VirTra Inc (VTSI) 2021 Q4 法說會逐字稿

Good afternoon, and welcome to VirTra's business update call. My name is Shamali, and I will be your operator for today's call.

Joining us for today's presentation are the company's Chairman and CEO, Bob Ferris; and Chief Accounting Officer, Marsha Foxx. Following their remarks, we will open the call for questions from the VirTra's institutional analysts and investors.

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 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.virtra.com.

Now I would like to turn the call over to VirTra's Chairman and CEO, Mr. Bob Ferris. Sir, please proceed.

Thank you, Shamali, and thank you, everyone, for joining us this afternoon. After the market closed today, we issued a press release that provided a business update, highlighting some of our recent accomplishments and providing selected financial disclosures we can provide at this time.

Our results for 2021 demonstrate another highly successful year for VirTra with record orders as we continue to grow our market-leading position in law enforcement and military with world-class training solutions. Orders for 2021 grew 37% year-over-year to a record $32.7 million. And we are particularly proud of these results as they came despite COVID-related restrictions that limited our ability to participate in trade shows and visit prospective customers.

Over the last several months, we have had a number of noteworthy business wins that I want to highlight for you. Internationally, in early January, we received 2 sizable orders in 2 different countries, totaling $2.7 million for multiple simulators, real-world consequence devices, recoil kits and other tools, along with installation and training courses. These are both follow-on orders from countries where we have already established sales with the repeat business demonstrating the value-add and customer loyalty that our products and services and [gender].

In North America, we were very excited to announce in December that we were awarded the standing offer from the Government of Canada to supply marks and ship and judgmental use of force simulation technology to their main police force, the Royal Canadian Mounted Police, or RCMP, and all other law enforcement related agencies such as their border protection and correction facilities, just to name a few. This standing offer allows the government of Canada to repeatedly purchase our products and services at prearranged prices from VirTra as part of a countrywide effort to standardize purchasing from one simulation training company. That is most important to note about this is, the standing offer, it expands our market share, expands those who will benefit from VirTra's industry-leading products and does so without needing to individually compete for each order from each agency.

In fact, we are already seeing evidence of business not possible without this award with our first order that we announced in February. In our market, a win like Canada is possible only once every decade or so, and our sales team and product lineup outperformed all others in our market when it mattered most.

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 Foxx, to provide a financial update and discuss the process of our independent audit. Marsha?

Thank you, Bob, and good afternoon, everyone. It's a pleasure to be speaking to you today. Since the independent audit of our financial statements has not yet been completed, we will not, at this time, be reviewing our full financial results for the fourth quarter and full year ended December 31, 2021, but plan to release them as soon as they are available as we continue to work with our auditor to complete the audit and file our 10-K.

As Bob mentioned, during 2021, we received orders totaling $32.7 million, a 37% increase from 2020 of $23.8 million. Note that orders may not directly correlate to reported revenue over the same period due to differences in physical delivery of our products, order structure and other related items, but we feel this metric is important in showing the strong growth our business continues to achieve. While we have not finalized our balance sheet as of December 31, 2021, we can report that we have estimated cash and cash equivalents of $19.7 million as of December 31, 2021, keeping us in a healthy financial position.

I would now like to cover the status of our audit and 10-K filings. As disclosed in our press release, we have filed a Form 12b-25 with the U.S. Securities and Exchange Commission to disclose our inability to file the Annual Report on Form 10-K for the year ended December 31, 2021, by the due date of March 31, 2022, and we are also not expected to do so within the 15-day extension period allowed by the Form. We would characterize this delay as growing pains of a smaller but growing company that is strengthening its infrastructure to catch up with the success of its business. As we have grown significantly over the past several years with continuous new sales records, our back-office infrastructure has been increasingly strained.

Last year, we reached a point where it made sense to implement a new company-wide Enterprise Resource Planning, or ERP system. This ERP system is consolidating 3 independent systems, and we are excited about the future improvements in our operating efficiency, but this has taken time to integrate even with hiring an ERP consulting firm a year ago to help us and to accelerate the process. Compounding these growing pains was a global pandemic with COVID-19 that an additional pressure on our integration work, supply chain and staff through remote work and other challenges.

It has been difficult at times to manage these various initiatives while still delivering for our growing customers simultaneously with COVID-related restrictions and integrating the largest back-office overhaul we have implemented in our company's history. None of these delays are indicative of a lack of effort, and Bob and I continue to be impressed with our staff's incredible work ethic and commitment towards successfully completing our audit in the near future.

That concludes my prepared remarks. I'll now turn it back to Bob.

Thanks, Marsha, and thank you for your incredible work on the audit. To build on Marsha's last point, we believe these are growing pains of a company that has an incredibly bright future ahead, and we will certainly keep investors apprised of our progress.

Although I want to reiterate my belief that VirTra, from a business owner's perspective, is in perhaps the strongest position in its history. Our confidence in the value proposition of VirTra is growing, especially as the world witnesses the critical need of police officers and war fighters to be trained at the highest levels possible. The tragic war in Ukraine highlights the importance of our industry-leading training technology, and we are profoundly humbled that Ukraine selected VirTra's products for their training needs long before the war began. Our thoughts and prayers go out to the war fighters in Ukraine, who must call upon their training and skills to fight and survive each and every day.

As COVID-related travel restrictions start to subside, we can get back to our normal trade show schedule and expand visiting prospective customers with on-site demonstrations. VirTra excels in these environments as we can better prove the efficacy of our world-class products and services when experience firsthand.

I'm really excited to be able to get back in front of our current and prospective customers to show off our differentiated recoil kit technology, simulation and training capabilities, just to name a few. Over our history, we have spent considerably more time and capital than anyone else in select product categories to develop technology, content and software that is remarkably superior to competitors' offerings. I believe these hard-earned advantages are being validated as we are seeing some evidence of our competition spending less money and time on items that directly compete with our established products.

Now shifting specifically to the military market, where I know we've been limited on the details we are allowed to share. I will remind everyone first that our current and past financial results have not yet fully benefited from our work in the military market, representing, we think, significant upside potential. We continue to believe our technology has applicability into various military programs, and we see potential opportunities for business in the military market for VirTra over the coming quarters and years.

However, near-term visibility in the material revenue can be challenging given the status of certain contracts and ultimate timing of their needs. VirTra's approach continues to be to put our customers and business first, and we believe actions and results speak louder than words. As you know, we say as much as we can and when we can, but there are instances in which we are prohibited from disclosing specifics. From the topic of supply chain and inflation, VirTra, like essentially any company globally, continues to be negatively impacted by these factors. Our teams are working diligently to meet the delivery needs of our customers, which remains of the utmost importance to us. And I have been pleased with their success, mitigating these challenges and coming through for our customers.

We have authorized the expansion of stocking far more components than normal to help mitigate potential future supply chain challenges. We have not been immune to inflation on certain materials, which will impact us in a similar fashion that it is impacting most of all companies.

We are working with our suppliers and even the design of our products to both reduce our risks with supply chain as well as to contain inflation impacts. Given our highly differentiated and proprietary products and service offerings as well as our leadership position for our core products, we hope to see above-average results over time for our shareholders.

Internally, we are ahead of schedule with moving some departments over to our new headquarters located in Chandler, Arizona, which we acquired late in 2021. Tenant improvements are moving forward, and we remain on track to fully move in during 2022. Recall that this property will provide us with a larger and more centralized facility, which will give us greater operational efficiencies than the 2 currently leased facilities, both of which we plan to sublease that once we move out. We are excited about the capabilities we will have once the state-of-the-art facility is operational as we think it will be the most advanced simulation training headquarters in our industry in the world, when fully operational.

To conclude, I remain highly confident in the outlook for VirTra as we have strong operating momentum. Having recorded our highest annual orders in company history while repeating 2021's growth on a percentage basis may be challenging, we are confident in our sales pipeline in 2022 and aspire to have another year of solid growth.

We also remain in a strong financial position with $19.7 million of cash and equivalents, giving us confidence in being able to deliver for our customers and not allow capitalization to be a constraint on our growth opportunities. Myself, the Board and employees of VirTra remain committed to maximizing shareholder value and capitalizing on our growth opportunities, all the while providing the world's most effective simulation training for those who risk their lives each and every day.

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.

(Operator Instructions)

Now our first question will come from the line of Jaeson Schmidt with Lake Street Capital Markets.

I know you're probably a bit limited on what you can say before the financials are out, but Bob, curious if you could provide any color around how backlog is tracking? And really how order patterns have been at least for the start of this year?

Yes. Thanks for the question. Yes, this year is looking good. Our sales pipeline appears to be healthy. And obviously, last year fourth quarter, we had a very strong quarter with approximately $8.3 million in new sales order in fourth quarter of last year, which is fantastic. So that momentum appears to be continuing into 2022.

Okay. No, good to hear. And you noted some inflationary pressure is not terribly surprising as everyone seems to be in the same boat, but can you just talk about how the supply chain is impacting you? And I guess, going off those inflationary pressures, are you looking to do any price increases or passing along some of those price increases you're seeing?

Yes. We absolutely are, and we have implemented some price increases, and we plan to do that as needed. So yes, the beginning of your question, though, was more on stocking and supply chain, and in that regard, we've really worked hard on 2-pronged approach. One is, create a more robust supply chain for us by sometimes designing in parts that have much higher availability that sometimes has involved electrical design reworks. Those have already been most all completed that were necessary, and we started that a while ago. The second, it has more to do with stocking components. And when we find supply, making sure that we increase our stock levels in case that those become in shorter supply, and we've been very successful in doing that. So right now, those 2 approaches have combined as well as some other workloads that have been allocated to better insulate ourselves from specific situations on specific products, but we've been able to really continue to sell and deliver simulators.

And we've heard some in the market -- and I don't know how widespread this is, but I've heard the other day that there was a competitor of ours that weren't able to deliver. They have had supply chain issues, and we have -- and they were really -- and they were complementing us and how we were able to do that. So I'm not sure exactly how prolific that is with our competitors, but I do know that VirTra for -- the majority of our product lines are well stocked and then those that have any issue, we do lean forward and we will increase the stock levels as insulation against having to deny a purchase order or inform a client that we're out of stock on something. We much prefer to have extra inventory and be prepared for that. We're fortunate we're in a position where we're able to do that.

Okay. That makes sense. And then just the last one for me, and I'll jump back in the queue. Just looking at the audit, I just want to make sure I understand this. I mean you're consolidating through independent systems into one ERP, but is some of this delay related to any sort of [recognition] practices?

Not really. That's not the issue. The issue, as I understand it, is much more around the integration of 3 systems, the ERP and all of the work that's involved in that reintegration and then having the -- working with the auditors on that. And so that's really -- obviously, COVID did not help because that created additional complexities of the whole supply chain. I already just mentioned about having extra stock of certain parts, and that all tracks through the new ERP system. And then you also have, obviously, a lot of remote work.

We also -- during the turn of the year, we also were in the midst of moving part of our departments over to the other facility that created complications as well. So we had a lot of things. And in the midst of all of that, we actually had a record number of orders coming in from clients. So we love having robust sales and having sales come in, but we did have a rush of sales right as we're trying to transition from a single accounting system and siloed systems into an integrated higher-scale enterprise-level system that is necessary for the kind of volumes and scope that we want this company to grow into.

(Operator Instructions)

And our next question comes from the line of Richard Baldry with ROTH Capital.

Maybe not getting into the numbers side of the business, but maybe looking at planning so we can gauge your confidence. You talk about like hiring plans for this year, maybe comparable to last year, changes to quotas or quota allocated, so we get a feel for how you're feeling about -- how you exited the year, and how you're growing into next year?

Thanks, Richard. I think one thing I can share with you is that -- as of today, we have 122 employees at VirTra. We are actively recruiting for 11 additional positions. So if we can fill those 11 positions, we would be at about 133 employees. So we are confident about the outlook for our company, and we do feel that the Canada opportunity is early. We just won it recently. We did announce initial sale on it.

And so -- but we do expect that could contribute quite a bit to the overall growth of the company in the months and years to come. And we are committed to having a right-sized company and make sure that we hire appropriately based on the opportunities we see -- that we see and opportunities that, frankly, are also confirmed opportunities. So we also want to be careful that we don't get overly optimistic. We want to be realistic, but we are encouraged with what we're seeing.

And can you talk a little bit more about the transition into the new facilities? How far along that is, when you think it'd be sort of -- I don't know if there's a fully complete or if it's going to be a work-in-progress for a while?

Yes. The area that probably is our longest lead time area in that is our CNC machine side of the company and that has to do with the preferred location for them at that facility -- takes time to make that available for them. And so I see them -- they're probably the last group to get moved over, and we will likely move over most all of the rest of the company prior to them.

Now they are also heavily positioned in the small suite. So as you may know, we have 2 leased facilities that are separated by a parking lot, actually a shared parking lot. And one of those is a smaller area that actually used to be a satellite office for a bank and that got converted to have our CNC machine area, and that area is probably going to be the last area to move over.

So we currently have part of our company at the new facility. We also have some tenant improvements that are going on at the new facility. Anyone who's lived in Phoenix, Arizona in the summer that had clients come in to see projects in process, we'll appreciate. We are adding air conditioning to the warehouse section of our -- of the building and that's underway. And that's a very critical component, especially with some of the higher tolerance work that we do, we need the advantage of controlled environments that HVAC provides. So the swamp coolers that were at on the building are [not adequate]. So we're making those improvements, and that does, though, create a bit of time, but we anticipated that in our planning.

Last to the extent you're comfortable, but it looks like cash went down a small amount quarter-to-quarter based on your current estimate. Do you think that has more to do with sort of ramping up the new facility and inventory, safety stocks, et cetera, versus operations? Or is there any way to think about sort of what the drivers of that usage would be?

Yes. Yes. Great question. And actually, you answered part of it there. Both of those are absolutely true. We did spend more money in building up inventories of certain components that we feared might be hard to obtain in the future, and we want to secure stock. There is some additional monies at that time into the tenant improvements of the new facility. And then the other area that I think is going to be part of our flow is realize that we had a overall sales order just jumped about 37% year-over-year for the year -- for 2021. With that occurring and because we do a lot of work with governments, keep in mind, there will be some times where we're waiting on payments, and we've had to put upfront money down for components or other cost of goods sold. So I think there will be some modifications, and there will be some flow on quarter-to-quarter based on just the scaling up of the company that we're looking forward to have -- to have happened so.

Our next question comes from the line of Allen Klee with Maxim Group.

This is Derek Greenberg on for Allen. I was wondering if you could maybe provide an update on the IDIQ contract and the standing offer contract you guys received and just how that's progressing. And possibly, if you've seen any additional opportunities as part of the IDIQ.

Are you referring to the Customs and Border Protection IDIQ?

Yes. Yes.

Okay. Yes, that -- Customs and Border Protection remains an incredible customer for VirTra, and their IDIQ seems to be well used by them. They continue to invest in VirTra. They've already invested considerably in VirTra. I think, overall, we are approaching probably $200 million of equipment that we have sold throughout the years that are simulation -- simulation training-related equipment. That's market-wide, but that gives you just a little bit of the scale of -- after all of these years.

And when we started selling in 2004, our first simulators, there's a lot of our equipment out in the field and Customs and Border Protection has a large amount of our products. And we are very excited because since we are a very popular brand throughout the Federal Law Enforcement community and because the Presidential administration is very focused on trying to increase police training and policing throughout America and Fund The Police has been -- has actually been a slogan that they've put out there. We feel very fortunate that we're in a good position to where the company and the products that they -- that the Federal government has [vetted] for police training has really been VirTra products, and they seem like they're looking for Federal Agencies to take some leadership role in sharing what they've learned on how to train police and sharing that with state and local police agencies.

And we really are excited to see that happen. And obviously, we want to support and encourage that. So that, as you know, one of our challenge is just educating those who don't even know that there's effective de-escalation and autism and use-of-force training that's available for them in an affordable and reasonable way versus trying to hire actors or do other things like that. So we're really encouraged by it, and we expect that they will continue to make good use of the IDIQ that is -- was awarded with VirTra being the supplier.

Okay. Great. That's very helpful. And then if you could maybe touch -- I think on the last call, you might have mentioned that you guys are in the process of developing additional products in the pipeline and trying to get patents for that. I was wondering if maybe you could touch on timing or if you see this as a potential opportunity for the next fiscal year?

Yes. I definitely expect that work that we have in the development pipeline, we'll be making their day view during this upcoming year. And yes, I'm -- I think we have some really amazing things in the pipeline that I think some of which will really kind of surprised people. And if we've done our job in keeping it under wraps, then there will be -- they'll be rather amazed by what we bring out.

But our policy on that is to keep it under wraps until, of course, it's time to release. So -- but we've made good progress, and we've had some important breakthroughs in that area, some of which came through a massive tenacity for success. So just we -- I mean we really don't -- we want people to have a good work-life balance, but I have to admit, we've had some research and development projects that have required weekend more -- far more weekend work that I'm comfortable with, but I'm honored to have a staff that is willing to put in the extra time to achieve success, especially when it's hard.

Great. That sounds very promising. And then I guess my last question would just be on -- maybe if you can touch on the partnership with Action Target. If you're seeing any additional client wins you're receiving as a part of that or just how that's progressing overall?

Yes. So I'll just give, for the benefit of everyone on the call, a little summary of that. So we announced a partnership with Action Target. Action Target is probably the #1 company in the world for supplying live fire ranges for police departments, and they also supply a lot of ranges for military as well, but they're very dominant in police forces. They also supply ranges for commercial ventures. So you can think of a local shooting -- live fire shooting range.

And they have a very good reputation based out of Utah, our neighboring -- our neighbors to the west of us, and they're just a great group of folks, really well respected in the industry. And so we ended up working with them on a partnership. They felt we were #1 in the world in simulation training, and we felt they were #1 in the world with live fire ranges. And so we decided that we would be stronger if we work together, and so we collaborate with us sharing certain client information with them. And we -- obviously, we have customers who might need live fire ranges, and they ask us who we recommend and vice versa. Even at a point of working in conjunction with them, so we come in as a team.

So you can imagine if somebody wanted to do training and they needed both live fire training and they needed simulation training, then they could have Action Target and VirTra come in together to supply an overall package to satisfy their needs, where Action Target is best of breed in their category and VirTra is best of breed in our category. It's a great solution versus maybe picking somebody who has a mediocre product in live fire and a mediocre simulation product and so.

We think this is a great idea into the future. We're seeing some success with it. It is still relatively new, and our teams, I think, are still learning how to best leverage each other's contacts and knowledge base. And I think there's still room for us to improve, but I do think that, that Action Target is a really wonderful group to work alongside, and they're very committed to effective training. They're just focused on live fire whereas, we're focused on simulation. So it's a great work relationship between us and them.

And at this time, this concludes our question-and-answer session. I would now like to turn the call back over to Mr. Ferris for his closing remarks.

Thank you. We really appreciate everyone taking the time to join us today. Please 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 and community, accomplish their mission and make it home safely. I firmly believe the best days for VirTra are ahead of us. Be safe, take care and God bless.

Thank you for joining us today for VirTra's conference call. You may now disconnect.