Q3 2022 VirTra Inc Earnings Call
Good afternoon, and welcome to virtuous third quarter 2022 earnings conference call. My name is Keith and I'll be your operator for today's call. Today's call is being recorded joining us for today's presentation are the company's chairman and co CEO, Bob Ferris and co CEO John Gibbons.
During their remarks, well open the call for questions from <unk> institutional analysts and investors.
Before we begin the call I would like to provide virtuous 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 are subject to a number of risks and uncertainties that could cause actual results to differ materially from statements made the company does not undertake any obligation to update them as required by law.
Finally, I would like to remind everyone. This call will be made available for replay via a link in the Investor Relations section of the company's website at Www Dot FERC <unk> Dot com now I would like to turn the call over to <unk>, Chairman and co CEO , Mr. Bob Ferris Sir Please proceed.
Thank you Keith and thank you everyone for joining us. This afternoon. After the market close today, we issued a press release have provided our financial results for the third quarter and nine months ended September 32022, along with highlighted business accomplishments. We also filed our 10-Q with the SEC.
Today, which is available for review at your discretion.
The third quarter included several exciting milestones for <unk> and we are proud to update you on today importantly, we had a record quarter of bookings of $16 7 million representing year over year growth of 52%, bringing our year to date bookings to $26 6 million.
Our strong bookings in the third quarter allowed us to end the period with a record backlog of $28 3 million up 30% year over year.
This growth was driven by our continued penetration of our core law enforcement markets.
Keep in mind, we still see massive upside in the military market for our shareholders, especially given <unk> technological leadership position with Deescalation and small arms training.
We are increasingly convinced we can expand our military simulation market share through efforts spearheaded by John Gibbons that he will detail shortly.
Our backlog growth was partially driven by lighter shipments in the third quarter shipping to customers prior to the close of the quarter, causing our year over year revenue declined by a little over $1 billion to $4 9 million.
We do encounter a quarter to quarter variations and we recommend viewing virtual on more of an annual basis.
But given our strong performance in the first half of the year our revenue for the first nine months of the year totaled $19 7 million up 24% compared to the prior year period.
We are set up for likely another year of record revenue in 2023, which would be 17 in a row a rare record in any industry, given the ups and downs of the general market for the past 17 years.
Recall that we noted slower sales in our core law enforcement market in the first half of the year, but that slowdown is now reversed with government sales growth of 13% in the third quarter.
Of note during Q3, we secured two orders totaling $9 million under an existing contract with the U S customs and border protection or CVP.
Included in this order.
A $4 $3 million order attributable to the CVP and a $4 $7 million order attributable to another U S Federal agency.
Also during the quarter, we received a nearly $1 million order for Canada.
Associated with our standing offer we were previously awarded last December .
Recall the standing offer we were sold solely rewarded streamlines the buying process for all federal provincial and municipal law enforcement agencies in Canada to obtain standardized training simulators.
We are encouraged by our continued penetration in our foreign markets, such as Canada, and we believe no other company in our market has a foothold in so many countries.
We have sold a 40 countries and we think due to our training value reliability and service network that more training occurs on purchased simulators worldwide than any other brand.
I would note international sales were a bit lighter this quarter as this fluctuates from quarter to quarter, but we remain optimistic on our international business prospects.
Especially since travel restrictions have been largely lifted post COVID-19, providing us better opportunities to travel visit perspective customers and demonstrate our world class solutions.
Lastly, we received an order from the federal law enforcement training centers or flexi for nearly 700000 to cover 59 purchase simulators deployed in four locations across the country.
<unk> became a customer in 2019 as the first customer to receive our ultra high definition for K simulation systems.
These systems support thousands of officers from over 60 federal agencies, making it a leading referral location whereby other agencies are introduced to purchase industry leading products.
I will now pass the call over to John to give us an update on the Buildout of our Orlando, Florida operations, our overall military presence and to discuss our financial results John .
Thanks, Bob and Hello, everyone first let me bring you up to speed on what we've been up to in Orlando. These past few months as you may have seen on October 4th we announced the opening of our Orlando, Florida facility to support military end market objectives.
We hosted an open house on October 20th to showcase a facility and provide immersive training demonstrations of our world class training solutions.
<unk> was extremely.
Well attended by military members acquisition leadership government program managers law enforcement industry Prime contractors, local and state officials and even shareholders. The feedback from the attendees were overwhelmingly positive about our solutions and local presence in the Orlando simulation community.
This 9000 square foot facility, which we have an option to purchase will serve as an extension of our R&D efforts customer service and as a demonstration and meeting site for our prospective customers.
The office strategically provides convenient access and support for Florida, and East Coast based potential customers Orlando is considered the epicenter of the worlds military simulation market.
The availability to demonstrate to our customers in their backyard is critical.
Currently we have the site set up to demonstrate our <unk> 304, K and BST pros simulators.
Since opening the facility, we have been extremely busy with tours and site visits a prospective military customers leveraging our local footprint and my relationships built over many years in the training and simulation market.
As far as I know no other direct competitor in the small arms simulation training military market has a similar and convenient facility providing us another advantage.
On our last call I talked about two of the three ingredients for success in the military market, which are a physical presence in Orlando and strong relationships. We now have definitely check those boxes.
Third ingredient is of course, a great product offering, which we are confident virtual <unk> space.
So now that we've opened the door, we just need to capitalize on the opportunity.
We have been encouraged with our traction but note. These things can take some time to mature we are optimistic that department of defense fiscal year 2024, which started October of 2023 is the year we.
We will start to demonstrate more concrete traction in the military market.
The other topic I want to briefly cover is an update on optimization, a virtuous staff and operations I have leverage my experience scaling operations to optimize virtuous systems their organizational structure and lean processes as I.
I see immense growth in <unk> in the coming years I have been very encouraged by the team's buy into these strategic moves and the progress we have made.
These last few months, which I expect to generate long term benefits and short term success as we complete orders and ship backlog.
Many have questioned the ERP implementation and the efforts to ensure filings and operations are on track and accurate. The team has worked diligently to identify all the items and processes, which have caused issues and we have developed processes to ensure immediate benefit and accountability.
We have invested in an improved ERP implementation and are confident the next phase of virtuous success will be tied to the system efficiencies and shorter purchase order to invoicing timelines.
Lastly, as you may have seen we filed a form 8-K on October 31st announcing the departure of our prior CFO Danielle D. Rosso DFS, while it would be improper for us to go into more detail about her departure no that it was not due to any disagreements on any.
Manner of accounting principles practices or financial statement disclosures virtuous finance and accounting team were able to step up to get the financials filed on time as demonstrated by our 10-Q filing today.
We are in the later stage discussions with a qualified CFO candidate and we will announce an appointment of a new CFO in due time, given this I will be covering the financial portions of the call today.
Our total revenue for third quarter, 2022 was $4 9 million.
This was a 20% decrease from the $6 1 million of revenue we recognized in the third quarter of last year the year over year decrease in total revenue was primarily due to unbilled sales not yet being recognized something I'm focusing on for fourth quarter.
For the nine months ending in 2022 total revenue increased 24% to $19 7 million from $15 8 million in 2021, the increase in sales for the nine months ending September 32022 resulted from an increase in the number of simulators and accessories completed.
<unk> and revenue recognized compared to the same period in 2021.
Our gross profit for third quarter in 2022 decreased by 12% to $2 5 million from $2 9 million in the third quarter of last year. The decrease in gross profit for the third quarter was due primarily to the lower revenue I previously mentioned.
Gross profit margins for the third quarter of 2022 was 51%, which was higher than the 47% in the third quarter of last year.
For the nine months ended in 2022 gross profit increased 28% to $10 9 million from $8 6 million in the nine months ending 2021 gross profit margins for the nine months ending in 2022 was 56% which was higher than the 54% for the nine months ending.
<unk> 2021 the.
The increase in gross profit for the nine month period was due to higher revenue along with the product mix of systems accessories and services sold.
Our net operating expense for the third quarter of 2022 was $3 6 million compared to $2 6 million in the third quarter of last year.
For the nine months ending in 2022, the net operating expense was $10 3 million compared.
Compared to $6 9 million for the nine months ending 2021, the increase was primarily due to expenses related to the move into the new building the Orlando location and increased payroll costs.
Turning to our profitability measures.
For the third quarter of 2022, we recorded an operating loss of $1 1 million compared to 266000 of operating income in the third quarter of 2021 for the nine months ending in 2022, our income from operations was 800 681000, a decline compared.
To the $1 7 million for the nine months ending 2021.
Net loss for the third quarter of 2022 totaled 803000, or <unk> <unk> per share diluted share.
Share compared to net income of $1 3 million or.
<unk> per diluted share in the third quarter of 2021.
For the nine months ending in 2022 net income totaled 562000, or <unk> <unk> per basic and diluted share, which compares to net income of $2 5 million or <unk> 25 per diluted share for the nine months ending in 2021.
Adjusted EBITDA.
A non-GAAP metric for the third quarter of 2022 was a loss of $214000 compared to a positive $520000 in the third quarter of 2021 for the nine months ending in 2022, adjusted EBIT totaled $1 9 million a decrease from $2 3 million in the <unk>.
Months ending 2021.
Turning to our bookings and backlog, we define bookings as a total of newly signed contracts and purchase orders received in the defined period for the third quarter and nine months, ending 2022, we received bookings totaling $16 $7 million and $26 $6 million respectively.
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 future periods backup.
Backlog also includes extended warranty agreements and step contracts that are deferred revenue recognized on a straight line basis over the life of each respective agreement as of September 32022, our backlog totaled $28 3 million, which was up 72% from the prior quarter and 30% from.
September 30 of 2021.
Finally, our balance sheet.
As of September 32022, we had unrestricted cash and cash equivalents of $15 7 million compared.
Compared to $15 million at the end of the period.
Or the prior quarter from a working capital standpoint at.
At the end of third quarter, we had $25 7 million and working capital a slight decrease from the $27 million at the end of Q2.
For additional details on our financial results. Please refer to our 10-Q, which was filed earlier today that concludes my prepared remarks, I'll now turn it back to Bob.
Thanks, John .
Before we close out I'd like to cover one more very exciting development for <unk> and for our industry as a whole.
We are tremendously proud of our announcement on October 19th that introduced our breakthrough training content creation technology.
Well, we have trademarked as <unk>, three or virtual volumetric video.
The ability to create realistic and effective training content is fundamental in our market and one of the greatest assets for a company like Berkshire is the usefulness and longevity of our library of training scenarios and curriculum.
Prior to these three customers had to make a trade off between high definition video capture or CGI human avatars with each having their advantages and disadvantages.
High definition video looks real but it is limited to the single angle originally captured.
Meanwhile, CGI can be <unk>, but cannot accurately replicate real human appearances.
Movements or subtle emotions that are critical for effective deescalation training and judgmental use of force exercises.
With <unk> three for the first time in the history of our industry. We can combine the best of both worlds utilizing high definition video and <unk> characters with the ability to affordably built a comprehensive training library.
Additionally, this library can be used for screen based and headset based platforms to provide a true first mover advantage with a significant competitive moat, while uniquely meeting the current <unk>.
And future demands of various customer training needs.
At this time throughout the World. There is only one volumetric video studio devoted to police and military training and its owned by virtual.
Further we have secured exclusivity rights for this technology from 40 views within our markets.
While still early feedback the feedback has exceeded our high expectations, even from industry veterans with decades of experience who have seen at all or.
Not since our first introduction of the <unk> 300 simulator has the word wow bidding you so often after someone experiences the realism.
Of three character.
The introduction of VIII continues <unk> track record of developing world class and innovative training solutions.
We are executing well on our core business as demonstrated by our strong bookings and backlog. We are building momentum in the military market and we're continuing to innovate to stay ahead of the competition and maintain and grow our dominating market presence.
We remain as optimistic as ever about our future.
And with that I'm going to wrap up my prepared remarks, we will open the call up for your questions. Operator, please provide the appropriate instructions.
Thank you at this time, we will begin the question and answer session to ask a question you May Press Star then one on your Touchtone phone.
If you are using a speakerphone please pick up your handset before pressing the keys.
Withdraw your question. Please press Star then two.
At this time, we will pause momentarily to assemble the roster.
And the first question comes from Richard Baldry with Roth capital.
Thank you.
Remind us about the issues that sort of gate.
Timing turning backlog into revenues.
Curious the record number that you've got up there now thats actually pretty close to the full year of revenue sitting on on backlog.
Are there things that push it out longer some of the newer orders or.
Is it things within your control to kind of determine the pace of that rolling out.
Okay.
Yes, thanks, so much for the question.
So to remind you on that.
The gates on this we.
A combination of three main things one is the production process, how long it takes us to produce get the computer setup and get all of the parts and test the system and be ready to ship. It out that's usually the first gate that is something.
That John has really worked hard on.
Revolutionizing actually changing that from things that took what was it John one item six months seven months to 45 days.
So some some of the longer lead time items. He has been able to really reduce the second part of that has to do with a lot of coordination with the customer as far as when they when they want the equipment and with they have space. Sometimes people have rooms that are being built and then the third is.
Getting the training and installation some of our customers want.
Once the equipment to arrive at the exact same moment that they have people ready to train on it and learn how to use it and so some of those are in our control, but the first one is in our control.
In the second and third items are more in the control of the customer that we work closely with so.
So yes, it's a combination of things Theres also keep in mind in backlog, sometimes there are warranty.
Warranty items or step contracts that are in backlog in those.
We have a prescribed length of time, we get to recognize revenue in other words, we recognized revenue over over the time span of of when were.
When those are going in and so sometimes those can actually be out one or two years or three years into the future. If somebody has ordered a very long extended warranty and they sometimes they order that upfront so.
Okay.
Could you give us a bit of an update on supply chain issues.
Keep cropping up randomly across different companies. So how good do you feel about the supply chain safety stocks have been able to put in with inventories aren't climbing a bit what's your bookings climbing.
It's kind of ease any of those potential bottlenecks down the road.
Yes, that's one of the things that we've really looked at we've put together a tiger team to kind of monitor and see which vendors. We've got multiple vendors now that we're monitoring where we have seen.
Some trending on how long it will take to get some of our long I guess long pole items and we have split those between multiple vendors and then we've also done some buy up as you've seen our inventory has gone up when we've been projecting out because of the backlog there have been some key items that have take.
And longer that maybe only had one or two suppliers that were backlog that we're looking we have looked and identified other vendors. So that we can keep our supplies moving without having to outlay as much cash. So right now it's gotten better I will say in the last six months, we've seen it ease up.
Slightly and we can get back to normal ordering without having to do these big buys, but it's been very dynamic and fluid. So I appreciate that question, but we have identified that and with our <unk> implementation.
Doing we're running these reports on a weekly basis as the sales come in for just that reason.
And maybe last for me given the very strong.
Backlog record bookings in the quarter can you maybe talk a little bit about the top of the funnel for the sales pipeline do you feel like you've really brought in a lot of orders.
The finish line at the right time right piece.
And maybe the top of the funnel is a little lighter so have to be careful watching sequential comparisons or you feel like there is the top of the funnel keeps growing as well. So this type of.
Execution can continue.
Yes, that's a great question. So we're seeing a mix some of our larger government contracts.
At the top of that funnel, we're going to be able to get those out by the end of the year because they are not dependent on the install and the training, but more of getting the equipment to the site. So we're implementing cycle counts to make sure all the inventory is there before the end of the year.
We've identified those top tiers to maximize our throughput.
Through the end of December 31 to burn off some of that backlog the one thing that.
You may have not been clear with Bob is that we also have what we call the step programs, where we're basically spreading the cost over five years for some of the smaller police departments and those are in that backlog of the $28 million and so some of those remain on don't have the breakdown at the moment, but those we won't be able to collect.
Further down into the funnel.
Great. Thanks, Congrats on the bookings number.
Thank you.
Thank you and the next question comes from Jason Schmidt with Lake Street.
Hey, guys. Thanks for taking my questions just wanted to look at the Q3 results understanding things can be lumpy, but do you think this wasn't a situation where orders got pulled into Q2 or relatedly got pushed out into Q4 or was just just the normal air pocket that can happen sometimes.
Thanks, Jason for the question.
I think it was a combination I think on the recognized revenue side.
Some things got.
<unk> pulled away from from this quarter I think on the on the sales order side <unk>.
Remember this is the quarter that corresponds to usually our larger bookings in our larger order intake from federal customers and so our team did a really good job on doing that this quarter. So I think I think I think the quarter was a combination of some push and pull on both.
Recognized revenue and something of a seasonality on on new order flow.
Okay. That's helpful. And then gross margin, obviously up year over year down sequentially was that just a function of the lower revenue level or were there other dynamics going on.
It was it was a combination but it was a little bit of a mix.
The inflation, we're not immune to inflationary pressures that are out there in the market, but also the lower.
The lower recognized revenue had an impact for sure.
Okay.
And then the last one from me and I'll jump back into queue. Just following up on that comment Bob how are you thinking about pricing are you guys passing along some of the pricing increases that you are seeing.
I wanted to follow up on that one so the other thing that had the pressure on Q3 was also because we've taken these orders in backlog and because we have to build them and buy in the pressures of inflation driving our cost up where our margins are actually down because of those pricing right now what we're doing we're actively looking.
At all of the Cogs for all of the prices of the <unk>.
Our products across the board and looking at.
Looking at the pricing of those to cover those inflationary costs and still remain competitive in our space.
Okay, that's really helpful. Thanks.
Thanks, a lot guys.
Thank you.
Thank you and this concludes our question and answer session I would like to return the floor to Mr. <unk> for any closing comments.
Yes.
Thank you Keith.
And thank you everyone. We really appreciate you taking time to join us today.
As you know last Friday, we honored the service of all veterans I ask that we make special effort to keep in our thoughts and prayers are missing the fallen and knows who right now volunteer to potentially be in harm's way to preserve our way of life.
Please know we are dedicated more than ever before to building shareholder value and building the world's most effective simulation training products. So that the war fighter and the law officer conserve 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 today today for <unk> earnings Conference call you may now disconnect.
Okay.