Q3 2021 VirTra Inc Earnings Call
Good afternoon, welcome to virtuous third quarter 2021 earnings conference call. My name is Holly and I will be the.
For today's call.
Joining us for today's presentation are the company's chairman and CEO, Bob Sarah and Chief Accounting Officer Marsha Fox following their remarks, we will open up the COO.
Call for questions from virtuous institutional analysts and investors.
Before we begin the call I would like to provide virtual 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 these statements.
Jade.
The company does not undertake any obligation to update them 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 virtue of Dot com.
Now I would like to turn the call over to virtuous Chairman and CEO, Mr. Bob Ferris Sir Please proceed.
Thank you Holly and thank you everyone for joining us this afternoon.
After the market closed today, we issued our financial results for the third quarter and nine months ended September 32021.
The third quarter represented a record setting pace of new sales or purchase world class training solutions.
We delivered a 16% sequential increase in revenue and ended the quarter with record bookings of $11 million, culminating in another record backlog at quarter end of $21 7 million, which was up 28% over last quarters prior record backlog figure.
In parallel we are seeing the light at the end of the Covid tunnel.
As I have previously mentioned limitations in certain markets related to COVID-19 protocols created difficulties in closing international deals.
Our recent international wins are a testament to our sales pipeline and the lifting of some COVID-19 restrictions. We certainly hope this is a sign of things to come.
Anyone who has trained on our equipment and then tried out the equipment of our competitors can attest to how important head to head demonstrations are to our sales process.
So you can imagine how excited we are to see in person trade shows beginning to resume.
In fact in two weeks from today, we will be demonstrating some of our latest products at its sick a large simulation training trade show in Orlando, Florida.
More broadly I continue to be impressed with the exceptional team we have put together at virtua, which outperformed their peers in our industry, we have a growth mentality and realize that even as we become the gold standard for simulation training for so many top agencies. There are still so many more in need.
[noise] of effective training that only virtual provides.
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 Marsha Fox to walk you through our financial performance for Q3, and the first nine months of 2021.
Marsha.
Thank you Bob and good afternoon, everyone.
It's a pleasure to be speaking to you today to review our financial results for the third quarter and nine months ended September 30th 2021.
Our total revenue for the third quarter of 2021 was $6 $1 million.
This was a 5% decrease from the $6 4 million of revenue we recognized in Q3 of last year.
The decrease in revenues resulted from the product mix of sales and delivery schedules to accommodate our customers' needs for.
For the first nine months of 2021.
Total revenue increased 21% to $15 $8 million.
From $12 5 million for the first nine months of 2020.
The increase in revenues for the first nine months of 2021 was due to an increase in the number of simulators and accessories.
<unk> delivered.
Our gross profit for the third quarter of 2021 decreased 28% to $2 $9 million from $4 million in Q3 last year.
Gross profit margin for Q3, 2021 with 47, 2%.
It was lower than the 619% in Q3 last year.
For the first nine months of 2021 gross profit increased 20% to $8 6 million from $7 1 million for the first nine months of 2020.
Gross profit margin for the first nine months of 2021 was 54, 3%, which was lower than the 57.0% in the same period last year.
The decrease in gross profit margin for the quarter and nine months period was due to an increase in reserve for inventory at the scale of our operation growth.
Our net operating expense for the third quarter of 2021 was $2 $6 million compared to $2 7 million in Q3 last year.
For the nine month period net operating expense was $6 9 million compared to $7 3 million for the first nine months of 2020.
The decrease was primarily due to the impairment write down in 2020 offset by the transition to a company wide ERP system in 2021, which included software fees consulting and time invested by company staff.
Turning to our profitability measures.
Our income from operations for the third quarter of 2021 totaled $266000 compared to $1 2 million in Q3 last year.
For the nine months period, our income from operations was $1 7 million an improvement compared to an operating loss of 115000 for the first nine months of 2020.
Net income for the third quarter of 2021 totaled $1 $3 million or 12 cents per diluted share an improvement compared to net income of $868000.
Or 11 cents per diluted share in the third quarter of 2020.
For the nine months period.
Net income totaled $2 $5 million.
Or 26 cents per basic and <unk> 25 cents per diluted share an improvement compared to a net loss of $123000 or a loss of two cents per basic and diluted share for the first nine months of 2020.
It is important to note that both our third quarter and nine month periods in 2021 benefited from a nonrecurring $1 $3 million gain on forgiveness of the company's P. P. P loans.
Adjusted EBITDA, a non-GAAP metric.
For the third quarter of 2021 totaled $520000 compared to $1 6 million in Q3 last year.
For the first nine months of 2021, adjusted EBITDA totaled $2 3 million an improvement from the $615000 for the first nine 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 nine months period, ending September 32021.
We received bookings totaling $24 $4 million.
Furthermore, we define backlog as the accumulation of bookings from signed contracts and purchase orders.
That are not started or uncompleted and cannot be recognized as revenue until delivered in a future period.
Backlog also includes extended warranty agreements and step agreements.
Our deferred revenue.
Recognized on a straight line basis over the life of each respective agreement.
As of September 30th 2021, our backlog totaled 21, $7 million, which was up 28% from the prior quarter and 51% from Q3 last year.
And finally to our balance sheet.
As of September 30th 'twenty, 'twenty, one we had unrestricted cash and cash equivalents of $21.5 million compared to $23 8 million at the end of June 2021.
From a working capital standpoint at the end of Q3, we had $25 $8 million in working capital a slight decrease from $27 7 million at the end of Q2.
For additional details of our financial results. Please reference our 10-Q, which was filed earlier today.
That concludes my prepared remarks.
I'll now turn it back to Bob.
Thanks Marsha.
As you can imagine we are encouraged with our progress in attracting buyers.
Has translated into contract wins for US one of these recent wins was the $24 $5 million award from the U S Department of Homeland Security for U S customs and border protection in a five year Ivy IQ.
The award covers the warranty and service of current systems and accessories in the purchase of new technology with four case simulator systems within recoil kits revpar devices accessories and training content.
The initial order was for $1 4 million and were excited about the long term potential of the small pay your award.
And the Paas, we have talked about plans to expand our business internationally, which has progressed at a somewhat slower pace than we would've liked due to COVID-19 related challenges.
However, we are starting to see some volume in these markets as we announced two large contract wins since our second quarter earnings call.
First was $137 million order from a new client in the middle East for use of force simulators within recoil kits and accessories.
This was <unk> first client win in this country and continues to broaden our deployments around the world.
Our other large international contract win was $1 3 million order from a country in Europe for use of force simulators would've been recoil kits and other training accessories.
What is important to highlight and this award is that out of the many responded to this law enforcement agencies RFP virtual was the only applicant that met the high standards required a suit their needs.
In fact, the agency requiring any company, making a proposal to be able to show the product and the demonstration.
We're all space financial fine to cover wasting the government's time.
Once the fine was added all other companies withdrew their proposals.
The requirements included capabilities, such as drop in recoil kits that could stimulate the bolt locked back when the trainee would be out of ammunition.
This is critical to avoid negative training and an area where virtue is unequaled.
We are pleased to see the continued success in our international business translate to financials as well with third quarter International revenue of 860000, representing almost twice the revenue generated internationally for all of 2020 and we hope it is just the beginning.
On the military side of things, we remain optimistic about the longer term potential within the segment as we partner with larger more established companies that have existing relationships with the right military decision makers.
We believe this is gaining traction.
Near term visibility into material revenue can be challenging at times, given the stouts status of certain contracts and ultimate timing of their execution of orders.
And we continue to be prohibited from disclosing details regarding much of this work.
Virtual approach is to put the business first and we believe actions and results speak louder than words.
As you know, we say as much as we can when we can but there are instances in which we are prohibited from disclosing specifics.
We continue to be encouraged with the results, we are achieving and see a long runway of growth opportunities for virtual.
These growth opportunities will require larger capacity, which is why we were excited to close on the acquisition of an industrial building in Chandler, Arizona during the quarter, which will be our new headquarters in 2022.
The property provides us with a larger and more central ice facility, which will give us greater operational efficiencies that are two currently leased facilities, both of which we plan to sublease once we move out.
We're really excited about this new facility, which we think will be the most advanced simulation training headquarters in our industry with unique capabilities not possible and our current facilities.
Now on the topic of margins gross margins decreased on a year over year basis to 47, 2% from 61, 9%.
It is important to note that most of that decrease was attributed to a reserve we were required to take to our inventory as the scale of our operations grows to a third quarter gross margins may not be indicative of all future quarters.
Keep in mind, we believe our historical margin profile is based on us offering uniquely effective and innovative products to the market.
We have several confidential projects underway right now that we think will not be easy to duplicate they will receive patent protection could justify sole source awards and will position us well to solve customer problems.
I look forward to sharing more information on each project when I am able.
We continue to have a strong balance sheet ending the quarter with cash of $21 5 million and $25 8 million and working capital.
As a public company. We believe it is both best practices in the industry and good corporate governance to have an effective shelf on file so while we will renew our S. Three in the coming days I want to be clear that we have no immediate plans to access the capital markets.
I believe the current management of virtual has been a good steward of Investor capital, both buying back shares and selling shares for the long term benefit of our company.
The strengthening of our balance sheet earlier this year allowed us to scale our operations more aggressively compete on larger contracts initiated innovative projects acquire our Chandler, Arizona building and grow our staff. Please know that we keep shareholder interest.
At the very center of every action, we take and as one of the largest shareholders of Berkshire.
Daily strive to reward our shareholders.
We have two goals that go hand in hand.
One is to grow while being financially healthy so as to provide exceptional returns to our shareholders and the other is to deliver the world's most effective simulation training to our customers.
We have much luck to accomplish with both of these goals.
Very pleased to report we made strong progress this past quarter.
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 questions. If you have any questions or comments. Please press star one on your phone at this time, we ask that while posing your question you. Please pick up your handset if listening on speaker phone to provide optimum sound quality.
Please hold while we poll for questions.
Your first question for today is coming from Jason Smith with Lake Street.
Jason Your line is live.
Hey, guys. Thanks for taking my questions and congrats on the continued progress I just wanted to start with the supply chain. Just curious if youre seeing any sort of component shortages or any tightness and more importantly, how you feel about being able to meet potential demand going forward from a supply standpoint.
Yeah. Thanks, Thanks, Jason.
We do have occasional supply chain challenges mainly.
Some cost items and once in a while some raw material <unk>.
So far we've been able to work through those and so we do expect to be able to deliver product to our customers and on time manner, even with the current supply challenges that are out there.
Okay. That's helpful. And then just looking at the international market are you finding that most of the competitors are you seeing in that space are similar to the ones you see here in the domestic market or are there new entrants are going up against over there.
No we have not seen a lot of new competition on the international seems so normally the companies that we expect will we'll be proposing on a project are the ones that end up showing up.
Again, we had a unique experience where the client actually liked our unique abilities and.
And so they actually require a company to show the unique abilities and we had some competitors who claimed to be able to do the same thing we did but when they were facing financial filings they.
They rescinded their their proposal at that point, which is an interesting situation. So.
So no on the international side I think it's it's really a matter of us being able to get in front of the right people and COVID-19 related travel restrictions lifting is because I think very.
Encouraging for us on the international front.
As long as that continues.
Okay got it and then just the last one for me and I'll jump back into queue understanding talking about charge you took that impacted Q3 gross margins vary based on your commentary Bob I mean should we expect a pretty decent snap back in gross margin here in Q4.
That's a great question I can tell you that our goal is to maintain healthy margins.
We do prefer to go with larger margins, but I can say that some things have to do with the product mix and that changes quarter to quarter and so.
There are there are situations, where our margin might grow or what may shrink and so that is that is something that fluctuates I would say if you look at us over all if you look at us over many many quarters in many many years.
We patched.
The company had strong margins and again I think that really has to do with if you have innovative products that are protected and are difficult to replicate in the market.
Then you're able to have higher margins. So long as those products are solving important problems. So we plan to stay on that path, but.
There could be some fluctuation quarter to quarter on our on our margins.
Okay that makes sense, thanks a lot.
Thank you.
Once again, if there are any questions or comments. Please press star one.
Your next question is coming from Allen Klee with Maxim Group Allen Your line is live.
Yes, good afternoon.
The new headquarters building could you talk a little more about how well.
What the benefits that you expect to get potentially related to efficiencies in <unk>.
To.
Your capacity thank you.
Sure. So the the building that we purchased and we do have some tenant improvements to perform to the building, but just.
You know keep in mind that is an existing building that we were taking over and we do plan for that to allow for an increase in capacity in our production capacity.
Especially in the area of recoil kit capacity, but also in other areas such as certain.
Research and development capabilities in and certain abilities that will impact our content creation.
And so there's a lot of ripple effect from what we're planning in that in the new facility, but there are certain things that were were limited by being in two facilities right now in.
Somewhat getting close to maxing out the two facilities were at.
And there's limits of our power our space and so we the new facility allows for centralization.
Our staff and a lot of our operations, which we expect efficiencies to be garnered there and then in addition, it's gonna enable brand new capabilities that we have we have not announced because of competitive reasons. So.
Okay and my other question is in the military market.
What would you say are the.
What would you say are the kind of the catalyst do you think that could.
It gets you to start.
Start.
Spending there.
Yes, so we've.
We fortunately have been.
And over the last couple of years, we've been expanding in the military area.
One that we announced with our press release was the admire agree.
Agreement that included mainly software and content that was customizing, what <unk> already done, but customizing it for more military use.
And then we also have an undisclosed.
Disclosed work being done on the military.
That is.
That is starting to funnel through our backlog and our recognized revenue.
That's not currently being broken out specifically in our financials, but we.
We are we are getting traction there, we do expect that traction to grow over time.
The catalyst to that is right now a lot of it has to do with working through primes, so existing companies, who have contracts and being a supplier to them and then they ultimately are supplying larger programs.
Four different military so we think that that's a that's a very important cause.
Do it for us for.
The military side, but we also are constantly working both the U S and internationally on military opportunities because we do have an enormous investment in technologies from years over years that have I've compiled now to the point, where a lot of our products are best in class.
For military and definitely well known and established best in class and police. So we expect that that that will produce fruit in the coming quarters and years and.
And we do think that there's not one specific catalyst, although we do have some very unique opportunities on the military side that were looking forward to having them come to fruition.
Thank you.
Thank you Alan.
Your next question is coming from rich Baldry with Roth capital Rich Your line is live.
Thanks.
The R&D line it stepped up pretty solidly in the quarter I'm sort of curious what you think of that is this a new run rate we should be you know.
Forecasting at was there anything unusual in there that makes it more.
Likely to refer to first half levels.
Yeah.
So yeah that.
Actually that relates to what I, just mentioned about the admire contract where the government is actually paying us to do.
R&D work that ultimate we still have rights.
And so and it builds on a lot of the work we've already done, which obviously we have lots of rights on the work that we did at private expense and we have full rights to that to that.
No.
So that has a lot to do with that but.
We.
The interesting thing I think about virtue here is is that we do various things to be competitive that don't always show up as pure staff time and expense. So we've.
We are investing in certain technologies and capabilities that we believe our next generation and some time and a lot of it that we've already spent some of the money that.
A lot of the money, we would expect to spend there, but we're always looking for opportunities that would make sense to to build a more competitive future for us again to have that unique product and that sole source capability. So we do invest and now you can imagine that thats very sensitive Intel it's ready.
To be announced and released and so we don't disclose a lot of information on that obviously, but but yes Don.
When we're talking about doing new projects, and having new technologies and capabilities, that's not always going to be just hire more developers can come by other means to.
Okay. When we look at your inventory build over the last couple of quarters.
That more to support the higher level of run rate revenue in bookings or is there a way to think about how much of that might be increased safety stock.
Because of supply chain issues.
When you move into your new headquarters is it pretty likely that that number goes up to a new level, because you'll have a greater capacity in the new facility.
Yeah, I think thanks for that question so.
That has a lot to do with safety stock, especially with the supply chain issues that are that are currently out there.
We made a mention that we feel confident that we can still supply products to customers, even with the supply chain issues.
<unk> companies, such as ours, and and part of that is maintaining adequate inventory or having inventory buffer added. So some of that is there to you now.
Okay.
And then can you talk a little bit about that.
Our sales capacity, how comfortable you are with that the bookings rising to the level. They have of late and the backlog growing do you think you have the right capacity heading into 2022 and beyond are there any plans to step that up meaningfully.
Yeah.
Sure that's an area of our business, we monitor very carefully we seem to always be on the lookout for talent.
And in that arena, and so I suspect we will be.
Monitoring that and reevaluating that I was very encouraged with the performance this past quarter.
That was a really strong addition of new sales and and in the midst of some difficulties, where we were not able to do.
Lot of in person trade shows we had a key in person trade show that got canceled a philosophy.
That would've been the largest police trade show for America, ICP and that was cancelled and we were.
We were really excited and had a lot of preparations underway for that so that was a big disappointment.
Despite those setbacks in the fact that we are working hard to get in person demos on a constant basis with our regional sales reps.
We were still able to to have a really record breaking new sales orders coming in.
No that was very encouraging so.
We both but there's always room to improve and that's something that we are constantly monitoring I don't we don't have plans at this time to do a big swing up and expenditures for sales staff, but if it is justified then we would do so.
We've been willing to to grow our sales staff.
And large jumps in the past when we felt it was necessary and when the talent we have the talent available and we continue to do that sometimes were due.
A sale.
Do a sales.
Person or even if we had just one opening and we might hire too because we.
We found the right talent so.
And the last for me.
Could you talk about your.
How do you view the bookings breadth in terms of.
Listing client.
More orders or versus new logos has that been.
The way you would have expected to come down is it improving on the new customer wins side is sort of the COVID-19 constraints ease and how you think about that going forward.
I'm I'm, sorry to repeat that question.
I'm just curious in the strength in your bookings do you feel like that's been sort of driven largely by expansions with.
Existing clients that you've been dealing with for a while or are new client wins sort of coming up again now that some of the worst of the COVID-19 restrictions that might make it hard for a new client wins are kind of easing.
I think it's a combination although I do think we continue to be a bit hamstrung on the international sales side of the house I still think that there's limitations for us too.
Get as much traction as we have in the past.
I do hope that we're starting to see signs of that.
Roaring back and I would we would love to see to see international snapped back to levels beyond what we experienced.
Prior to COVID-19, and that's very very possible a bit hard to predict but possible.
I do think that.
Maybe COVID-19 has opened up jump.
Some public coffers, a bit more to where.
Public service is being funded more so and so maybe that helps virtue in ways, but it could also be that because of the media attention. That's been played to use a forced decisions made by police officers. It is possible that there is just a mentality that I don't want.
Mediocrity in my training program I want the I'll pay for the best training out there who is that Oh, that's virtue. Okay. That's what we need I don't I don't need to check a box and then go home and worry about officers not being adequately trained in a wrongful death lawsuit I'd much rather.
Go with the certified training the leader in training vetted by some of the best subject matter experts in the industry with the best track record with some of the largest agencies and.
Some of the most respected programs out there that I should go with and so maybe that's.
Contributing.
The increase in new sales with with virtue, but.
But no.
We're not we're not seeing a direct COVID-19 type correlation.
Except for the fact that we do see international.
Sales being depressed.
That seems correlated to COVID-19, we think.
Maybe one last one.
Revenues year to date up about 26%, which is obviously really good performance, but backlog is now higher than your total revenue for all of 2020 at the same time, so maybe talk about what gates the recognition of that backlog in and any ability to work it down which would obviously further color at your revenue recognition.
And what what really is the decider on that.
That that factor into the model. Thanks.
Yeah, Great question. So actually that question gives me an opportunity to talk about something that many investors really like about virtual and that is that that backlog also includes.
It also includes warranties that are multiyear multiyear warranties and those warranties.
Provide a recurring revenue stream that is highly attractive to any company and particularly useful to virtuous. So so some of that backlog.
No matter, what we do will not work down now that that's a fairly small portion of it is not.
Certainly not 80% of it but that portion there. So there is in that backlog includes things that where somebody bought from us and they were so convinced that virtual was their solution that they bought and added a three year warranty or four year warranty and so so we can't recognize that revenue right away that sits.
And backlog until the three years is up and then Meanwhile, we're getting new contracts that include a three or four year warranty. So that backlog has a tendency to grow there. Some of that is just time locked.
Other ones are more have to do with with organizing with a client okay were going to install this in eight weeks does that work for you and coordinating with them when the products will be installed for them and sometimes our products take a little longer to finalize depending on.
The size contracted and whatnot.
And the specifications for the contract so that can sometimes delay, but generally speaking we have a good track record in getting that backlog.
<unk> over into recognized revenue, but it is a complicated process as far as how much of that we are able to pull into recognized revenue on a quarter to quarter basis and it's a.
It's a complicated process that involves the client it involves our supply chain of times. It involves approvals and specification meats and things like that but generally speaking we've been fairly fairly good at getting recognized in a reasonable amount of time so.
Alright, thanks, and congrats on the quarter. Thank.
Thank you.
There are no more questions in queue I would like to turn the floor back over to Bob for any closing comments.
Alright. Thank you we really appreciate everyone, taking the time to join us today.
On Wednesday of this week, we'll be participating in the Roth virtual event for those investors and analysts who are attending I look forward to speaking with you soon.
As you know this past weekend, we honored the service of all veterans.
I ask that we make special effort to keep in our thoughts and prayers to missing the fallen.
Those who right now volunteer to potentially be in harm's way to preserve our way of life.
Thank you.
We just know we are hard at work building and inventing the world's most effective simulation training products. So that the war fighter and the peace officer can serve their country accomplish their mission and make it home safely.
I firmly believe the best days for virtual are ahead of us be safe take care and God bless.
Thank you for joining us for a virtuous third quarter 2021 conference call you may now disconnect.
Okay.