VirTra, Inc. (NASDAQ:VTSI) Q2 2024 Earnings Call Transcript

VirTra, Inc. (NASDAQ:VTSI) Q2 2024 Earnings Call Transcript August 13, 2024

Operator: Good afternoon, and welcome to VirTra’s Second Quarter 2024 Earnings Conference Call. My name is Paul, and I will be your operator for today’s call. Joining us for today’s presentation are the company’s CEO, John Givens; and CFO, Alanna Boudreau. Following their remarks, we will open the call for questions. Before we begin the call, I would like to provide VirTra’s 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 the statements made.

The company does not undertake any obligation to update them as required by law. Finally, I’d 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.virtra.com. Now I’d like to turn the call over to VirTra’s CEO, Mr. John Givens. Thank you. You may proceed, sir.

John Givens: Thank you, Paul, and thank you, everyone, for joining us this afternoon. After the markets closed today, we issued a press release that provided our financial results for the second quarter ended June 30, 2024, along with highlighted business accomplishments. Today, I’ll begin by discussing our second quarter performance and strategic achievements, including the launch of our V-XR platform and our military market engagements before handing it over to Alanna for a detailed financial review. After that, I’ll provide some concluding remarks before moving on to Q&A portion. Our second quarter results reflect the continuation of a transitional period as we ramp up our new sales initiatives. While our performance was not strong as we had hoped, I take full responsibility for these results.

And we have entered into the second-half in a position to reboot progress. Our revenue came in at $6.1 million. The results are due to both controllable and uncontrollable factors. The controllables are being our go-to-market efforts, the uncontrollables being delayed decision-making from delayed budgeting resolutions during the first-half of the year. We are making progress on the controllable areas and finding workarounds to the uncontrollable areas, which I’ll detail shortly. Despite our top line results, we maintained exceptionally strong gross margins of 91%, demonstrating that our operational efficiencies we put in place last year and the beginning of this year are yielding positive results. These efficiencies will support our growth as sales initiatives gain momentum.

Notably, our bookings increased by $3 million quarter-over-quarter, doubling since Q1, highlighting improved market conditions and the strengthened sales approach. Despite recent challenges, the demand for our solution remains robust, and we are still positioned to capitalize on it moving forward. We have faced external headwinds in the first-half of the year due to primarily delayed budget decisions at the federal and local levels. These are not excuses, but realities that we are tackling head on. While local law enforcement budgets are compressing, we have strengthened our ability to secure federal grants, which are increasing and will provide essential funding for our customers. This approach helps us maintain our pipeline and capitalize on growth opportunities.

While using grant money extends the sales cycle slightly, it ultimately helps us grow our customer base, and these efforts are important as we prioritize long-term relationships. Additionally, with military budgets beginning to open, we are positioned to seize new growth opportunities there in the coming quarters. As you may have seen, last week, we announced the addition of Brandon Cox to our — to VirTra as our Chief Technology Officer. Brandon brings a wealth of experience in data analytics and system integration, which will be instrumental in accelerating our innovation and leading new product development efforts. Having Brandon on the team will free me up to do what I’ve done in my whole career, build customer relationships and drive sales.

With military budgets beginning to open up, there’s a significant opportunity for VirTra to win large and long-term contracts, and I plan to lead that effort with our sales team. In parallel with the changes we’ve made in our sales process, we are continuing to enhance our internal operations. Over the past year, we’ve completely rebuilt our ERP system. This change as well as several others to improve our operations are continuing to help us increase throughput, reduce production errors and ultimately improve our book-to-ship times. As we grow our sales, we are well equipped to scale effectively. In addition to having operations to scale, we continue to invest in the right content. We strengthened our competitive position. We have expanded our scenario library to include more real-world situations like crisis intervention and active shooter responses developed by our industry experts.

One of the newer areas that we’ve begun to create additional content for is the health care field. Since our initial V-180 deployment to Ascension’s St. John’s Hospital, we’ve seen an increase in demand for our training solutions for more than six additional institutions. The content we created allows hospital security staff to train on common scenarios that ensure the proper response for patient and staff safety when responding. The early reception of these scenario shows the significant untapped market potential. We are continuing to create content for these applications and expect our V-XR to also grow sales in these markets. With the new content we are creating, we are excited about the upcoming launch of our V-XR. Our new extended reality solution is set to disrupt and improve professional training environments.

It’s designed to enhance soft skill training across applications in law enforcement, health care, education and other related sectors. We are customizing the V-XR to accommodate diverse agency sizes, budget constraints and specific training requirements. By extending beyond the traditional shoot, don’t shoot scenario-based training, V-XR focuses on development of critical interpersonal skills, enabling professionals to better navigate sensitive situations, diffuse potential conflicts and build strong community relationships. It’s wide array of application positions V-XR as a key pillar in our long-term growth strategy. Since our last call, we’ve also added two additional scenarios that was shipped when the product is launched. We are currently finalizing terms and conditions with Meta.

And once this is complete, we’ll be ready to take orders and then begin shipping. With this launch, we are prepared to moderate our strong profit margins temporarily to secure more substantial market share and ensure sustained growth. Before turning the call over to Alanna, I’ll give you a rundown of how our end markets performed in Q2. In the second quarter, our government revenue decreased to $5.3 million from $9.5 million in the prior year. This difference is attributed to the delay in federal budget decisions with — which impacted our ability to close contracts within the expected time frame. As I mentioned earlier in the call, law enforcement budgets are facing continuous cuts and now rely heavily on grant funding from the federal government.

Our grant watch program will help bridge this gap between the customer and federal funding. Internationally, our revenue was $0.6 million, a decrease from $0.7 million in 2023. The slight decrease in international revenue is primarily due to the long lead times in our international pipeline, which have slowed the execution of opportunities. With our international pipeline continuing to grow, we expect higher close rates in the next several quarters as the budgets are approved. As part of our sales team restructuring, we now have a dedicated international sales. And these changes are enhancing our ability to forecast and stabilize future revenue streams within this segment as we continue to build out a more predictable international pipeline.

Turning to our progress in the military. We are continuing to make progress with U.S. Army’s Integrated Visual Augmentation System, or IVAS program. As a reminder, this is a $5.9 million prototype contract secured through our collaboration with Microsoft as a prime contractor. Included in this order are our industry-leading recoil hardware kits, high-pressure air fill stations and magazines, all engineered to meet the U.S. Army’s stringent requirements. This partnership reaffirms the reliability and performance of our technology and also highlights our capability to innovate and adapt in response to the demanding needs of military training. We are also focused on expanding our reach further into U.S. federal and Department of Defense channels by pursuing these opportunities through targeted marketing campaigns and strategic initiatives.

We have deployed a dedicated sales team tasked with securing larger contracts in U.S. Federal and Department defense channels. The specialized unit is strategically equipped to navigate complex opportunities and drive significant growth in these key areas. This quarter, we’re also approved for Department of Defense funding for research projects. This approval confirms what we’ve known virtuous simulators can record shooting performance accurately and track individual progress over time reliably, thereby qualifying them as a verified and consistent research tool. This was done by an independent research study conducted by Ohio State University and further emphasizes our potential. I’ll now turn the call over to Alanna to discuss our financial results in further detail.

Alanna?

Alanna Boudreau: Thank you, John, and good afternoon, everyone. Now let’s review our unaudited financial results for the second quarter ended June 30, 2024. Total revenue was $6.1 million compared to $10.3 million in the prior year period. The decrease was primarily due to delays in federal funding attributed to the U.S. government’s continuing resolution, which caused numerous contracts to be placed on hold. This temporary challenge impacted bookings in the first-half of the year. Our gross profit totaled $5.5 million, 91% of total revenue, compared to $5.9 million, 57% of total revenue in the prior year. The 7% decrease in gross profit was primarily due to the change in sales. Gross margin increased mainly due to the lower cost of sales driven by operational enhancement, offsetting labor costs related to development projects and 40% of the total revenue driving from our service and step contracts, which have limited cost of sales associated with that revenue.

Net operating expense was $4.4 million, marking a 10% increase from the $4 million in the prior year period. This increase was driven by investments in sales and marketing, as well as strategic hiring to support growth initiatives. Also adding to the increased operating expenses related to our improved IT structure and compliance requirements for our future — for our current and future contracts. Operating income was $1.1 million, compared to $1.9 million in the second quarter of 2023. Net income was $1.2 million or $0.11 per diluted share based on the 11.1 million weighted average diluted shares outstanding, a 17% increase from net income of $1 million or $0.09 per diluted share based on 10.9 million weighted average diluted shares outstanding in the prior year period.

Adjusted EBITDA, a non-GAAP metric, was $1.6 million, compared to $2.6 million in the prior year period. 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 second quarter of 2024, we received bookings totaling $5.9 million. 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 June 30, 2024, our backlog totaled $13.8 million. The breakout of this backlog includes $5.6 million in capital, $6 million in service and warranties and $2.2 million in step contracts. As a reminder, service warranties and step backlog is revenue that will be recognized on a straight-line basis over the coming years.

In addition to the backlog, there are $7 million in renewable stuff contracts that would represent additional revenue for the next five years. This year, as our first step customers are ending their original agreements, we are seeing a 93% rate of either renewing their subcontracts or moving to a capital purchase. This retention highlights our success in building a loyal customer base as we focus on new pipeline development. Finally, to our balance sheet. As of June 30, 2024, we had unrestricted cash and cash equivalents of $18.4 million compared to $22.4 million at the March 30, 2024. This decrease primarily reflects in our corporate tax payment. From a working capital standpoint, at the end of second quarter, we had $34.8 million in working capital, up slightly from the $33.2 million at the end of Q1 in 2023.

For additional details of our financial results, please reference our 10-Q, which was filed earlier today. That concludes my prepared remarks. And now I’ll turn it back over to John for his closing remarks.

John Givens: Thank you, Alanna. As we review the past quarter and the first half, it’s clear that while we are navigating through some temporary challenges, our strategic initiatives and our operational improvements are setting the stage for incredible future growth. Our upcoming launch of the V-XR platform and growth into our strategic military engagements are important components to this response, and they will be key to our success for the rest of 2024. Looking ahead, we have the right procedures in place and are optimistic for the second half of the year as grant funding becomes clear and military contracts begin to open. We are positioned to capitalize on our healthy pipeline of opportunities in the months ahead while continuing to enhance our customer relationships, which are the single most important in this business, particularly as we extend our global reach and rollout of new products.

In conclusion, despite the temporary hurdles, VirTra does remain at the helm of training industry, driven by innovation and a commitment to excellent training outcomes. We are optimistic about what the back end of 2024 holds and we look forward to sharing our progress, and we appreciate your continued support and interest. Now before we open the call for questions, I want to let everyone know that our Annual Shareholder Meeting will be held in Chandler, Arizona in October. We’ll follow this with an Investor Day where we’ll offer a presentation and a tour of the facility. More details will be made available in a forthcoming press release, and we look forward to engaging with our shareholders and investor during these events. And with that, we’ll open up the call for your questions.

Operator, please provide the appropriate instructions.

Q&A Session

Operator: Thank you. Well, now we’ll be conducting a question-and-answer session. [Operator Instructions] Our first question is from Jaeson Schmidt with Lake Street Capital Markets. Please proceed with your question.

Jaeson Schmidt: Hey guys, thanks for taking my questions. Just want to dig in a little bit more on sort of the bookings activity. Obviously, a nice rebound in Q2. Understanding the budget constraints impacting Q2. Just curious if you’ve seen bookings continue to accelerate here in Q3?

John Givens: We are seeing — see not to make it forward-looking. We’re pleased with what’s happening in the first month of the quarter.

Jaeson Schmidt: Okay. No, that’s helpful. And then looking at – sorry, you noted some continued traction in the health care market, adding kind of six additional institutions. When do you think those could maybe pivot from more kind of pilot programs to firm POs?

John Givens: Well, we’re seeing several of those come in, and those are the numbers that were reported in bookings. It’s an underserved market that has — there’s specific rules in California and Connecticut now that require health care workers to have some type of training, not certified, but I think it’s going to move towards that and VirTra is right there at the start and the middle of it right now. So we should see that’s the growth that we’re seeing, the word’s getting out and VirTra is taking care of their customers and they’re seeing that it’s meeting the needs they have now and is driving some of their policies going forward. So that’s a bit unpredictable of — it’s going to be a very large market, but we’re going to have to see how that plays out because the health care industry has never had to deal with this — with training, they just usually had a security force is just dealing with stuff.

And as these laws come out to protect patients and health care workers, it becomes — it’s becoming more apparent that they need some type of training aid. And the training that we do, it doesn’t require much to adapt to what they need in that industry. It’s more about how they handle it within their environment because it is slightly different.

Jaeson Schmidt: Okay. That’s really helpful. And then just last one for me, and I’ll jump back in the queue. Obviously, gross margin was extremely strong in the quarter. You noted mix and some other efficiency improvements. But how should we think about gross margin here in the second-half? I assume it’s going to at least come down a bit from Q2 level.

Alanna Boudreau: Yes, we expect…

John Givens: We don’t — yes, go ahead Alanna.

Alanna Boudreau: Yes. No, we do expect it to come down. There was sort of the best of all the things that could have happened in this quarter to get such a high number, as we pull in the development projects that we were talking about and those start — those expenses start to hit that all sort of level set us out. So I still expect us to be in the low 60s where we anticipated this quarter was just unique in an outlier.

John Givens: And I’ll add, Jaeson. I’m willing to sacrifice a little bit of the gross margin to gain when we start releasing the V-XR to gain as much market share as I can. So high 50s is probably — mid- to high 50s is the lowest target that I’ll go to, but I’m willing to sacrifice a little bit for that.

Jaeson Schmidt: Okay, no, that’s really helpful. Thanks a lot, guys.

Alanna Boudreau: Thanks.

Operator: Thank you. Our next question is from Richard Baldry with ROTH Capital Partners. Please proceed with your question.

Richard Baldry: Thanks. You’ve been very focused on efficiencies in the business since you took the CEO seat. I want to — I’m curious that the inventory level sort of set a new high in the quarter as revenues have been a bit soft. Does that indicate something you’re seeing in sort of near-term opportunities? Or are there more defensive stance to be taken on maybe harder to procure items or something we need to be aware of?

Alanna Boudreau: One of the — I can take that. So one of the things that you’re seeing in the $1 million increase in inventory is those labor costs that we’re talking about that got moved to a work-in-progress account until those projects come to fruition to match the revenue accordingly. So that is a big chunk of it, work-in-progress.

Richard Baldry: Got it. And…

John Givens: And Richard, the other part is the purchases for IVAS and our prototyping as well. So we’re putting product out in each of those phases. So we are buying for that while we’re still in production for our customer base that we have been for years.

Richard Baldry: Got it. I don’t want to be too bogged in technical accounting, but you were EBITDA positive. The cash went down about $4 million. That same amount basically is missing from accrued expenses and other. It’s sort of a random line. Can you walk through what’s in that line? Why it fell to such a kind of dramatically low level is otherwise the cash would have been essentially sideways and wouldn’t look like it was falling is why I ask.

Alanna Boudreau: Yes, it’s all in our tax calculations and our tax provisions. We are sitting on a prepaid tax in both federal and state taxes, which is where the cash movement went. And then we were attempting to not hold as much accounts payable on the balance sheet for quarter end as well.

Richard Baldry: Got it. So then maybe from a higher level perspective, if you step back and think about the continuing resolution hampering budgets, can you talk about like activity levels outside of that or whether that’s product pipelines or sales pipelines, the degree to which the sales people are engaged with either existing clients, new clients. And I’m asking is this a way to gauge once a budget situation improved, there’s sort of a soft off the book backlog of activity that gives you some hope for sort of a reenergized growth rate going forward?

John Givens: And I wish I had a crystal ball for that one, Richard, because there’s so many indicators. One is just that they start putting us back in the process or they start opening up the competition. But I’ve stated the differences before. The military and police law enforcement sales are very, very similar. I understand both of them very well. The big difference that people do not understand is while it’s a big chunk and very large contracts for the military, you’re only dealing with a handful of people for 25 or 30 sites as they buy in volume. So you deal with one contracting officer and one person. Those are easy to determine when those come around. The harder part is there’s different agencies that are putting out federal grants.

And in each one of the law enforcement, you have state, local, federal, city municipalities, that all have different ways of releasing funds and purchasing processes and all of that. So I can give you a very good indication of when the military markets open, but it’s state and local level, some have to go through accounting commissioners. We understand how all that works is just — it’s not very clear when that opens up because you’re talking to different people in different cities, in different states. So what we — the biggest indicator for us is the federal contracts because a lot of them are funding some of the small municipalities and police departments. And with that, there are sometimes they’ll be matching funds. So when those start to move, we know that the funds are starting to release and we’ll start getting the POs. And we’re starting to see some of that now.

I can answer your question specifically, but really is — I wish it was that easy to tell you what the answer is.

Richard Baldry: Got it. Thanks for your help.

John Givens: Thanks, Richard.

Operator: At this time, this concludes our question-and-answer session. I’d now like to turn the call back over to Mr. Givens for his closing remarks.

John Givens: Thank you, Paul. VirTra is dedicated to our customers and their crucial missions is as strong as it ever has been. Our passion, hard work and dedication of our team are the cornerstone of our success, and I’m confident in our ability to provide that leadership to our customers and continue innovating at the top of the industry and making a meaningful difference. That’s our priority. To our shareholders, I want to thank you for your continued support and hope to see you in October in Chandler. Paul, over to you.

Operator: Thank you for joining us today for VirTra’s second quarter 2024 conference call. You may now disconnect.