Q3 2023 VirTra Inc Earnings Call
Okay.
Good afternoon, and welcome to Great Trust could quota ticker change to <unk> earnings Conference call My.
My name is Irene and I will be all trade show for today's call.
Joining us for today's presentation are the company see John Gibbons see if I'm a lineup of dry and executive chairman.
Yes.
Following their remarks, we will open the call for questions.
Before we begin the call I would like to provide a safe Harbor statement that includes cautions regarding forward looking statements made during this call.
During this presentation management may discuss final projections information or expectations about the company's products and services or markets or otherwise make statements about the future, which are forward looking and subject to a number of risks and uncertainties that could cause actual results to differ materially from the statements made.
The company does not undertake any obligation to update the Mitchell Collett bundle.
Finally, I'd like to remind everyone that this call will be made available for replay.
A link in the Investor Relations section of the company's website at Www Dot veteran Dot com.
Now I'd like to technical is it too, but you see Mr. John Gibbons. Thank you and you might proceed.
Thank you operator, and thank you everyone for joining us. This afternoon. After the market close today, we issued a press release that provided our financial results for the third quarter ended 30 September 2023.
Along with highlighted business accomplishments. We also filed our 10-Q with the SEC today, which is available for your review at your discretion as a brief overview for today's call I'll begin by providing highlights for the third quarter of 2023, and summarizing our operations and initiatives before passing the call to Atlanta.
To discuss our financial results in more detail Bob will then come on to discuss our recent the XR product development and after that I'll provide some concluding remarks before moving to the Q&A and with that we'll begin.
In Q3, we built on our success from the first half of the year advancing our operations and sales efforts. Further these improvements continue to show up in our financial performance as with net income climbing over $2 4 million from the previous year and revenue increasing by 54% year over year.
Operationally.
We are finalizing our machine shop consolidation into a single facility, while being mindful to minimize the impact of our delivery schedule.
We're also planning a $1.4 million capital investment.
To significantly enhance our manufacturing capability and speed and most importantly, the quality of our product as a result, we're improving the customer experience, while also reducing our cost.
We've established the right processes to scale, our operation effectively without compromising the quality of our final product.
Our operational efficiency has set the stage for increasing our sales opportunities, we maintain a robust pipeline of potential agreements with in the law enforcement and military markets.
With the recent introduction of our <unk> XR training solution. We have further accelerated this momentum since its debut last month at IAC P V XR and innovative headset based training platform that transcends the traditional shoot don't shoot scenario has sparked a wave of interest.
<unk> V. XR provides unprecedented value to our law enforcement and government customers, but also the security agencies. The hospital security teams educational institutions and criminal Justice academies and by focusing on the development of critical interpersonal skills. These professionals will be better.
To navigate sensitive situations diffused potential conflicts increase their cultural awareness and build stronger relationships with the communities that they serve VX ours extensive range of use cases gives it that unique position in the market.
Following its debut in October we received a strong response from the market with hundreds and hundreds of inquiries already coming in from agencies looking to advance their teams soft skills.
We are currently accepting preorders with deliveries expected to begin April of 2020 for Bob will delve into the product and how it's transforming the sector, but we already see it as a considerable opportunity as we roll out <unk>, we have a longer term plan of offering annual.
<unk> for access to our training content library.
Personally we believe that our content library is the most comprehensive and effective in the industry as made possible by our <unk> technology.
We expect over time, this offering will enhance our predictable reoccurring revenue streams, bringing us closer to our 30%.
Our goal of 30% of total revenue our commitment to innovation doesn't stop at the XR. We are actively advancing internal research and development projects surrounding the implementation of artificial intelligence into virtuous content creation and data analytics processes as we.
To push the boundaries of immersive training solutions AI will play a pivotal role in enhancing our capabilities and driving further success first and foremost AI will transform our content creation process by leveraging advanced algorithms and machine learning techniques, we will generate highly.
Realistic and dynamic content assets as an unprecedented at an unprecedented pace. This means that our customers will have access to a broader range of training content and scenarios, allowing for more comprehensive and realistic simulations.
Furthermore, AI will enable us to analyze vast amounts of data collected during training sessions with the help of sophisticated algorithms, we can extract valuable insight and patterns from this data, providing our customers with actionable feedback and performance matrix. This data driven approach will not only.
We enhanced the effectiveness of our training programs, but will allow for targeted improvements and customization based on individual needs.
Additionally, AI will play a significant role in enhancing the gapped ability and responsiveness of our stimulations by continuously analyzing user interactions and feedback AI algorithms can dynamically adjust and fine tune the training experience in real time, this adaptive learning capability.
Ensures that our simulators remain relevant engaging and effective for each user maximizing their training outcomes.
The utilization of AI, and virtuous content creation and data analytics processes marks an exciting chapter in our journey by harnessing the power of advanced algorithms and machine learning, we are poised to deliver even more immersive and effective training experiences through AI driven data and.
Political we will gain valuable insight that will guide our decision, making and ensure we remain at the forefront of the industry in.
In addition to these product innovations we are focused on revamping our sales and operation functions on our last update call I shared our plans to realign sales the sales force into designated territories. We expect this to increase direct engagement with existing and potential.
Customers to cultivate important relationships and expand our footprint.
Since we've since made substantial progress in this approach successfully establishing our presence in all our outline territories. We've placed particular emphasis on the international market recognizing the need for dedicated international sales personnel to tap into the expanding global labs landscape.
We expect this to bolster our total pipeline of opportunities. This quarter, we revised our sales initiative, we revised our sales initiatives incentive program to.
To not only attract the industry's top talent, but also reward performance.
To retain.
The best talent.
We're fostering an environment that rewards performance and dedication.
To further support this initiative, we have added sales support specialists to our team their role is to streamline our sales process and work in tandem with our sales representatives, who are now more focused than ever on generating new business. These sales specialists are strategically located in Arizona and Florida offering.
Extended support to our customers and acting as a catalyst to move sales through the pipeline efficiently.
In addition.
We've refined our internal sales procedures to enhanced monitoring and advancement of potential deals. These improvements enable more frequent and meaningful touch points with law enforcement agencies and military departments. Our goal is to provide unparalleled customer service responding properly to their needs and ensuring the <unk>.
<unk> journey from initial contact to close.
The enhancements we've made to our sales infrastructure reflects a strategic shift designed to propel us for it.
With this context of transformation that we welcome Tony sand flown to the virtuous team as our new VP of sales with his rich history of sales leadership, Tony has already begun to infuse our sales strategies with new insights and proven tactics as Tony joins the fold and gets.
Acclimated to our operations, we look forward to his expertise to further home purchase market opportunities. These significant changes with our sales functions, our not just promising for the future. They are already having influence on our financial results. Our recent progress is beyond our initial.
Sure.
Projections and we're optimistic that as these initiatives solidify our booking rates will escalate in tandem.
While these and while these enhancements were only recently implemented and thus fully reflected in the third and not fully reflected in the third quarter results. We're seeing indications of future benefits just to be clear all of these territories are now up and running and there are sales individuals hired.
Working these territories, along with leadership and sales support specialist looking closer to how end markets performed in the quarter.
In third quarter, our government or government revenue increased by 71% to $7 3 million from $4 3 million in the prior year. This growth is attributable to a jump in design and prototyping revenue.
Complemented by stronger simulator and accessory sales.
Internationally, our revenue was 180000, a decrease from 380000 in 2022. This can primarily be attributed to the longer lead times for the international pipeline.
And while our international pipeline has grown the current geopolitical tension and U S government budgeting issues have affected the expected release dates of those opportunities. We do expect higher close rates in the next several quarters as that funding and those projects are released.
We have reported continued growth from our subscription training equipment partnership and step program, which provides reoccurring revenue for virtual and offers an easy on ramp for the smaller agencies interested in our solution, but are perhaps budgeted constraint for an outright purchase. This also gives our store.
<unk> another tool and closing the sale.
Currently our reoccurring revenue, including warranty revenue represents 25% of the total quarterly revenue, but we expect this to increase in the future.
Regarding our military operations as of Q3, we continue to work ahead of initial expectations are nurturing of a strong pipeline of leads has resulted in military related contracts are reaching 4 million year to date and achievement that notably surpassed our goal set at the onset of the department of defense.
Fiscal year 2024 and October one.
All the competition insensitive nature of these contracts warrants discretion and public disclosures our confidence in <unk> potential for further expansion in the military section remains high overall the outlook for the military small arms training acquisition is likely to focus on modernization technology driven tree.
<unk> realism safety and interoperability.
[noise] military small arms training is shifting towards more realistic and mission specific scenarios virtuous products and training programs are designed specifically to replicate real world conditions, including urban warfare counter terrorism and asymmetric warfare.
As defense strategies involve the acquisition of small arms training systems and equipment that remain as important.
Aspect of military readiness and effectiveness.
As we tailor our products for this market virtually is positioned as a tier one provider of our regiment revolutionary recoil kit capabilities for military weapons, such as the <unk> four and <unk> 49, I will now turn the call over to Atlanta to further discuss the financial results and their details.
Atlanta.
Thank you John and good afternoon, everyone. It's a pleasure to be speaking to you today to review our unaudited financial results for the third quarter and first nine months ended September 30 of 2023, our total revenue for the first nine months of 2023 increased 42% to $27 9 million from $19 7 million in the prior year.
Year period for the third quarter of 2023 revenue increased 54% to $7 6 million from $4 9 million in the third quarter of 2020 the.
The increase in revenue was driven by our continued improvement in sales strategy and continued demand for our training solutions.
Our gross profit for the first nine months of 2023 increased 67% to $18 3 million or 65% of revenue compared to $10 9 million or 56% of revenue in the prior year period for the third quarter gross profit increased 140.
10% to $5 4 million or 71% of revenue from $2 5 million or 51% of revenue in the third quarter of 2022, the increase in gross profit margin for both the three and nine month periods was due to increase sales while maintaining cost account in line with 2020.
Two levels.
Our net operating expense for the first nine months increased to $11 2 million from $10 3 million in the prior year period net operating expense for the third quarter of 2023 was $3 7 million compared to $3 6 million in the third quarter of last year.
Increase in net operating expense is primarily due to an increase in salaries and benefits, resulting from addition of new staff expenses for the new Orlando office increased R&D spend and implementation expenses related to the launch of the new ERP system.
Our operating income jumped to $7 1 million from the first nine months of 2023, a $6 4 million increase.
From <unk> 6 million in the prior year period for the third quarter of 2023 operating income increased by $2 8 million to $1 7 million from negative $1 1 million in the third quarter of 2022 net.
Net income for the first nine months of 2023 was $5 6 million or 51 cents per diluted share an improvement compared to the net income of <unk> 6 million or five cents per diluted share in the year prior.
Net income for the third quarter of 2023 totaled $1 6 million or 15 cents per diluted share, which represents an increase compared to the net income of negative <unk> 8 million or negative <unk> 17 per diluted share in the third quarter of 2022.
For the first nine months of 2023, adjusted EBITDA, a non-GAAP metric to increase to $9 4 million from negative $1 7 million in the prior year period adjusted EBITDA for the third quarter of 2023 increased to $2 9 million from negative <unk> 5 million in the third quarter of 2022.
Now 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 first nine months, we have received bookings totaling $20 1 million for the third quarter of 2023, we received bookings totaling $7 3 million.
John mentioned, we anticipate that these will gain momentum as our sales success initiatives begin to take effect now.
Now looking at our backlog, which we define as the accumulation of bookings from signed contracts and purchase orders that are not yet started or incomplete and cannot be recognized as revenue until delivered in a future period as of September 32023, our backlog totaled 16 million. The breakout of this backlog includes 7.3.
Millions of capital $5 9 million in service and warranties and coupon 8 million contracts and are based on current contract delivery dates. We expect the majority of new capital bookings received in the first nine months of the year to be converted into revenue in 2023.
As a reminder service.
Warranties and step back why is revenue that will be recognized on a straight line basis over the coming years.
In addition to the backlog there is about $6 million in renewable stuff contracts that would represent an additional revenue for the next five years historically, we have greater than 95% renewal rate on our staff contracts and finally to our balance sheet as of September 30th 2023 we had unrestricted cash and.
Cash equivalents of $17 2 million, an increase from $13 3 million at June 30th 2023, and from a working capital standpoint at the end of third quarter, We had $29 2 million in working capital an increase from $26 6 million at the end of Q2.
We did have an increase in our inventory largely due to the development projects we've been working on.
For additional details about our financial results.
Please reference our 10-Q, which was filed earlier today and that concludes my prepared remarks, and now I'll turn it over to Bob to discuss some of the improvements we've made with our technology.
Thank you Elena and good afternoon, everyone.
To take a step back and provide a broader perspective on our trajectory and how our recent technological strides our lane with overarching industry trends as.
As we navigate our leading position in the training landscape innovation remains at the forefront of our strategy is.
It's clear that a key strength of ours lies in recognizing the unique challenges faced by each of our customers.
The XR training the VX, our training solution is more than a new headset product. It embodies our response to an increasingly complex world that demands a sophisticated approach to training beyond the conventional.
Its design is more than issue don't shoot trainer as John mentioned, extending its scope beyond mere marksmanship improvement.
Rather it cultivates critical soft skills and high pressure situations.
The <unk> is a low profile lightweight system that immerses users in a span of situations containing lifelike characters are three D. Human characters captured by our D. Three capture studio are displayed in front of students. These.
These characters are highly realistic and include eye and mouth movements look natural and eliminate the uncanny valley. This plagues all of our competitors and the difference between what they offer and what we offer is just undeniable.
The system can be instructor led or entirely self driven making it a flexible training solution for agencies. It offers a variety of lessons across three learning modules, which we call the three es educate experience and engage.
Users can learn skills like interviewing deescalation with and transitions decision, making and more.
Our engage module for example provides unmatched training with realistic stimulated individuals' experiencing mental health crises.
With VX or we are not just evolving training methods, but also responding to societal need for empathy and understanding in law enforcement and security practices.
Regrettably the lack of mental health resources is unlikely to change in the near term.
However, this challenge presents an opportunity for virtu to make a significant impact.
We are determined to supplying affordable super convenient and superior solution through the XR.
Our recent technological advancements encompass both hardware and software guided by valuable customer and expert input.
We've significantly refine our $1 80, and 300 series simulators optimizing them for standard room Heights, and streamlining across access to critical components.
These enhancements not only accelerate setup now achievable by a single individual.
But also integrate standardized cables and materials, which reduces manufacturing costs and augments profit margins.
This balance of operational excellence with financial stewardship is a testament to our commitment to delivering customer satisfaction hand in hand with cost effectiveness and there's a lot of what John Gibbons has been driving Eric Percher.
Our progress in investment and our military products have resulted in capabilities that are levels beyond anything else in the market.
Keep in mind that virtually not only leads and simulator capabilities, but we also supply market, leading recoil kit capabilities, allowing realistic training without the need for expensive and dangerous blank rounds.
It's these significant developments that will help to fuel some of our future growth and advance our reputation as the industry leaders.
Look forward to sharing more about our achievements when the time is right and when we can provide further details.
While our year to date figures are promising the true value lies in our potential for tomorrow.
Our technology doesn't just represent a product rather it is a pathway to a safer and more prepared to society.
And as we continue to innovate we keep our vision clear to equip those who serve with the very best training tools available helping them to become the best trained version of themselves to make critical decisions that save lives and protect our communities.
I will now pass the conversation back to John who offer closing thoughts on our exciting journey ahead. Thank you.
Thanks, Bob as highlighted our products form the core of vouchers mission. This year, we've witnessed growing demands for our solutions and I'm proud to say that our operations have scaled to meet this challenge in the first half we effectively addressed our backlog and concentrated on elevating the customer experience the complete.
Overhaul of our ERP system has not only increased our installation efficiency efficiencies, but also significantly boosted our customer service capabilities and provided visibility on how well our processes changes are affecting the bottom line.
We also made strong advances in supply chain management, reducing the risk of delays and disruptions.
Disruptions, while enhancing our operational performance these improvements along with our scalable infrastructure have refined inventory management enhanced timely order fulfillment and improved financial oversight.
The restructured territories and additional regional sales managers.
Along with the revised incentive plans and the addition of sales support specialists are already reflecting positively in our outcomes collectively the modifications we've implemented in our operational and sales strategies are set to propel growth further our ongoing focus is to 4%.
By our business pipeline across key markets.
Uphold a standard a world class operations and consistently deliver superior quality to our customers as we move forward.
Towards the end of the year and into 2024, we are confident in the opportunities that lie ahead and expect a strong continued pace of growth.
With that I'll open up the call for questions. Operator, please provide the appropriate instructions.
Thank you we will now be conducting a question and answer session.
If you would like to ask a question. Please press Star then one on your telephone keypad.
A confirmation tone will indicate your line is in the question queue.
You May press Star and then two could you talk to remove your question from the queue.
For participants using speaker equipment, it may be necessary to pick up your handset before pressing the sakes.
The first question we have is from Jason Smith of Lake Street. Please go ahead.
Hey, guys. Thanks for taking my questions and congrats on a nice quarter wanted to start with that big jumping bookings was this driven by a few customers or was it just broad based strength across the business.
It was broad based strength and maybe.
And our perspective, one or two decent sized deals.
But yeah, it was pretty much strength across the board.
I concur okay.
[laughter].
And then looking at gross margin also took a nice jump sequentially.
How should we think about gross margin going forward is this the new level or will it revert to more of that normalized Q1 Q2 range.
I would say that Q1 is probably.
More normal Q2, we now we took a hit because of the inventory write offs that we had so I think it's a combination of both Q1, and it's where we need to be.
Q3 was an anomaly as we moved a fair amount of labor into our R&D category. If we were doing some development items that offset some of our cost of debt.
Okay. That's helpful. And then just the last one for me and I'll jump back in the queue looking at that B XR product I know, it's early but just based on customer feedback how should we think about order patterns for the best do you think police departments are ordering multiple of <unk> devices.
Or is this one for the whole department and I guess Relatedly I. It does seem very complementary but are you at all concerned that this will cannibalize your core stimulator market.
Yeah, I'm going to I'll talk about the cannibalization because I thought about that very long. So one of the problems that we've had is there is such a long cycle, because when youre doing sales, whether it's military or with.
With counties or state governments, there will have to put the budget and so theres 12 to 18 months one of the problems that we had as we're standing alone waiting on that but they have discretionary dollars at a level, we needed a product not only serve to.
Served to solve a problem of soft skills, but we also needed something at a price point. So we could stay in their show our capability as far as cannibalize no because the training component with our V. Three hundreds.
Other than the chute don't shoot in those scenarios, we're not chasing that in the in the V expects our headset because we find that that is negative training because you can't put your regular weapon you can't see this sites. There's a whole bunch of complement we did a lot of searching and a lot of investigating a lot of research to put.
Together, what path, we were going to chase and so I think we're in a very sweet spot it really complements what our 300 or <unk> hundred 80, <unk> does we don't use a recall kits with the <unk>.
The price point is quite low and your other part of that question is I think theyre going to buy multiple kits because of our price point and whats the value I always say content is king and the <unk> is based on our content. We made a significant investment prior to me coming on board in the <unk>.
Three studio and all these captures and I want them to continue to capture.
I tell them every three months I want them to come to me and tell me they need to paint the floor because they burnt paying off the floor with using it. So much so that library is paramount and going forward. So I think you'll see some nice revenue.
From from that capability as a complimentary product, but no nothing in the cannibalizing at all.
Okay that makes sense really appreciate the color thanks guys.
Yeah.
At this time. This concludes our question and answer session I'd now like to turn the call back over to Mr. John Gibbons. Please closing remarks. Please go ahead.
Thank you operator.
We stand firm in our service to our customers and their life saving missions, the passion and dedication of our team is a driving force behind our success and I have every confidence that we will continue to push the boundaries of what is possible and change the world for the better as we look forward to the rest of the year end.
Into 2024, I'm excited to see the results. Following the strong strong foundation, we've worked diligently to lay out thank you be safe take care and God bless.
Thank you for joining us today for <unk> third quarter 2023 conference call.
You may now disconnect.
Yeah.
Okay.
Yes.
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Okay.
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