VirTra, Inc. (VTSI) Q4 2019 Earnings Report, Transcript and Summary

Good afternoon. Welcome to VirTra's Fourth Quarter and Full Year 2019 Earnings Conference Call. My name is Jess, 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 VirTra’s institutional analysts 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 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 and good afternoon everyone, and thanks for joining us today. After the market closed, we issued our financial results for the fourth quarter and full year 2019 in a press release, a copy of which is available in the Investor Relations section of our website. I’d like to begin today by briefly describing some of the macro events, which are affecting most industries. Over the past few months, we’ve all experienced dramatic shifts in our daily lives as COVID-19 has spread across the globe. Many must wonder the potential impact on VirTra. As far as the supply side, VirTra’s supply chain is considerably insulated so far due to the fact that we’ve expanded in-house production abilities in recent years and what we don’t produce, we can usually purchase from multiple suppliers, many of which are U.S. based. As far as the demand side, we sell to government agencies that still must instruct trainees on effective firearm use even during these stressful times. Some would suggest that now more than ever the government must train first responders effectively, especially since simulation training can occur while maintaining social distancing guidelines. More to the point, we have not yet had a single order cancelled since COVID-19 made the headlines. However, the totality of the impacts at VirTra from this virus are not fully understood at this time, so we are proceeding cautiously. We are doing our part at VirTra to continue to serve the brave men and women who are working so hard to keep our nation safe while still mitigating the effects of COVID-19 to ensure our people and our partners remain healthy. I’ll touch more on this topic in my closing remarks, but first let’s look at the year-end review. When we last spoke in November, I ended our call by discussing why we were optimistic; we’d be able to conclude the full year 2019 with overall positive results. As you are all aware, the third quarter of 2019 was one of the most successful quarters in our company’s history. We delivered near-record topline revenues, we were net income positive by a large margin, and we exited the quarter with the largest backlog in our company’s history. However, due to the slow start in the first half of 2019, from a financial perspective, we still have substantial ground to cover if we were going to continue the trend we established in 2008 of year-over-year revenue growth. In the fourth quarter, our entire organization worked diligently to continue the momentum from the third quarter and to generate new business while converting some of our record $11.3 million backlog into revenue. I’m very pleased to be able to report today, but thanks to the incredible work of the team at VirTra, we were able to achieve that goal. We’ve now delivered our fourteenth consecutive year of increasing revenues while also investing time and money into future growth. In the fourth quarter, we generated $5.9 million in revenue and adjusted EBITDA of $729,000. In general, the positive results of the fourth quarter were driven by our team’s ability to not only secure new contracts, but to scale our efforts to successfully deliver product in a timely manner. This is perhaps best evidenced by the large $2.3 million follow-on order we received in October from the Arizona Department of Public Safety. As we’ve discussed in the past, the timing of when products arrive to the customer can have a material impact on our quarterly financial results. And in many cases, the timing of deliveries is not one of the variables we have complete control over. We saw the negative effects of timing a year ago in orders at the end of 2018 were delayed and therefore not recognized as revenues in Q4 of that year. However, what we can control is our ability to scale quickly and deliver quality product when customers are ready, and that’s essentially what happened at the end of this year. With multiple orders in our backlog ready for receipt, including a substantial portion of the order from the Arizona Department of Public Safety, our team effectively scaled their efforts to meet this demand and deliver product in a timely manner. As a result, we ended the full-year 2019 with $18.7 million in revenue and adjusted EBITDA of nearly $1.1 million. Additionally, despite the revenue we recognized in Q4, we maintain a robust pipeline of business and entered 2020 with a $9.6 million backlog. Our financial success in the second half of the year, which drove improving results for the full year 2019, is in large part due to our ability to consistently execute against our strategic priorities. In January 2019, we used the start of our 26th year in business as an opportunity to not-only reflect on how our company has evolved, but to outline our objectives for the year. We entered 2019 determined to strengthen and diversify our business by bolstering our technological capabilities and increasing our sales footprint and to work harder on meeting the needs of the military market. Throughout the year, we’ve done just that and the fourth quarter was no exception. In the fourth quarter, we launched new products in curriculum, expanded our sales pipeline by securing new orders, one of which I’ve already mentioned and strengthened our competitive moat to better position ourselves to meet the current and future demands of our respective markets. During the International Association of Chiefs of Police Conference, or IACP, in October, we unveiled the world’s first 4K 300-degree simulator. The higher resolution in these enhanced simulators finally achieving nearly perfect match to the human eye allowing even higher levels of realism and effectiveness throughout our product line. The technological hurdles to achieve this are non-trivial, and we aren’t surprised that competitors are struggling to someday follow our lead. Shortly after announcing our new ultra high-definition simulators, we received our first order for them from the Federal Law Enforcement Training Centers or FLETC. FLETC is the main training site for Federal Law Enforcement and their switching to VirTra means they now join the U.S. Marshals, Secret Service and Customs and Boarder Protection in trusting VirTra as their supplier. I believe this is the first time in our industry when one company VirTra has become the standard for essentially every major Federal law enforcement agency. It is an incredible honor and huge accomplishment for our company. During IACP, we also launched our driving simulators, known as the virtual driving training simulator or VDTS for the U.S. Law Enforcement Market. Earlier in the year, we’d seen initial success with VDTS and the international market as evidenced by the $1.9 million order we received through the department of state for the Republic of Mexico during Q1 and our second and third orders also through the Department of State, which we announced during our second quarter conference call. However, it was only in the fourth quarter that we brought this product to the domestic market. From the initial conversations we’ve had with perspective customers we have reason to believe that we will do well here and allow us to continue to expand our revenue streams. In addition to the enhancements we made on our product suit by adding new hardware products we also introduced new training curriculum. New technology can get people excited, but at the end of the day, what our customers really want is effective training. We’re in the business of improving the training of law enforcement and military personal to ensure they are as prepared as possible to respond to the wide range of potentially dangerous situations they may face on a daily basis. VirTra, possibly better than any other company in our market combines new technology with certify and effective professional training content. For that reason, we’re always working with our customers to design new scenarios and better curriculum to meet their needs. To that end, during the fourth quarter, we released updated versions of our certified V-VICTA curriculum, which included courses on autism spectrum disorders, special populations, and emotionally disturbed persons, among others. While these specific updates are available to all V-VICTA users, it’s worth noting that in many cases agencies also come to us with request for custom content. This is especially true in the federal space where an agency may have a very specific location or scenario for which they need to train. We don’t typically discuss the details of these orders publicly as the training scenarios themselves can be of a [sense of nature]. It is worth noting, our ability to deliver industry leading content is one of the main reasons we remain ahead of our competition. And in the fourth quarter of 2019, it certainly helped contribute to our business success. In addition to the new products and curriculum we launched in the fourth quarter, we also positioned our product portfolio to be better suited for the needs of military. At the end of October, we announced that we had issued two new patents. One related to TASER cartridge kits and the other related to drop-in recoil conversion kits of real fire arms. While both of these patents are well-suited to enhance our competitive mode in the domestic law enforcement market, we believe our drop in recoil kit conversion capabilities may also improve our position in the military market. The military was highly realistic and highly flexible solutions for simulation trainee, our patents ensure VirTra is the only company in the U.S. that can produce or sell our specially designed kit that affordably converts a live fire arm into a safe reliable training tool that can even simulate standard weapon functions and therefore increase realism. It made simulation training much more flexible as it allowed trainees to train with their real military weapons, [indiscernible] and law enforcement weapons. While we’re yet to announce a large military contract, we’re continuing to conduct demos with high profile decision makers and prove to them the potential better training at lower cost through VirTra. We therefore remain confident that the enhancements we made in the fourth quarter when combined with the additional changes of the past year have us better positioned than ever to meet the needs of the military. So, overall the fourth quarter was extremely strong for VirTra and I believe helped to set the stage for a solid start of 2020, but before I add any additional details on 2019 as a whole and our current thoughts on 2020, I’m going to turn the call over to Judy to walk you through our financial results for the fourth quarter and full year ended December 31, 2019. Judy?

Thank you, Bob and good afternoon everyone. Our total revenue for the fourth quarter of 2019 was $5.9 million. This was a 133% increase from the $2.5 million of revenue we recognized in Q4 of 2018. For the full year 2019, our total revenue increased 3% to $18.7 million from $18.1 million in 2018. The increase in recognized revenue for both the three months and full year ended December 31, 2019 resulted from increase in the number of stimulators and accessories completed and delivered compared to the same period in 2018. Our gross profit for the fourth quarter of 2019 increased 176% to $2.6 million or 44.8% of revenue from $957,000 or 37.8% of revenue in the fourth quarter of 2018. For the full year ended December 31, 2019, our gross profit decreased 12% to $9.7 million or 51.9% of total revenue from 11 million or 61.1% of total revenue in 2018. In both periods, the changes in gross profit was primarily due to differences in the product mix and the varied quantities of systems, accessories, and services sold. Our net operating expense for the fourth quarter of 2019 decreased 19% to $2.3 million from $2.8 million in Q4 of 2018. For the full year 2019, our net operating expense decreased 6% to 9.5 million from 10 million in the same period a year ago. The decreases in net operating expense for the fourth quarter and full year 2019 were both due to decreases in the following. General and administrative cost, stock option compensation and redemptions, professional services, public company expense, which were all of slightly offset by increases in salary and benefits, sales and marketing, and facility costs. Additionally, during the year ended December 31, 2019 there was 120,000 of allowance for bad debt on accounts and notes receivable and we recorded a 280,000 impairment loss as operating expense on the statement of operations. For the year end December 31, 2018 there was a 318,000 allowance for bad debt on accounts and notes receivable and a 255,000 impairment loss also recorded as operating expenses. Turning to our profitability measures, income from operations for the fourth quarter of 2019 was 356,000, compared to a loss from operations of 1.9 million in Q4 of last year. For the full year 2019, income from operations was 262,000 compared to income from operations of 1 million in 2018. Both the allowance for bad debt on net receivable and the impairment expense again are recorded as operating expenses reducing income from operations by these non-cash GAAP reserves. They total 388,000 combined and 522,000 for the years ended December 31, 2019 and 2018 respectively. Due to the items just mentioned, we were near breakeven for the fourth quarter of 2019 with a net loss of 66,000 or $0.01 per diluted share. This compares to a net loss of 1.3 million or $0.16 per diluted share in Q4 of last year. For the full year ended December 31, 2019, our net loss totaled 75,000 or $0.01 per diluted share, compared to a net income of 818,000 or $0.10 per diluted share comparable period a year ago. Our adjusted EBITDA and non-GAAP financial measure was 729,000 in the fourth quarter of 2019 compared to an adjusted EBITDA loss of 246,000 in Q4 last year. Our adjusted EBITDA for the full year 2019 was 1.1 million, compared to adjusted EBITDA of 1.9 million in 2018. Turning to our bookings and backlog, we define bookings as the total of new signed contracts and purchase orders received in the given time period. For the three months ended December 31, 2019, we received bookings totaling 4.2 million. We define backlog as the accumulation of bookings from signed contracts and purchase orders that have not been started or uncompleted performance objectives 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 lives of each respective agreement. At December 31, 2019, our backlog was 9.6 million. And finally, to our balance sheet, at quarter end, we had approximately $3.3 million in cash and cash equivalents and certificates of deposits, which was down 2.7 million from the end of the period December 31, 2018. Accounts receivable and unbilled revenue combined totaled approximately 5.9 million at quarter end compared to 2 million in the same quarter in 2018, an increase of 3.9 million. From a working capital standpoint, we ended 2019 with 7.1 million in working capital, an increase of 300,000 in working capital from the period ended December 31, 2018. For additional details of our financial results please reference our 10-K, which was filed earlier today. That concludes my prepared remarks. I’ll now turn it back to Bob.

Thanks Judy. The fourth quarter was obviously a strong finish to the year for VirTra, but we have much more to accomplish in 2020 and beyond. We have laid a lot of the ground work required for our future growth. We expanded into new categories, introduced new and innovative products, and landed key new customers. As part of building this foundation, we expanded our recoil kit capability both from an internal development and by acquiring intellectual property. And we continued this theme by launching and driving simulator in the U.S. market after spending a great deal of time reviewing feedback from our initial deployments and leveraging our years of experience with domestic law enforcement to ensure these products and corresponding training content fit their needs, and we also launched the world's first 4K 300-degree simulators, which demonstrates that VirTra once again is leading the industry into the future. We will also continuously launch new scenarios and upgraded our certified V-VICTA training curriculum. In Q1, we launched curriculum for high-risk vehicle stops, which combines physical assets such as a vehicle with virtual scenario-based training. We then announced a new curriculum for non-escalation and de-escalation and crisis intervention which we developed in tandem with one of our strategic partners Vistelar. We also expanded the partnership we initiated in April of 2018 with four science institutes to create new realistic training and education for law enforcement officers, which is backed by the science of human performance. As a reminder, all of these scenarios not only increased the quality of our training platform, which I discussed earlier, but uniquely VirTra’s curriculum is actually certified and counts towards the mandatory training law enforcement officers are required to receive annually. This combination of increasing compliance, as well as improving the quality of training is one of the many reasons more and more agencies and departments are compelled to work with VirTra. With many of these products and enhancements VirTra has become an even better fit for the military market. You can imagine that when VirTra creates a next-generation drop-in recoil conversion kit it works for firearm that might be used by both police and military when coupled with the relationships we’ve been building with various demos and the help of our strategic consulting, we’re cautiously optimistic that the military could leverage products and technology already refined by VirTra. The combination of these enhancements has only increased our position as the market leader and high quality simulation training in our product categories. And when coupled with the introduction of the staff subscription program, our sales team now has more weapons at their disposal than ever before. It’s important to remember that STEP is still in its infancy, but it’s already proving useful tool for our same sales teams. One of the primary reasons we introduced a subscription model was to remove upfront barriers of capital outlay to allow more agencies to sustain a long-term training program for the perishable skills their officers need for their own safety and that of the public. And so far, we’ve certainly seen evidence of that being the case. It’s clearly been a busy year at VirTra, and I'm very proud of the work our team has accomplished and ensure our company is in its strongest position to date and entering 2020 in a position of strength is especially pertinent now when considering the level of level of uncertainty in the world today. Currently, we’re approaching 2020 with caution and carefully monitoring the effects of COVID-19 on VirTra and the industry. Obviously, there could be an impact on VirTra and our competitors as travel restrictions and social distancing may exist for an unspecified duration. And it is possible that our industry could encounter delays of delivering or installing equipment due to COVID-19 related logistical challenges. However, VirTra is likely in a better position than many of our competitors. We just modernized our website with much more automation, and that timing couldn't have been better. More to the point, we’ve never in our history had such a strong electronic marketing and sales infrastructure as we have right now when we need it most with the restricted personal travel. Further, our strong balance sheet, no debt, and cash reserves mean not only do we plan to survive COVID-19, but moreover we might be in a position to make one or more acquisitions if the right opportunity presents themselves. Our staff and stakeholders are central to our continuation, and we currently have most all of our staff working from home in an effort to mitigate the impacts of COVID-19, but if there’s anything we’ve learned over the past 26 years of being in business, it’s how to operate a business responsibly and how to adapt to changing market conditions and sentiment. Yet regardless of how things exactly unfold with COVID-19, what we do know is that the need for well-trained law enforcement and military personnel is likely to only grow in importance, and we intend to fulfill that need. Please know our core mission, which is to improve and ultimately save lives by providing law enforcement and military personnel with the world's most effective simulation training will remain intact. First responders will always need a way to safely practice and prepare for the risks and uncertainties they may face at any moment during their careers , and we intend to continue to play our part to ensure they are as prepared as possible by providing the world's best simulation training solutions. And with that, I’m going to wrap up my prepared remarks, and I believe we’re ready to open the call for your questions. Operator, please provide the appropriate instructions.

Thank you. [Operator Instructions] We will move first to Jaeson Schmidt at Lake Street.

Hi, guys. Thanks for being my questions. Bob, it sounds like you really haven't seen a significant impact from COVID-19, but just curious if you’ve seen the sales cycle get elongated at all because of this issue or just the macro headlines in general?

As of today, we have not seen sales cycle lengthening, but it would be important to point out that our sales cycle range from sometimes a couple hours, which is the rare event where agencies need to spend it or lose it at the end of a fiscal cycle or it can be one to two years sales cycle. In this environment, I think it actually insulates VirTra a bit, because our sales cycles are longer, many times everything has been set up to get a purchase done or get a subscription done, and once all that’s setup, many times they don't want to derail that the machinery is in motion. So, I think that’s one reason that we have not seen a knee-jerk reaction by someone calling us up and saying, you know what we are going to need to cancel an order. I think that’s maybe rather specific to business to government companies like VirTra.

Okay. That’s helpful. And it sounds like the STEP program traction has been progressing nicely, just curious if you could quantify the number of customers signed up for that or just what percent of the engagements you’re currently seeing look to the STEP program instead of an outright purchase?

We aren’t giving that information. We do have an item in our financials that shows depreciation of the STEP hardware, so I would refer you to that to kind of get in some idea of the activity there, but we're not breaking that out right now.

Understood. And the last one and I will pass it. How are you guys thinking about OpEx and investment in the current macro environment?

I'm sorry, could you repeat that?

How are you guys thinking about operating expenses and investments in the current macro environment?

So, we are approaching the future cautiously, however, with our strong pipeline we’re seeing currently no cancellations. We are currently proceeding with maintaining our staff, making sure that our infrastructures are intact and continuing to do investments where opportunities present themselves. I believe the simulation training market is ripe with a lot of opportunity, particularly for an industry leader like VirTra, and so we are not slowing down and investing in that, but we are being prudent overall with how we approach investments and operating expenses.

Okay. Thanks a lot guys.

Thank you.

With no other questions holding, I would like to turn the call back over to Mr. Ferris for his closing remarks.

Thank you. It is my sincere hope that our extraordinary employees, customers, shareholders, and partners all remain healthy and safe during the great challenges we all face. Please note that VirTra’s staff is as committed as ever to advance our business, create the world's best simulators, and support our customers who are often those running towards danger to protect our very lives. We look forward to updating you on our next call. Thank you and God bless.

Thank you for joining us today for VirTra’s fourth quarter and full year 2019 conference call. You may now disconnect.