VirTra, Inc. (VTSI) Q1 2019 Earnings Report, Transcript and Summary

Good afternoon. Welcome to VirTra’s First Quarter 2019 Earnings Conference Call. My name is Omar 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 questions from the VirTra's institutional analyst and investors. 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 a 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.

Thank you. Good afternoon everyone and thank you for joining us today. After the market closed, we issued our financial results for the first quarter 2019 in a press release, a copy of which is available in the Investor Relations’ section of our website. Q1 marked an important point in our company's development. As I outlined on our last call in March, we’re implementing new initiatives to diversify and expand our business. We're doing this by bolstering our technological capabilities to expand our market share in law enforcement while simultaneously working diligently to penetrate new markets like the military market which has a growing need for VirTra type products. As most of you know, our mission at VirTra is to improve and save lives through uniquely effective hi-tech products and over the years we've established ourselves as the industry leading experts in simulation and de-escalation training for law enforcement. But to remain the industry leading experts, it's critical to evolve and continue to adapt. Our company's greatest rewards trace to innovation and we're dedicated to constantly improving upon our solutions and finding new creative ways to increase our positive impact on customers and profitably grow the business. With that goal in mind, the first quarter 2019 witnessed us implementing new strategic growth initiatives which we believe will have substantial positive impact on our business in the years to come. As I'm sure, you're already aware we’ve invested in the development of new products, new scenarios and new sales strategies that we believe will be accretive to our business over time. To be sure some of these initiatives will not generate results immediately but with each passing day, we expect they will grow and start to account for a meaningful contribution on our numbers. For example, due to tremendous effort by VirTra staff and better than expected market acceptance, we're already seeing success with the STEP program. That being said, it would not be surprising for us to continue to experience some fluctuations in our financials as we work to fully ramp up these programs. So with that in mind while the financial results of Q1 were lower year-over-year, we were encouraged to see that despite the large initiatives we implemented in Q1 and the unique challenges that come along with making such changes, we still witnessed noticeable sequential improvements in our numbers. When compared to the prior quarter, our top line increased 20%, gross profit increased 88% and gross margin increased to 59% which is more in line with our historical numbers. Additionally, our balance sheet continued to remain strong with about $4.6 million in cash, cash equivalents and CDs. And perhaps most encouraging, our backlog increased to $9 million which bodes well for our business and our ability to deliver a strong 2019. Another metric that we’re encouraged by this quarter was the improvement we made in domestic sales. In the first quarter of last year, we delivered a large order from an international customer that made up a significant portion of our revenues that quarter. If you exclude this international order, our domestic revenue in Q1 of 2018 were roughly $1.6 million. By comparison in the first quarter of this year, our domestic revenue increased by nearly 70% to $2.7 million. We believe this substantial increase is significant for a few reasons. First, it demonstrates the continued increase in demand we see for our products as the U.S. marketplace continues to mature and become better educated on the importance and effectiveness of simulation training. As we mentioned in our Q4 call, more and more agencies are beginning to realize that simulation training is key to producing the most highly qualified and effective officers and thanks to continued technological advances in many instances, simulation training can be far more cost effective than the alternatives. Second, the increase in domestic sales also credibly demonstrates that our sales team is becoming more effective at capitalizing on these improving macro trends. We currently have 21 employees who serve as part of our sales team and marketing team and clearly the investments we've made in this sector of our business are paying off. So the need for our products is apparent. The reality is that a VirTra simulator is an inherently complex sale. It can take several touch points to establish the confidence of an agency and eventually close a deal. And I'm proud of the work our team has done so far in 2019. Finally, the STEP program is gaining traction right out of the gate. As a reminder, STEP which stands for Subscription Training Equipment and Partnership allows agencies to subscribe to our products and services and thereby gain access to the tools they need to sustain and improve the inherently perishable skills related to use of worst decision making and mandated training. STEP and in-field sales professionals are both recent and major changes we made to purchase sales strategy. As you're all aware due to the large size of some of our contracts, revenues can be unpredictable from quarter-to-quarter. As anyone who's had an opportunity to demo our products, we are the goal standard for effective simulation training for our types of products. However it can still be difficult and time consuming for an agency to ultimately allocate capital for one or more simulators. Once that decision is made, there are frequently external factors that can cause orders to be delayed or expedited at a moment's notice. Sometimes orders get held up in customs when shipping International. Other times a customer may want a simulator delivered as soon as possible in order to meet budgetary requirements or ramp-up training as quickly as possible or the opposite delays. All of these factors make it difficult to say with certainty when simulators will be delivered and therefore when revenue will be recognized. That has the potential to eliminate many of these variables, STEP allows for quicker deployments and less upfront capital from the customer. It lowers the barrier to entry and it can be far less complicated to sell than our traditional model. We’re very encouraged by the traction we've seen so far with this program and we continue to believe it will be a major revenue driver in the future, while we test market it and spoke with medium subscription experts prior to launching STEP. There is still uncertainty when we introduced the program as to how it would affect our traditional sales model. I'm pleased to say that so far we have not seen STEP significantly detract from traditional sell hardware purchases but rather attract new customers. It seems to validate the decision offer both the subscription and our traditional sales models in tandem. Keep in mind that STEP is still new, so it may take some time before it becomes a meaningful line item of revenue. However, we are confident that ultimately adding STEP and its recurring revenue component will prove to be incredibly valuable to both our customers and our business. And 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 as well as our outlook for 2019. Judy?

Thank you, Bob and good afternoon everyone. Turning to our financial results, our total revenue increased 20% to $3.1 million in the first quarter of 2019 from $2.5 million in the prior quarter and decreased 7% from $3.3 million in the first quarter of 2018. The year-over-year decrease in total revenue was due to lower simulator and accessory sales which were partially offset by increases in reoccurring extended warranty and other revenues. Our gross profit increased 88% to $1.8 million, 59% of total revenue in the first quarter of 2019 from $1 million or 37.8% of total revenue in the prior quarter and decreased 20% from $2.3 million or 68.8% of total revenue in the first quarter of 2018. The year-over-year decrease in gross profit was primarily due to differences in the product mix and quantity of systems, accessories and services sold. Our net operating expense for the first quarter of 2019 decreased 20% to $2.3 million from $2.8 million in the prior quarter and decreased 7% from $2.4 million in the first quarter of 2018. The decrease in net operating expense was due to reduced selling, general and administrative costs for labor benefits, professional services, public company expense, research and development expense and bad debt. Turning to our profitability measures. Loss from operations for the first quarter of 2019 was $457,000 compared to a loss of $1.9 million in the prior quarter and a loss of $158,000 in the first quarter of 2018. Our net loss for the first quarter of 2019 totaled $313,000 or negative $0.04 per diluted share. This compares to a net loss of $1.1 million or negative $0.13 per diluted share in the prior quarter and a net loss of $86,000 or negative $0.01 per diluted share in the first quarter of 2018. We recognized an income tax benefit of $107,000 in the first quarter of 2019 compared to $29,000 in the first quarter of 2018. Our adjusted EBITDA loss, a non-GAAP financial measure in the first quarter of 2019 totaled $278,000 compared to an adjusted EBITDA loss of $46,000 in the first quarter of 2018. Turning to our backlog, backlog consists of bookings for goods and services to be delivered in subsequent periods. Backlog includes sign contracts for our products, services and deferred revenues. At quarter-end, our backlog increased to $9 million. Turning to our balance sheet. At quarter-end, we had cash and cash equivalents and certificates of deposits totaling $4.6 million. From a working capital standpoint, we ended the first quarter of 2019 with $5.5 million in working capital compared to approximately $6.8 million in the first quarter of 2018. And finally in January of this year, our Board of Directors increased the amount authorized under the stock repurchase program from $1 million to $2 million. We have purchased 318,000 of common stock since the beginning of the year bringing the aggregate amount of common stock repurchase since mid-November of 2018 to approximately $700,000. That concludes my prepared remarks. I'll now turn it back to Bob.

Thanks Judy. I'm pleased to report that VirTra’s products and the quality of our service continues to set the bar for the industry. However when you're at that level, competitors are watching closely and often try to emulate each initiative. Fortunately, much of our recent progress and partnerships are either difficult or impossible to directly copy. However we're constantly working to balance providing detailed company updates with preventing our competition from gaining valuable insights in our strategy and initiatives. Therefore for competitive purposes, we’re typically forced to keep very quiet about initiatives currently under development. So while we remain extremely hard to work behind the scenes, prudence demands that we refrain from providing too much detail about new program and issues at this time. However I can't say that we have good reason to remain cautiously optimistic about the remainder of the year and we are excited to begin seeing our new initiatives mature. With that in mind, let's turn back to our Q1 updates. There are two major components to the strategy we outlined in January to focus more of our resources on enhancing and diversifying our technology suite and expand our sales presence and footprint in the law enforcement military markets. With the patent portfolio we acquired from Tiberius Technology we saw the potential to kill two birds with one stone. Our ability to simulate the operation of firearms is cornerstone to our simulation business for both law enforcement and military. And this ability is now expanded with additional patent protection as well. Accurately simulating realistic firearms is one of the most critical and difficult components effective simulation training. Unrealistic weapons can at best lead to less impactful training and at worst lead to life threatening negative training. If a trainee does not spend ample time training how to reload their weapon or deal with mechanical issues while under duress in a simulation, they may fail to do so when it matters most, when lives are at stake. In my opening remarks, I briefly discussed the changing macro environment and the growing demand, we are witnessing in the market for our products. As the market continues to become more educated, we’ve seen demand increase not only for our traditional products but for new ones as well. In anticipation of these changes, we've been investing both capital and resources to design new products to meet these growing needs. Near the end of Q1, we announced the addition of a driving simulator to our product line due to the competitive aspects of our business that I outlined previously we are not currently in a position to disclose extensive details about this new product, our decision to diversify our product line by moving into the driving simulator market was validated by a recent $1.9 million contract with the Department of State with the Republic of Mexico. We’re excited to have another product line that not only diversifies our revenue streams but could expand our simulation capabilities into vehicles. We will have more specific updates to show in this program later, in the year as it continues to develop. In February, we introduced our new certified curriculum called HRVS which is specifically designed to simulate High-Risk Vehicle Stop. Traditional training methods for High-Risk Vehicle Training can be either Labor or resource intensive not to mention potentially dangerous. Our HRVS curriculum like most of our other solutions provides a safer, more cost effective and more effective alternative to current training methods. This curriculum is the latest addition to V-VICTA which we launched in the third quarter of last year. As a reminder, this program enables law enforcement agencies to teach, train, test and sustain departmental training requirements while we do not break out sales for individual products and I can report that this program has been well accepted so far and continues to receive positive reviews from the first customers. In addition in new products and services, we also strengthen our management team by adding a new season Vice President of Program Management, Steve Handel. As a reminder, Steve brings 20 years of experience in technology and management to our team. Perhaps his most relevant credential to VirTra relates his previous work at Axon. Steve led the development program for the recently released TASER 7 Conducted Energy Weapon or CEW which has been Axon’s most effective TASER weapon to-date. CEW’s total addressable market has been estimated at $1.8 billion. The key takeaway here is that in addition to having great passion for the why and our companions, Steve has a history of developing products that are not only directly relevant to our space but that are designed to be used on a large scale. As he came on board with the team in Q1, Steve has been on a fast track and we’re pleased to report he settled in nicely. He’s been a great addition to an already industry leading team and we're happy to have him onboard. Personnel was one of the most intangible factors that doesn't directly show up on a balance sheet and those difficult to quantify. I'm confident that the employees here and the culture or great customer service are among the primary reasons we receive exceptional ratings and notes of appreciation from customers related to our employees, our products or both. That we continue to implement changes intended to improve our business, the core mission of this company remains much the same, we continue to believe that the best way to drive shareholder value in the long run is to remain focused on improving and saving lives by providing effective, hi-tech products in the most efficient manner possible. All of these changes reflects that mindset. This is an exciting time at VirTra while it may take time for all the positive benefits of these recent endeavors to fully come to fruition, we remain optimistic about the future of this business and we look forward to updating you all soon. And with that, we're ready to open the call for your questions. Operator, please provide the appropriate instructions.

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

Hey guys, thanks for taking my questions. Bob, I just want to start with the macro backdrop. Curious if that is impacting the length of your sales cycle or impacting your engagement timeframe with customers?

What aspect of the macro backdrop are you speaking to?

Just the overall trade war tensions and if customers are getting concerned that the macro is softening if that has elongated your sales cycle at all?

Well, concerning the trade war rhetoric, one fortunate situation for VirTra is we don't export firearm training simulators to China which could be directly impacted. I also checked this morning on our cost of goods sold side of the House and our supplier and so far we're not seen as of today, we're not seeing an impact on cost of goods sold from the trade tension. When it comes to our sales, both domestic and international I have not heard that the tariff standoff is affecting that. So at least at this point, we have not seen any major business impact at least VirTra in what we do from the tension with China.

Okay, that's helpful. And should we interpret your comments that the STEP program hasn't impacted normal product sales as an indication that most of the excitement from customers are really from new customers and less from current customers may be looking to transition to the STEP program?

I think that's -- that's fair. The only caveat I would put there would be that that VirTra may be also having customers that are coming up on warranty renewals and offering them STEP contracts instead of warranty renewals but either STEP contracts or warranty renewals are essentially the same type of revenue for VirTra and they're fairly interchangeable internally we prefer the STEP contract but we offer clients either options, that make sense.

Okay. That does make sense. And finally, looking at OpEx, I know you outlined you have 21 sales employees but just given the number of different opportunities you have. Do you expect to need to add to headcount significantly to go after all these new opportunities?

It is possible that we would have to add some headcounts that is a situation that is difficult to exactly predict. Keep in mind too that while we might be working on a sales opportunity in the military that might have implications to various multiple different programs. So you may not in certain situations need multiple sales staff depending on the arrangements since we're pretty specialized market. We might be able to still be able to get our products in front of people without having a huge swing up. I didn't mention about infield sales and I think that's an important item where we have sales staff scattered throughout the United States that actually show up and do personnel demonstrations. And so that that also and that only began little over a year ago when we really started that program in earnest. So that also impacts our ability to sell and so we did increase some sales staff but we did it. We did our big increase in sales more like two years ago and that was somewhat intentional because of the sales, the elongated sales process when you're not having something like a subscription program available, you can't have much longer sales cycles so.

Okay, thanks a lot.

Thank you.

[Operator Instructions] Our next question comes from Allen Klee, Maxim Group. Please proceed with your question.

Yes, hi. I know you don't provide financial guidance but I think it would be very helpful for investors if just based on what you know now, if you had some sense of if you thought that revenues and earnings for 2019, if you think that they might be higher than what they were in 2018 or if you can provide any qualitative color on that. Thank you.

Our goal is certainly that 2019 would be stronger top line and our goal would be that the stronger bottom line as well and in 2019.

Okay, thank you. That's very helpful. And then for the bookings and backlog that you announced which were very good numbers. Can you give us some sense of how we should think about how much of that might get recognized next quarter or within 2019?

I think we have a lot of different contracts in the work. And again those contracts can move substantially around quarter-to-quarter based on the customer's ability and schedule to take delivery. I think we can see good majority of them recognized in 2019 but it's very hard to break it down on a quarter-by-quarter basis.

Okay. And then could you talk a little about, I know a few calls ago, you talked about opportunities in penetrating military and you've mentioned the patent portfolio which should help there. Anything else you can add of how you think about the military opportunity in 2019?

So I think that there is a solid military opportunity. The big question would be what does that look like timing wise and recognized revenue wise. So that's where things get very, very fuzzy, I do think that you have a situation of the military having a demand for products and VirTra uniquely having some of those products already developed with track record behind them. I think that's a good combination. But I think it's too early. Unfortunately, it's a bit too early for us to really identify when revenue might hit, is it 2019, is it 2020. So sorry we don't -- there's not great visibility on the win.

Okay. And then could you give us an update on the State Department program in terms of how much is still available and how you think about the sales pipeline there?

Yes, I think you're referring to the IDIQ through Department of State, so that program is continuing, their funding levels appear to remain intact. As far as we know, the total amount on that is approximately $40 million. I believe that they have used at least $15 million of that $40 million already off the top of my head. And so we continue to very carefully monitor new opportunities. We do think that adding, driving, simulating simulator capabilities is very important for us in being able to compete on that IDIQ.

Great. My last question is just to understand, I know you mentioned that you didn't believe that you were impacted by the tariff situation but does that also take into account if the tariffs go up from go to 25% starting in June, will that have an impact on your cost of goods sold?

We’re not 100% sure on that since we haven't had this situation occur in our operational history of 26 years. So I can't give you a 100% answer, I would say that that based on the parts that we get from China that we're generally optimistic that we won't be overly impacted by it. But that is an area that we do not have precise data on as that is not exactly happening in the past.

Great, okay. Thank you so much.

[Operator Instructions] Our next question comes from William Gibson, ROTH Capital Partners. Please proceed with your question. William, your line is now live.

Bob, excuse me, I was on mute. I was little surprised by the sequential drop in operating expenses given all the additional hiring and the spending on the technology, is first quarter a good base for the year, did they go up from here or more like the fourth quarter?

Bill, lot of the things that happened in the year for year-end happened in Q4, when we're getting at the end of the year for audit adjustments to potential accounts such as profit sharing different things like that. So Q1 starts out as a pretty good baseline and then adjusts throughout the year based on initiatives. But Q4 tends to get kind of back loaded for all those year-end expenses and true-ups at audit.

Okay, that makes sense. And then on the backlog, is there any step in that?

Yes, definitely there is. It's just getting started. And of course all of those revenue recognition rules under the new GAAP 606 are applicable. So it will be considered deferred revenue amortized over the life of the contract.

Thank you.

But we do feel, we do feel very strongly that that recurring revenue will be very, very helpful to conversion, our overall valuation in the future especially as it becomes more meaningful.

Thank you.

Thanks Bill.

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

Thank you. Before we close, I'd like to point out that this week is National Police Week. I therefore like to take a moment to extend our thanks and gratitude to the brave men and women who put their own safety at risk to ensure our communities are safe. It's a true honor to be able to serve those, who serve us. VirTra has come a long way since our first head mounted display based product in 1993 and we still have so much to accomplish. This is a very exciting time at VirTra and we certainly would not be here without the support and commitment from our extraordinary employees, customers, shareholders and partners. 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.

Thank you for joining us today for VirTra’s first quarter 2019 conference call. You may now disconnect.