Edited Transcript of VTSID earnings conference call or presentation 23-Mar-20 8:30pm GMT

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 that thanks to the incredible work of the team at VirTra, we were able to achieve that goal. We’ve now delivered our 14th 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 at 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 when 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 enter 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 strengthen 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 achieve a 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 nontrivial, 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 Border 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

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during IACP, we also launched our driving simulators, known as the virtual driving training simulator, or V-DTS, for the U.S. law enforcement market. Earlier in the year, we’d seen initial success with V-DTS in 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 prospective customers, we have reason to believe that it will do well here and allow us to continue to expand our revenue streams.

In addition to the enhancements we made to our product suite 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 personnel 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 certified 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 requests 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. Now we don’t typically discuss the details of these orders publicly as the training scenarios themselves can be of a sense of nature, but it is worth noting that 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 position our product portfolio to be better suited for the needs of the military. At the end of October, we announced that we had issued 2 new patents, 1 related to TASER cartridge kits and the other related to drop-in recoil conversion kits of real firearms. While both of these patents are well suited to enhance our competitive moat 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 wants highly realistic and highly flexible solutions for simulation training. 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 firearm into a safe, reliable training tool that can even simulate standard weapon functions and, therefore, increase realism. It makes simulation training much more flexible as it allows trainee to train with real military weapons while — 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 of better training at lower costs through VirTra. We, therefore, remain confident that the enhancements we made in the fourth quarter when combined with the additional changes over 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?

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Judy A. Henry, VirTra, Inc. – CFO, Secretary & Treasurer [3]

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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 3 months and the full year ended December 31, 2019, resulted from increase in the number of simulators 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 very 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 costs, stock option compensation and redemptions, professional services and public company expense, which were all 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 expense.

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 noncash GAAP reserves. They totaled $388,000 combined and $522,000 for the years ended December 31, 2019 and ’18, 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 in or $0.10 per diluted share comparable period a year ago.

Our adjusted EBITDA, a 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 a given time period. For the 3 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 are uncompleted performance objectives and cannot be recognized as revenue until delivered in a future period. Backlog also includes extended warranty agreements and STEP agreements that our deferred revenue recognize on a straight-line basis over the life 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 deposit, 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.

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Robert D. Ferris, VirTra, Inc. – CEO, President & Chairman of the Board [4]

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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 groundwork 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 through internal development and by acquiring intellectual property. And we continue this theme by launching a 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 a 4K 300-degree simulators, which demonstrates that VirTra, once again, is leading the industry into the future.

We’ve also continuously launched 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 new curriculum for nonescalation and deescalation 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 Force Science Institute 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 increase the quality of our training platform, which I discussed earlier, but uniquely, VirTra’s curriculum is actually certified and counts toward 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 a 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 consultant, 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 in high-quality simulation training in our product categories. And when coupled with the introduction of the STEP 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 proven a useful tool for our 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 to 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 uncertainty in the world today.

Currently, we’re approaching 2020 with caution, and we’re 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 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 opportunities present 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’re 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.

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Questions and Answers

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Operator [1]

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(Operator Instructions) We will move first to Jaeson Schmidt at Lake Street.

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Jaeson Allen Min Schmidt, Lake Street Capital Markets, LLC, Research Division – Senior Research Analyst [2]

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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.

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Robert D. Ferris, VirTra, Inc. – CEO, President & Chairman of the Board [3]

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Yes. 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 of hours, which is the rare events where agencies need to spend it or lose it at the end of a fiscal cycle or it can be 1 to 2 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 has been set up to get a purchase done or get a subscription done. And once all that’s set up, 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’re going to need to cancel an order. I think that’s maybe rather specific to business-to-government companies like VirTra.

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Jaeson Allen Min Schmidt, Lake Street Capital Markets, LLC, Research Division – Senior Research Analyst [4]

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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?

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Robert D. Ferris, VirTra, Inc. – CEO, President & Chairman of the Board [5]

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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 some idea of the activity there. But we’re not breaking that out right now.

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Jaeson Allen Min Schmidt, Lake Street Capital Markets, LLC, Research Division – Senior Research Analyst [6]

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

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Robert D. Ferris, VirTra, Inc. – CEO, President & Chairman of the Board [7]

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I’m sorry. Could you repeat that?

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Jaeson Allen Min Schmidt, Lake Street Capital Markets, LLC, Research Division – Senior Research Analyst [8]

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

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Robert D. Ferris, VirTra, Inc. – CEO, President & Chairman of the Board [9]

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So we are approaching the future cautiously. However, with our strong pipeline, with 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.

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Operator [10]

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

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Robert D. Ferris, VirTra, Inc. – CEO, President & Chairman of the Board [11]

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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.

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Operator [12]

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Thank you for joining us today for VirTra’s Fourth Quarter and Full Year 2019 Conference call. You may now disconnect.