VirTra, Inc. (VTSI) Q3 2019 Earnings Report, Transcript and Summary

Good afternoon. Welcome to VirTra's Third Quarter 2019 earnings Conference Call. My name is Cynthia, 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. [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 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 made available for 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.

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 2019 in a press release, a copy of which is available in the Investor Relations section of our website. At VirTra our primary mission is improve and ultimately save lives by providing law enforcement and military personnel with the world's most effective simulation training. We use cutting edge technological solutions to help first responders safely practice and prepare for the risks and uncertainties they may face at any moment during their careers. That's been the primary focus of this business for over a decade and a half and ever since we entered this market we've continued to push boundaries and innovate to establish and advance our position as an industry leader in this space. This is an ongoing process that requires consistent ingenuity and perseverance as well as patience as there is no overnight shortcut for long-term success. In the third quarter of 2019 we saw much of our diligence over the last few quarters rewarded as we recognized the second most successful quarter in our company's history and our best third quarter to date. During third quarter 2019, we recognized $6.7 million in revenue, and we generated $1.4 million in EBITDA and $937,000 in net income. Furthermore, we generated these results while increasing our backlog to a record $11.3 million. Typically, we have seen an inverse correlation between our revenues and our backlog. For example, when customers request delayed shipment of product revenues were not recognized but backlog increases. In third quarter this year, however, both of these metrics moved in tandem. This parallel increase naturally begs the question, what changed in third quarter from prior quarters? What did we do differently that caused us to both increase revenues in the immediate quarter and increase backlog to benefit future quarters? The answer is that, really little has changed as we have simply continued executing on the major initiatives we outlined at the beginning of the year. To bolster our technological suite of products and expand our footprint in both current and new markets, we've spoken before about the fact that our revenues have a tendency to fluctuate from quarter-to-quarter. And, as a result, the most objective way to evaluate our business is on an annual rather than a quarterly basis. And if anything, the financial results of this quarter, like prior quarters, should reinforce that message. In the second quarter of 2018, our financial results witnessed the positive effects of this volatility as we delivered a large order. Since then, we've seen our financial results flex downwards as we've experienced customers delay orders, and revenues get pushed into later quarters, as a result. Then in this quarter, the hard work throughout the year in both production and sales paid off. We saw some federal contracts come through after considerable efforts over the past year. We were also able to recognize a material portion of revenues from the robust pipeline we've been building over the past few quarters. Further, unlike some of our previous quarters, we did not experience any significant customer delays in the third quarter. One of the points to take away from these results are the fact that quarterly performance for VirTra can fluctuate in both directions, and therefore, a longer-term view might yield the most accurate insights. Now that being said, it should be stressed that at no point are we passively operating and simply waiting for the tide to turn it in our favor. We are constantly working to expand our presence in current and new markets and improve our products to better serve our customers. So while the strategy has not changed from prior quarters, there are 2 factors worth highlighting that were major contributors to the financial success of the third quarter. The first is the effect of driving simulators. We originally announced our introduction of driving simulators late in the first quarter of 2019, in conjunction with an initial $1.9 million contract with the Department of State for the Republic of Mexico. On our last call, I mentioned that in addition to this inaugural order, we had received 2 additional orders for driving simulators. We recognized much of revenue from these orders in the third quarter and those revenues contributed to our topline financial success. We're certainly encouraged by the market's initial reaction to this new product line and we're optimistic about the future of this program as we have just recently made it available to domestic U.S. law enforcement. These initial orders as well as the buzz we've seen in early conversations here in the U.S., appear to validate the investment required to add these products to VirTra's offerings and enter this market. However, I should stress that while the initial reaction has been exciting, we do not expect the number and size of contracts to continue to grow at its current rate. We think there is great potential for our driving simulators in the long run and we believe it will alternately serve as an excellent means of augmenting sales of our core product suite of use of force and small arms training simulators, but this could take some time to mature. The second factor that we believe contributed to our success this quarter is the broader market's changing perception of our company. Let me explain. Berkshire has long been a leader in simulation training. Our name and our products have been well recognized and respected for years, but recently the changes we've been implementing in our business are becoming more and more appreciated by the market and our prospective customers. We've made immense additions to our product suite this year, including advancements to our recoil kits with the patents from Tiberius Technologies we purchased, the introduction of driving simulators, the launch of ultra-high definition simulators that utilize state-of-the-art 4k technology, the recently awarded patent for realistic simulation training with TASER and our certified V-VICTA training curriculum. And we've made all of these simulation tools more accessible with the introduction of the STEP program as a subscription alternative to our traditional hardware sales model, another industry first. Combined, these advancements have helped to increase our position in the market and it's become more apparent than ever that VirTra is the leader in our markets. I'll speak more about this changing sentiment and what it may mean for our business going forward. But before we go into too much detail about our operational progress and outlook, 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 positioning and provide further updates. Judy?

Thank you, Bob, and good afternoon, everyone. Our total revenue for the third quarter of 2019 was $6.7 million. This was an 89% increase from the $3.5 million of revenue we recognized in Q3 of last year. The increase in revenues for the 3 months ended September 30, 2019, resulted from an increase in the number of simulators and accessories completed, delivered, and revenue recognized compared to the same period in 2018. For the 9 months ended September 30, 2019, our total revenue decreased 18% to $12.8 million from $15.5 million in the first nine months of last year. The decrease in revenue for the 9 months ending September 30, 2019, was the result of a large onetime order being recognized in 2018 that did not recur in 2019. Our gross profit for the third quarter of 2019 increased 80% to $3.8 million or 55.9% of revenue from $2.1 million or 58.8% of revenue in the third quarter of 2018. For the first nine months of the year, our gross profit decreased 30% to $7.1 million or 55.2% of revenue from $10.1 million or 64.9% of total revenue in the first nine months of the year 2018. In both periods, the increases and decreases in gross profit was primarily due to differences in our product mix, the varying quantities of systems, accessories and services sold. Our net operating expense for the third quarter of 2019 increased 25% to $2.5 million from $2 million in Q3 of last year. For the first nine months of 2019, our net operating expense was relatively flat at $7.2 million compared to the same period a year ago. The increase in expense for the third quarter was due to increases in selling, general, administrative costs for labor, benefits, professional services, sales and marketing expense and research and development. Turning to our profitability measures. Income from operations for the third quarter of 2019 was $1.2 million compared to income from operations of $80,000 in Q3 of last year. For the first nine months of 2019, loss from operations was $94,000 compared to income from operations of $2.9 million in the first nine months of 2018. Our net income for the third quarter of 2019 totaled $937,000 or $0.12 per diluted share. This compares to net income of $61,000 or $0.01 per diluted share in Q3 of last year. For the 9 months ended September 30, 2019, our net loss totaled $10,000 or $0.00 per diluted share compared to net income of $2.1 million or $0.25 per diluted share in the comparable period, 2018. As a result of the net income in Q3 and other deferred tax adjustments, our income tax expense was $348,000 in the third quarter and is $24,000 year-to-date in the first nine months of 2019. Our adjusted EBITDA, a non-GAAP financial measure, was $1.4 million in the third quarter of 2019 compared to adjusted EBITDA of $174,000 in Q3 last year. For the first nine months of 2019, our adjusted EBITDA was $339,000 compared to adjusted EBITDA of $3.3 million in the first nine months of 2018. Turning to our bookings and backlog, we define bookings of the total of newly signed contracts and purchase orders received in a time period. For the 3 months ended September 30, 2019, we received bookings totaling $7.8 million. We define backlog as the accumulation of bookings from signed contracts and purchase orders that are not started or are uncompleted and cannot be recognized as revenue until delivered in the future period. 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 September 30, 2019, our backlog was $11.3 million. Finally, to our balance sheet. At quarter end, we had approximately $5.3 million in cash and cash equivalents and certificates of deposit, which was down $698,000 from the end of the period December 31, 2018. From a working capital standpoint, we ended the third quarter of 2019 with $6.4 million in working capital, a decrease of $372,000 from the end of the period 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 turn it back to Bob.

Thanks, Judy. As I mentioned earlier, we've added new revenue streams this year, which was a major component of the strategy we outlined in January. But, of course, even great products require expert salesmanship. So in an effort to market ourselves and our solutions more effectively, we completed a number -- a record number of demos for key decision-makers over the past few months as well as developed some tremendous partnerships. Of the annual events in the police industry, the largest and the most important is the International Association of Chiefs of Police or IACP conference, which we attended in September. I'm pleased to report that the conference was, by all metrics, a huge success for VirTra. Of the vendors who operate in police training, we had the most new products, the largest staff presence and the most respected experts working alongside us and in our booth. We showcased many of the new products we've introduced this year, including our upgraded recoil kits, the industry's newest driving simulator designed specifically for U.S. and international law enforcement, our new ultra-high definition simulators that leverage 4K projectors, and our certified V-VICTA curriculum. V-VICTA is the only nationally certified simulation training curriculum for a variety of key policing topics, and it sets the standard for use-of-force training curriculum. It is one of the reasons we notice our products standing further and further apart from the competition's. While trying to remain as unbiased as possible, and from the conversations I had with attendees, customers, prospective clients it was clear that IACP helped prove that VirTra is the company best positioned to improve the training of police officers to save lives. I think any attendee who compared VirTra to other competitors at ICP 2019 would see the numerous and substantial advantages of going with VirTra. We've really become the dominant and most trusted name in simulation training for law enforcement. If we reflect on some of our more recent press releases and contract wins, we can see proof of our growing reputation, particularly in the federal law enforcement space. Recently, we've announced both new contracts and expansions with several significant federal law enforcement agencies. We received a $1.1 million expansion order from the Secret Service. We were awarded a $5 million IDIQ contract in addition to a $1.7 million expansion order from the Department of Homeland Security for Customs and Border Protection. We've continued our relationship with the U.S. Marshals Service. A major new piece of news is that we received the first order for our ultra-high definition 4K simulators from the Federal Law Enforcement Training Center or FLETC. This Federal Training Center is famous throughout our industry. In fact, it houses the largest number of police driving simulators in the U.S., just to name 1 distinction. For those who are curious about these individual contracts, you can find the details associated with each of them in their respective press releases. However, broadly speaking, these contracts demonstrate that we're continuing to successfully execute on our strategy of broadening our presence in current and new markets by establishing a substantial foothold in a crucial branch of law enforcement. As we look back several years ago when our first federal government clients decided to switch to VirTra as their new supplier, we see parallels to the military market that gives us optimism about what is possible for VirTra in the future. As you know, one of our goals has been to expand our presence in the military market. And one of our means of achieving this goal is to leverage the reputation and expertise we've developed from working with a broad range of federal law enforcement agencies. As a result of this expertise, as well as additional initiatives like hiring one of the top military consultants in the industry, we've been making progress towards this goal. We've been conducting multiple demos with high-profile decision-makers in various branches of the military. At the moment, we don't have any tangible results we can share. However, given the changes we've made in the past year, including enhancing our various product lines and bringing on a respected consultant in this area, combined with the momentum we've built from recent contract wins with the federal government, we believe we are well positioned to capitalize on opportunities within the military. We, therefore, continue to remain cautiously optimistic about our prospects here, and we will continue to share updates as they develop. As we shift our focus to the end of the year and begin to think about 2020, we understand that some investors may be curious about how the full year 2019 will shape up when compared to 2018. If you compare the 9 months results, we clearly have some ground to cover. Currently, we don't provide guidance on either a quarterly or annual basis, but I would like to take a few moments to speak about our outlook for the rest of the year. VirTra has achieved 13 consecutive years of increasing revenues. And despite the ground we have lot to make up we are doing everything within our power to continue that streak. Third quarter of 2019 was a uniquely strong quarter during which we witnessed a substantial increase in our top line, while exiting the quarter with a record backlog of $11.3 million. Due to the mix of our current backlog, we believe there is a good -- that there is good reason to suspect we will finish the year in a strong position. We obviously cannot guarantee how the fourth quarter will pan out at this time. As we've spoken of in the past, there are a variety of factors that can cause customers to delay shipment of orders, which can impact our financial results. Yet, based on the quantity and mix of our backlog and the incredible hard work our team continues to put in every day, we remain cautiously optimistic that we will end the year on a positive note. And with that, I'm going to wrap up my prepared remarks, and I believe we're ready to open the call for questions. Operator, please provide appropriate instructions.

[Operator Instructions]. Our first question comes from William Gibson of Roth Capital Partners.

Bob, could you give us a little more update or insights into the progress on the STEP program, perhaps even the number of people that are now signed up.

Yes. So we continue to sell STEP to both law enforcement and military customers. It's progressing well, but it remains a relatively small amount of our revenue. So when we started STEP, we did explain that we were allowing customers to either go with STEP or go with the traditional equipment purchase route, and that came after quite a bit of market testing and internal debate on what is the best way to go forward. So that continues to be our strategy of pricing it fairly. But it is taking time for people to get into the pipeline with STEP. The good news is that STEP is, we believe, a very streamlined way to purchase. So there are people that found out about STEP and then were able to activate a STEP contract right away. But at this time, we're not breaking it out, and we're not giving a lot of information about the amount of STEP contracts or the dollar value of STEP contracts right now, but we're looking forward to that changing as it, hopefully, will become a larger portion of our revenue.

And does that show up in net sales or in-licensing income?

Net sales.

Net sales. Thank you. And then 1 follow-up, please. You mentioned the driving simulators. Is that available on a pay-as-you-go method as well?

Yes. We're still working out the details of that, but our hope is to definitely have driving simulators be available on the STEP program.

[Operator Instructions]. And 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. 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. Yesterday, our country celebrated Veterans Day, and it was a solemn reminder of the responsibility and privilege we have to serve those who serve our country by going the extra mile in providing the absolute best training simulators with the best customer service found in our industry. That is how exceptional reputation is earned. 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 Third Quarter 2019 Conference Call. You may now disconnect.