're focused on V-Author assets, other times we're focused on we have some customers who request custom scenarios to be created just for them and so we focus on that at that time but generally speaking, we internally set objectives and then go about meaning those but those do adjust from time to time. So, -- but thank you.

Thank you. And do you have anything you might share regarding new products or how soon we might see some new products or even types of products?

Obviously we've mentioned one use of the Reg A proceeds is related to research and development in new products, but we keep all new product releases intentionally confidential to [indiscernible] competitors. So, our preference is would be to get a product fully developed and ready for market and then do corresponding sales and marketing release at that time and we think that's for the best benefit of all the shareholders.

All right, thank you very much, Bob.

Thanks so much, take care.

Great job by you and the team.

Thank you, thanks so much.

Okay. And that was our final question. I will now turn the call back over to Bob for closing remarks.

Thank you so much, and thanks everyone who is listening to this call. In closing, I would like to thank every shareholder for their support and continued ownership of our company, I feel we have the right product at the right time with the right staff, we now have 84 of the most talented and dedicated professionals working tirelessly to grow the value of our business in a world that is desperate for solutions for effective simulation training. I'm honored to service the CEO of an organization and not only has generated financial success but also successfully created the world's finest training simulators. Thank you so much and have a great day.

Thank you. This concludes today's conference call. We thank you for your participation. You may disconnect your lines at this time and have a great day.