Q2 2021 VirTra Inc Earnings Call
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Good afternoon, welcome to virtual second quarter 2021 earnings conference call. My name is Jess and I will be your operator for today's call joining.
Joining us for today's presentation are the company's chairman and CEO, Bob Ferris and Chief Accounting Officer Marcia Fox.
Following their remarks, we will open the call for questions from <unk> institutional analysts and investors.
Before we begin the call I would like to provide <unk> 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 services or markets or otherwise make statements about the future, which are forward looking and are 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 Dot <unk> Dot com.
Now I'd like to turn the call over to Richards, Chairman and CEO, Mr. Bob Ferris Sir Please proceed.
Thank you operator, and thank you everyone for joining us this afternoon.
After the market closed today, we issued our financial results for the second quarter and six months ended June 30.
2021.
As you can see from our release, we delivered strong results across the board in the second quarter highlighted by a 90% increase in total revenue and a 99% increase in gross profit.
Our continued focus on driving profitable growth also enabled us to deliver another quarter of positive net income and adjusted EBITDA, which totaled $1 million or 19% of our total revenue.
Demand for <unk> World Class training solutions continues to build as reflected by the 6% sequential and 19% year over year increase in our backlog totaled a record 17 million at quarter end.
Our strong financial performance in Q2 also demonstrates our team's consistent operational excellence as well as the value and effectiveness that purchase products provided to our end users and partners are.
Our results also reflect the continued execution of key strategic initiatives.
To drive business scale.
I'm very proud of the exceptional team we've assembled at virtual who continue to perform despite the ever changing COVID-19 limitations.
Before I go into more detail about our operational initiatives and progress within the context of our growth strategy I'm going to turn the call over to our Chief Accounting Officer, Marcia Fox to walk you through our financial performance for Q2.
The first six months of 2021 Marcia.
Thank you Bob and good afternoon, everyone. It's a pleasure to be speaking to you today to review our financial results for the second quarter and six months ended June 30th 2021 hour.
Our total revenue for the second quarter of 2021 was $5.3 million. This was a 90% increase from the $2.8 million of revenue we recognized in Q2 of last year.
For the first six months of 2021 total revenue increased 59% to $9.7 million from $6.1 million for the first six months of 2020.
The increase in total revenue for both the second quarter and the first six months of 'twenty 'twenty. One was due to an increase in the number of simulators and accessories completed and delivered and therefore revenue recognized compared to the same periods in 2020.
Our gross profit for the second quarter of 2021 increased 19, 9% to $3.1 million from $1.6 million in Q2 last year.
Gross profit margin for Q2, 2021 was 59, 7%.
An improvement compared to 57% in Q2 last year.
For the first six months of 2021 gross profit increased 80% to $5.7 million from $3.2 million for the first six months of 2020.
Gross profit margin for the first six months of 2021 was 58, 8% an improvement compared to the 51, 9% in the same period last year.
The improvement in gross profit and gross profit margin for both the second quarter and the first six months of 2021 was due to decreased cost and a more favorable product mix of systems accessories and services sold.
Our net operating expense for the second quarter of 2021 was $2.3 million compared to $2.4 million in Q2 last year.
For the six month period, net operating expense was $4.3 million compared to $4.5 million for the first six months of 2020.
The decrease in net operating expense for Q2, and the first six months of 'twenty 'twenty. One was primarily due to the impairment write down in 2020 offset by an increase in software license fees in 2021.
Turning to our profitability measures.
Our income from operations in the second quarter of 2021 totaled $821000 compared to a loss of $822000 in Q2 last year for.
For the six months period.
Operating income was $1.4 million.
An improvement compared to an operating loss of $1.3 million for the first six months of 2020.
Net income for the second quarter of 'twenty, 'twenty, one totaled $529400 or five cents per diluted share an improvement compared to the net loss of $601300 or a loss of eight cents per diluted.
<unk> share in the second quarter of 2020.
For the six month period, net income totaled $1.2 million or 13 cents per basic and diluted share an improvement compared to a net loss of $990700 or a loss of 13 cents per basic and diluted share for the first six.
Months of 2020.
Adjusted EBITDA, a non-GAAP metric for the second quarter of 2021 totaled $1 million and an improvement from a loss of $579200 in Q2 last year.
For the first six months of 2021, adjusted EBITDA totaled $1.8 million.
An improvement from a loss of $978300 for the first six months of 2020.
Turning to our bookings and backlog.
We define bookings as the total of newly signed contracts and purchase orders received in a defined period.
For the six months period, ending June 30th 2021 we received bookings totaling totaling $13.5 million.
Furthermore, we define backlog as the accumulation of bookings from signed contracts and purchase orders that are not yet started or uncompleted and cannot be recognized as revenue until delivered in a 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 June 30th 'twenty, 'twenty, one our backlog totaled $17 million.
It was up 6% from the prior quarter and 19% from Q2 last year.
Finally to our balance sheet.
As of June 30th 'twenty, 'twenty, one we had unrestricted cash and cash equivalents of $23.8 million compared to $5 million at the end of the prior quarter.
From a working capital standpoint at the end of Q2, we had $27.7 million in working capital and an improvement from $10.8 million at March 31st 2021.
For additional details of our financial results. Please reference our Form 10-Q, which was filed earlier today.
That concludes my prepared remarks, I'll now turn it back to Bob.
Thanks Marcia.
The demand for Brooks is world class training solutions continues to swell and our ability to fill that demand and to continue to grow remains mission critical.
In many ways our success over the last 20 years as a result of our organization's flexibility and adaptability atrophy.
Attributes that have allowed us to build a world class team customer base and training systems, while facing various challenges.
Well flexibility and adaptability will continue to serve as the foundation for Berkshire going forward. When you are at a critical point in our growth trajectory that requires us to take measured steps to drive even greater business scale.
You've heard me talk about scale in prior calls and we have certainly made meaningful progress in our efforts to build financial scale organizational scale and operational scale.
Overtime, we project that these efforts will enable us to deliver more value to our end users and shareholders and ultimately.
Later success, but our goal to save and improve lives through truly effective training simulator product lines.
In terms of financial scale and April we bolstered our balance sheet by successfully executing an $18 million equity capital raise.
Now with more than $23 million of cash on our balance sheet, we have the resources to accelerate growth by more effectively capitalizing on larger opportunities in both the police and the military markets.
As we pursue larger and larger opportunities.
Important that our organization and infrastructure are built to absorb it.
An integral part of this is our human capital.
Purchase ongoing success in large part as a reflection of our talented people and valued partners.
Virtual has worked alongside some of the most gifted people in our industry long before D escalation training made the headlines.
In fact, one out of every three virtual employees as a bedroom or retired law enforcement officer, who understand the crucial need for realistic training.
These individuals' fundamentally believe and effective training, which provides us with the critical insights to deliver value to our end users.
As our top and bottom lines have expanded so has the need to scale the human capital of our organization.
Our expansion extends across many departments from increases in our operations and production to increases in staff, creating a remarkable training content and next generation products.
Today, our organization our organization spans approximately 119 talented individuals dedicated to realizing purchase mission.
We have the strongest and most talented team in our company's history, who collectively provide us with the knowledge base knowhow and reach to capitalize on the growth opportunities in our pipeline.
As it relates to our infrastructure in Q1, we began the upgrade of our ERP or enterprise resource management system to significantly improve our business processes logistical systems and internal controls.
While the implementation of a new ERP system may not seem significant on the surface. It is in fact, a major milestone in positioning <unk> for higher growth and greater scale in the years ahead.
With our financial and organizational improvements underway, our focus is on building operational scale.
More specifically this involves increasing our manufacturing efficiencies and production capabilities to meet not only the demand today, but the anticipated demand in the future.
This is an ongoing process borne out of our continued success and I look forward to sharing further updates with you in the near future.
During the second quarter, we received an $800000 delivery order under the five year single awardee idea IQ or indefinite delivery indefinite quantity contract from U S Department of Homeland Security for U S customs and border protection.
Since September we have provided customs and border protection with video base simulators and custom content force training facilities, we anticipate generating continued revenue from the idea IQ for the next two years, which could be up to $5 million over the five year contract for just this one <unk>.
Continuing to assist customers and border protection with their training as proof of the value and efficacy of our products.
As a vital necessity to our country's CBP agents and officers must have effective tools to ensure.
The development and retention of their skills and virtue is proud to be their solution of choice.
U S customers and border protection is just one of the many domestic and international law enforcement agencies that have deployed our systems accessories and curriculum.
Along with best in class customer service, and Unparallel technology, including the world's first 300 degree small arms simulator and innovative and patented recoil kits. It is no surprise that the finest military and law enforcement agencies in the U S and globally continue to select.
Virtual.
Our partnerships with larger companies that have existing relationships with the right.
Our military decision makers continues to gain traction.
While we are eager to share more about current programs and prospects as I mentioned on our last call due to the sensitive nature of many of our relationships. We are prohibited from disclosing details related contracts.
Purchase approach continues to be to put the business first and we believe actions and results speak louder than words.
We say as much as we can when we can but there are instances in which we are prohibited from disclosing specifics.
Unfortunately, this remains one of those instances.
At a high level.
Virtual provides.
Advanced training systems to best prepare the military for real life incidents, including service members to better protect our country and return home safely.
Much of virtuous investment into simulation training improvements that have taken the police training market by storm also improve military training.
Our military training and simulation product lineup now contains drop in recoil conversion kits that support form fit and function closely matching the real weapon. The most effective T escalation scenarios in the industry.
Date of the art simulator ballistics with a full marksmanship suite.
The ability to quickly author photo realistic scenarios.
Custom courses of fire.
Military weapons qualification courses and much more in development.
These capabilities are unique to virtual and are the reason for why we remain confident in our ability.
To extend our competitive moat and capitalize on the abundant opportunities within our markets.
In summary, the second quarter was strong across the board.
As we look ahead, our business has never been better positioned to grow in scale than it is today.
Our pipeline is expanding our sales are accelerating and the need for effective training that enhances skills and saves lives is increasing.
Our financial and operational success in the first half of the year.
Coupled with the operational measures, we're executing has us on track to deliver accelerated and profitable growth in 2021 and beyond and.
And with that I'm going to wrap up my prepared remarks, and we'll open the call up for your questions. Operator, please provide the appropriate instructions.
Thank you ladies and gentlemen, the floor is now open for your question. So if you do you have a question. Please press star one on your telephone keypad at this time.
A speaker phone, we asked that while posing a question you pick up your handset to provide the best sound quality.
Again, ladies and gentlemen, if you do have a question or comment. Please press star one on your telephone keypad at this time.
We'll go first to Jason Smith with Lake Street. Your line is open Sir Please go ahead.
Hey, guys. Thanks for taking my questions and congrats on the continued momentum.
Bob I just wanted to start with sort of that momentum you have been seeing it just curious if you could talk about the order patterns you've seen so far this quarter I know you don't provide guidance, but how should we think about some of the dynamics here in Q3, especially with seasonality regarding the government fiscal year end.
Yeah. Thanks, Jason.
Yes.
We're quite pleased with the robust sales pipeline that we have but.
There is a button on that.
Is very difficult for us to judge exactly when pipeline will turn into orders and then orders turn into.
Recognized revenue I E. When we actually are allowed to deliver and install still having some COVID-19.
COVID-19 limitations, so where we're still facing some challenges at times on installing equipment, thereby being able to recognize revenue but.
Overall, we've been pleased on the local and state police departments their budgets seem to be going going fine they seem to be able to place orders, but of course that can change, but as of right now it seems like I'm like the.
Government agencies are executing on the idea of adding training technology that can help them achieve their goal of keeping their officers in the public safety. So overall, we're pleased but we're monitor we monitor that very closely.
Okay that makes sense and just following up on those comments on budgets wondering if you could expand on what you're hearing from your customers regarding their budgets I think there was a lot of concern that COVID-19 was going to do some pretty heavy damage to forthcoming budget, but now you have some federal funding initial.
It is and then the different dynamics, whether it be the defund the police movement rising crime and I mean, certainly some of these budgets are in focus now so just curious in the commentary you're hearing from customers.
It ranges and we have some customers who are have no budget issue.
I would say that the the.
The biggest area of.
For our sales team is is to be able to demonstrate our product to the client if at all possible and have them spend the time to look at what what training product do I want and if they actually try out our product and then try out alternatives to our product.
That's the most important thing for us and winning sales when you are actually able to see the training.
Efficiency of what we provide and then compare that head to head versus other options the decision becomes clear.
So.
That's probably the biggest issue is convincing them that they need training first of all with some of them are already convinced that they need it.
And then the second thing is okay. If you if you do realize you need to train that who do you use to train and I think virtual.
As of today is a really.
It has a lot going for us to be that that to be that choice, particularly if they actually try out the product which.
We always encourage them to do because this is a very important purchase it's usually one of their key training purchases and it has a huge ample ripple effect throughout the organization.
They buy a mediocre simulator it sort of sets the tone for the entire organization and their approach to policing and if they choose.
A high level product then you know the date, it's as if they're holding themselves to a higher standard, which I think a lot of police agencies in America I believe is the right course for them. So so.
So, yes, I would say that it's the most important aspect of police budgeting is that virtual <unk> make sure that they take the time to make a good decision on where they spend their money.
Okay. That's helpful. And then just last one for me and I'll jump back in the queue, you mentioned COVID-19, maybe creating some friction from the install side, but are you seeing any constraints from the supply side, specifically any components you can source.
About nine months ago, we began we began adding extra inventory of components that we felt might.
Get constrained and that served us well, but work we're constantly monitoring that.
Can say that that as of today, we have not.
I've been unable to ship a product due to those constraints. So so we've not had in other words, we've not been missing a component from Asia that is stopping us from being able to ship, but that is.
That is something that we are aggressively monitoring and actually already did some proactive work along those lines and we will continue to be proactive in and stocking.
Items that we feel could be dangerous for us to run out of in the future if that makes sense.
Okay. It does thanks, a lot guys.
Thank you.
We'll take our next question from Richard Baldry of Roth Capital. Please go ahead Sir.
Thanks.
Maybe building on that last question could you talk about whether the inventory build sort of over doubling from the beginning of last year to current.
How much of that would be there to support your much higher run rate for revenues and how much is maybe to derisk component shortage concerns.
Yes.
I think from a dollar standpoint most of that.
Is is just due to the scaling of the business. So in other words, while we put some money into Derisking Asia Asian components or a.
Chip chip related components, the dollar value of that would be relatively small.
And could you talk about sort of overall about the or from a very macro perspective, the implementation challenges you're still seeing a in a COVID-19 risk.
Resurgent World I guess do you feel like the seasonality we saw last year, where you know third quarter was pretty strong coming out of some inhibitors from Covid is that replicable. This year are there anything unusual about the second half of this year.
Really comparing your first half grocery is about 60%.
Is there also anything in that that's not duplicable in the second half.
Yeah.
That's a good question.
That's the that's a difficult.
Call it one to predict.
We're not exactly sure how COVID-19 is going to impact the rest of 2021.
We are we are still seeing limitations caused by COVID-19 on the international front, particularly is still problematic.
But even domestically, we can have installs delayed or postponed due to COVID-19, or other COVID-19 related issues I think I would say that.
That we are 2021 has seen other in 2020 COVID-19 was was very much so mainly a trainee a a travel and an installation issue with COVID-19, and in 2021 its expanded into more various issues. So it might be a travel issue.
Or it might be a supplier issue because they had a COVID-19 issue and so now we have to go to an alternate supplier or work around a supply interruption. So 2021, COVID-19 issues I would just say our now more complicated and a little less heavy handed in 2020 was just almost.
Complete mortuary them on travel for a while and that was just a very heavy handed impact and that's what you saw in some of the 2020 numbers that we posted 2021, it's more nuanced, but in and I'd like to say that that should minimize its impact somewhat but.
Not really sure that's a bit of a moving target on that one.
And you know I know you don't guide, but I'm sort of curious.
Your first half bookings were up 92% year over year. So not you know just taking that a good number from the second quarter, but the full first half.
What really drives the difference between longer term between reported growth and bookings growth is there sort of a meaningful long term separation between those should they converge over time.
Yeah, because well your first half growth has been very strong bookings.
Even higher than that so I'm sorry, we're just trying to understand how we should think about sort of second half even out to 'twenty two against the backdrop of that booking strength.
Yes.
Thanks for the question so on the bookings for us get a bit complicated because there's.
There.
There is a little publicized aspect of virtue and which part of our revenue is recurring is a recurring revenue component that goes out sometimes for years. So many of them, sometimes our customers will buy five years of warranty for example at the time of purchase and then we have to follow very specific guidelines, where we have to spread.
That revenue out for years so.
There is a recurring revenue component and then virtual does not break out that recurring revenue component independent. So the there is some convergence of of backlog or bookings or backlog and bookings into recognized revenue, but it is not a straight line.
And it is a bit complicated because we could.
Included in that or warranties that or three years out into the future. What is not included in the just to set the record straight as if we receive an idea IQ that does not get put into it so and I D. IQ is a $5 million is saying that the government has a vehicle to spend up to.
$5 million with us over X number of years, we never put that number into bookings that we would have to receive a direct order.
From that idea IQ and then that direct order, saying I want these products and I want them delivered in 60 days that would then become part of our of our backlog and then when we deliver those within 60 days and that example, then that becomes recognized revenue.
So.
Did that answer your question.
Yeah, It did and so the last kind of builds on that it it looks like in my model the bookings for a second quarter were better than any two of your quarters last year combined I assume that was a record number for the company and the.
The deferred revenue growth sequentially, I guess, it must be tied to that because it spiked to a you know a pretty dramatic new high the sequential growth as well.
Almost bigger than your total deferred revenue you'd had you know up to say a year ago. So can you maybe talk a little bit about you know.
How the deferred revenue should look going forward and sort of the magnitude of that bookings versus any prior record numbers.
Yeah.
So our our deferred excuse me.
Our deferred revenue figures going forward, just like Bob was saying a few minutes ago, where we are we have certain customers that purchase a longer term warranties and it will flow through.
Through our deferred revenue into revenue.
It's going to the deferred revenue number is going to fluctuate.
Based on exactly when the back.
When the backlog becomes a true order.
It's a really difficult number to actually model.
I believe he asked a similar question last quarter and it's a it's a very difficult number to model.
So it was so.
If it's in backlog it is a true order.
It's an actual order the only problem would be is it is that we can't no matter. We obviously, if it's a three year warranty. So in bias advisors simulator buys it with a three year warranty because they've got enough budget to do all of that and that way. They don't have to go back and ask for permission. So they do it all at once than there was that.
Three year warranty.
We cannot recognize obviously until we and we recognize that a little bit every quarter. We've now accumulated so many of those if those are starting to become a decent amount of money that already are credit to us going into that quarter, where while we fulfill the warranty obligations during that quarter.
Now.
Now the one thing to keep in mind as we started the subscription program. While the subscription program says you can do a pure recurring revenue model with virtue in which you pay monthly quarterly or for the year and it's only a 12 month span. So you could imagine maybe somebody before who did a three year.
Purchase with a three year warranty might now say well I'll just do one year step.
Step program. So then that would actually impact that customer right, there, which is actually a wonderful customer to virtue to have a pure recurring revenue customers wonderful, but that customer might actually shift out of that of being part of the deferred revenue and now shifted into the step the step income, which we don't currently.
Segregate out so.
So that's where some of the fluctuations can come in where and then also we can just simply have a.
Fewer people, who order a stimulator with a three year warranty or with a five year warranty.
There are certain customers who'd like to do that and maybe they still do but they order simulators and then they wait the simulators get old and then they later on do another order and so theres some time sequences between.
What customer comes in with what order with what number of years of warranty if that makes sense.
Okay, great. Thanks, and congrats on a really great first half.
Thank you thanks for the questions.
And our final question from retro as institutional analyst is from Allen Klee with Maxim Group. Your line is open Sir. Please go ahead.
Hi, Yeah. Good good quarter could you talk a little bit more about the step.
Offering and maybe like how is that.
How that's changing as it has.
How much it is of your mix. So just relatively it's if you think it's meaningful and is it growing as a percent.
Of everything that yourself.
Yes.
Thanks, Alan Great question I'm glad you brought up step so our subscription model that.
That we launched over two years ago, we continue to offer to the market and we have some folks in the market that have really taken to it and then we have some who absolutely want to purchase straight up and we have some we want to purchase like we were just talking and want to include a three or four or five years.
Warranty with their purchase so we continue to see all of the above in the door.
Marcia and I are delighted to see all of those come in the door and in large numbers and as we try to bring the highest level of training to the police and military. So we're delighted that that's working.
Step program.
Continues to be a very valuable tool for our sales people and so we've heard nothing but compliments on it in fact.
As of today I am not aware that we have had a single step program stopped their service. So in other words, 100% of every client who started a step program started or a recurring revenue version of our system has stayed on it and it has renewed not one has dropped off so.
We're very pleased with that track record.
It is still a relatively small part of our business. So we're not at a point where half of the orders coming in our subscription orders but.
But we do we do see sometimes there's larger amounts of those orders and sometimes theres fewer we're still in the process of educating the market for that so you know our market with <unk>.
With government agencies generally tend to be slower sales cycle. So it takes a while for people to become happier customers.
Customers and they tell other people Hey, you should really just do the step program. It's great that takes time and that's really a more.
The most effective sales processes for the market to tell the other parts of the market that they should do this but that does take some time so bottom.
Bottom line, we're delighted with with our subscription model very good to see that recurring revenue piece of our business grow.
But at this time it is not separated out independently at some point, we will very much consider having all of our recurring revenue components separate it out potentially when that makes sense at the moment, we do that of course, it's now hard to compare how we're doing two previous quarters, because we have a change in the way we read.
Part of our financials, and we're cognizant of that some shareholders prefer not to have any change. So they can keep doing one to one comparisons, but there may be a point when the value of separating that out as warrants separating it out so.
Thank you my my only other question is in your prepared remarks, you should spend it.
A good amount of time talking about plans to scale the company.
And you talked about your ERP system and how your people are so important.
You too.
And I know you don't give guidance, but what would it be reasonable to imply that this means that operating expense growth rate might be at a at a higher rate going forward then.
The run rate that it's been at.
There you know that we're a conservative management team, but yes.
Yes, there's the potential that for.
For certain situations, we might have to spend some money on capital equipment or on infrastructure.
Beyond just software licenses.
Need to physical machines, and things like that but keep in mind.
We are not the sort of company that requires a billion dollar foundry or that sort of capex. So.
And we're generally conservative group, but yes, there is the potential that our demand for products might exceed our physical equipment at some point and we want to be ahead of that yes.
Great. Thank you so much.
Thank you.
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 we really appreciate everyone, taking the time to join us today.
Thank you for being part of <unk> journey, we are honored by your continued support and entrusting the team at virtue with your investment and to realize our mission of saving and improving lives through highly effective simulation training to someday reach every police officer in every war fighter.
Who serves America and our allies.
Be safe take care and God bless.
Ladies and gentlemen, thank you for joining today's veterans second quarter 2021 conference call you may now disconnect.
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