VirTra, Inc.

Good afternoon and welcome to Virtra's fourth quarter and full year 2023 earnings conference call. My name is Doug and I will be your operator for today's call. Joining us for today's presentation are the company CEO John Givens and CFO Alana Boudreaux. 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 on the company's website at www.virtua.com. Now I'd like to turn the call over to Virtua CEO, Mr. John Gibbons. Thank you. You may proceed, sir.

Thank you, operator, and thank you, everyone, for joining us this afternoon. After the market closed today, we issued a press release that provided our financial results for the fourth quarter and the full year ending December 31, 2023, along with highlighted business accomplishments. We also filed our 10-K with the SEC today, which is available for review at your discretion. As a brief overview for today's call, I'll begin by providing highlights for 2023 and detailing our recent operations and incentives initiatives before passing the call to Atlanta, to discuss our financial results in more detail. After that, I'll provide some concluding remarks before moving to Q&A. And with that, let's begin. 2023 was a year of substantial transformation and achievement, which culminated in a strong fourth quarter with revenue of $10.3 million, our third double-digit million revenue quarter in 2023. This led to record-breaking annual revenues of $38.2 million, representing a 35% increase from 2022. Our success has been the result of strategic changes we've implemented across our business, particularly in enhancing our internal operations. Last year, we successfully upgraded our machine shop and consolidated production into a single facility, implemented a new ERP system, and revised every process for scalability just to name a few of the operational strides we took. These actions have increased our throughput significantly and improved our book-to-ship ratio, all while reducing production costs and maintaining excellent product quality. We are now shipping orders that we receive within days instead of years, and we have a set of solid foundation for future success and demand as our solutions continue to rise. This strategic overhaul was instrumental in effectively working through the substantial backlog we faced entering 2023. With that backlog down to 19.4 million entering 2024, growing bookings and our pipeline is critical to our growth trajectory going forward. As such, we began efforts to improve sales productivity and improve our customer success functions in the back half of 2023. beginning with the hire of Tony Sanflone as the new VP of Sales during Q4, and we aligned our sales team to maximize future growth opportunities, introducing a mandatory sales methodology, restructuring and increasing our territory-based approach, and revising our compensation structure. I've outlined our initiatives in previous calls, but as a reminder, we established eight domestic and three international territories to expand our penetration into previously underserved larger regions. We also divided the federal accounts across the sales staff evenly to focus more attention on customer ownership and constant contact. Additionally, we have placed particular emphasis on the international market, recognizing the need for dedicated international sales personnel to tap into the expanding global landscape. While the international sales lifecycle takes longer than domestic sales opportunities, we are confident this will significantly bolster our total pipeline of opportunities. We revised our sales incentive program to not only attract the industry's top talent, but also to reward performance to retain the best talent. To further support this initiative, we 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. no matter which stage in the pipeline they exist. These improvements enable more frequent and meaningful touch points with law enforcement agencies and military service branches. Our goal is to provide unparalleled customer service, responding promptly to their needs, and ensuring a seamless journey from the initial contact to the close to the product support. As these new sales strategies take root, We've also been driving important technological innovations that are designed to further serve our core law enforcement market and make significant inroads in the military sector. The introduction of VXR, our extended reality training platform in Q4, has been met with great interest, and its release in Q2 will set us up for strong delivery volumes starting in the next few months. our extended reality training platform transcends the traditional shoot-don't-shoot scenario-based system. The VXR provides unprecedented training value to our law enforcement and government customers, but also to security agencies, hospital security teams, educational institutions, and criminal justice academies. By focusing on the development of critical interpersonal skills, These professionals will be better equipped to navigate sensitive situations, diffuse potential conflicts, increase cultural awareness, and build stronger relationships with the communities they serve. VXR's extensive range of use cases provides us with a unique position in the training market, as well as a tool for risk mitigation. Our strategy is squarely focused on expanding our market share. even if it means temporarily dialing back on our strong margin position. We are confident in our strategy because we believe in the unparalleled quality and comprehensiveness of our content library. Unlike others, our content benefits from our advanced capabilities of our V3 technology, which in combination with the expertise of our subject matter experts and a certified training curriculum, we set the industry standard. Over time, we expect the VXR will enhance our predictable reoccurring revenue streams, bringing us closer to achieving our target of having reoccurring revenue constitute 30% of our total revenue. With the enhancements of our simulator technology, in addition to this new product to our portfolio, we've been able to expand our total addressable market beyond our legacy law enforcement market. Our platform focuses on training soft skills, including managing mental health crises, recognizing key indicators, and identifying decision points. This approach directly engages our core market and also expands our reach into adjacent markets, such as hospitals and care facilities, just to name a few. Additionally, as we talked about before, we've integrated DBS virtual battle space a premier military software facilitating the creation of real-time geospecific training into our simulators. This leading military software allows organizations to rapidly create very specific training scenarios for changing mission requirements. As we focus on expanding our total addressable market, this step was absolutely necessary towards targeting the military training market. Military organizations rely on this software when it comes to high performance precision training. We also position Virtra for success in this market by engineering custom recoil kits compatible with the M4 and M249, weapons that are frequently used by the US military. We've made solid progress in penetrating this market in the fourth quarter. Our confidence in this market segment is shown by our decision to open a dedicated business development and training center in the Department of Defense's hub for simulation training procurement in Orlando, Florida. We remain dedicated and engaged with our existing relationships and are continuing to cultivate new leads in that area. Take a closer look at how our end markets performed in 2023. For the year, our government revenue increased by 39% to 31 million from 22.4 million in the prior year. This growth is attributed to a jump in design and prototyping revenue, complemented by stronger simulator and accessory sales. As law enforcement budgets face continuous cuts, they rely heavily on grant funding from the federal government. We've implemented a grant watch program which monitors and matches department needs with grant requirements to fund needed equipment for training. Internationally, our revenue was 5.8 million, an increase from 4.2 million in 2022. This can primarily be attributed to stronger simulator and accessory sales, along with associated training and service revenue. While we experienced solid year-over-year growth here in 2023, We are experiencing longer lead times for the international pipeline, and while the international pipeline is growing, the current geopolitical tension and U.S. government's continuing resolution and budget issues have affected the expected release date of many opportunities which rely heavily on these government funds. We expect a higher close rate in the next several quarters as budgets are approved and the continued resolution is resolved. We are also starting to see results from the changes in our sales structure and dedicated international sales employee as they build out our international pipeline for more predictability within the segment. We've reported continued growth from our subscription training equipment partnership or STEP program, which provides reoccurring revenue for Virtra and offers an easy on-ramp for smaller agencies or constrained capital budgets interested in our solution, but are able to access operational funding. This also gives our staff another tool in closing the sale. Currently, our reoccurring revenue, including warranty revenue, represents 20% of the total quarterly revenue, but we expect this to increase in the future. Regarding our military operations, As I previously mentioned, we continue to work ahead of initial expectations. However, given the highly competitive nature of these contracts and the security-sensitive aspects of these contracts, we continue to exercise caution in sharing these specific details about the contracts at this time. However, we are confident in our progress and ability to capture and retain military market share in the coming years. While these contracts take time, they become an excellent source of dependable revenue in the long run. Overall, the outlook for military small arms training acquisition is likely to focus on modernization, technology-driven training, realism, safety, and interoperability. Military small arms training is shifting towards a more realistic and mission-specific scenario integrated with AI-assisted training and evaluation. Virtus products and training programs are designed specifically to replicate real-world conditions, including urban warfare, counterterrorism, and asymmetric warfare. As defense strategies evolve, the acquisition of advanced small arms training systems and equipment will remain an important aspect of military readiness and effectiveness. As we progress into 2024, Our operational and sales strategies are taking hold, and we are confident in our ability to seize the opportunities ahead. I'll turn the call over to Alana to discuss our financial results in further detail. Alana?

Thank you, John, and good afternoon, everyone. It's a true pleasure to be speaking to you today to review our financial results for the fourth quarter and full year ended December 31, 2023. Our total revenue for the full year 2023 increased 34% to $38 million from $28.3 million in the prior year period. For fourth quarter of 2023, revenue increased 17% to $10.1 million from $8.6 million in the fourth quarter of 2022. The increase in revenue was driven by continued demand for our training solutions with government customers, both domestically and internationally. Our gross profit for 2023 increased 64% to $26.7 million or 70% of revenue compared to $16.3 million or 57% of revenue in the prior year period. For the fourth quarter, gross profit increased 58% to $8.4 million or 83% of revenue from $5.3 million or 61% of revenue in the fourth quarter of 2022. The increase in gross profit margin for both the three and 12-month periods can be attributed to increased sales alongside a decrease in the cost of sales, thanks to operational efficiencies, as well as an initial milestone payment from a contract with no significant associated costs. Our net operating expense for 2023 increased to $17 million from $13.7 million in the prior year period. Net operating expense for the fourth quarter of 2023 was $5.8 million compared to $3.4 million in the fourth quarter of last year. The increase in net operating expense was primarily due to an increase in salary and benefits resulting from the addition of new staff, expenses for the new Orlando office, increased R&D spend, and the implementation expenses related to the launch of the ERP system. Operating income jumped to $9.6 million in 2023, a $7 million increase from $2.6 million in the prior year period. For fourth quarter of 2023, operating income increased by $700,000 to $2.6 million from $1.9 million in the fourth quarter of 2022. Net income for 2023 was $8.4 million, or 77 cents per diluted share, an improvement compared to net income of $2 million or $0.18 per diluted share in the prior year period. Net income for the fourth quarter of 2023 totaled $2.8 million or $0.25 per diluted share, which represents an increase compared to net income of $1.4 million or $0.13 per diluted share in fourth quarter of 2022. For 2023, adjusted EBITDA, a non-GAAP metric, increased to $11.6 million from $4 million in the prior year period. Adjusted EBITDA for the fourth quarter of 2023 was $1.7 million, down slightly from $1.9 million in the fourth quarter of 2022. Now turning to our bookings and backlogs. We define bookings as the total of newly signed contracts and purchase orders received in a defined period. For 12 months, we received bookings totaling $33.6 million. This represented a year-over-year increase in bookings of half a million dollars, continuing a seven-year growth trend. For fourth quarter of 2023, we received bookings totaling $13.5 million. As John mentioned, we anticipate that these will gain momentum as our sales success initiatives begin to take effect. We do anticipate a growth period for those initiatives to become fully realized. 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 December 31, 2023, our backlog totaled $19.4 million. The breakout of this backlog includes $10.5 million in capital, $6.3 million in service and warranties, and $2.6 million in step contracts. Based on Current contract delivery dates, we expect that the majority of new capital bookings we receive in the first three months of 2024 will be converted into revenue in 2024. 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 $6.9 million in renewable step contracts that would represent additional revenue for the next five years. Historically, we have had greater than a 95% renewal rate on our step contracts. And finally, to our balance sheet. As of December 31st, 2023, we had unrestricted cash and cash equivalent of $18.9 million, an increase from the $17.2 million at September 30th, 2023. From a working capital standpoint, at the end of the fourth quarter, we had $33.2 million in working capital. an increase from $29.2 million at the end of Q3. We did have an increase in our inventory, largely due to the development projects that we've been working on. For additional details of our financial results, please reference our 10-K, which was filed earlier today. And that concludes my prepared remarks, and now I'll turn it back over to John to discuss some of the improvements we've made with our technology and where we see the rest of the year heading.

Thank you, Alana. Now I'd like to take a step back and provide a broader perspective of our trajectory and how our recent technological strides are aligning with overarching industry trends. As we navigate our leading position in the training landscape, innovation remains at the forefront of our strategy. It's clear that a key strength of ours lies in recognizing unique challenges faced by each of our customers. Early in the call, I touched upon our technology advancements. While the technology has continued to improve, so too has our content. As we have learned from our rich history and training, content is king. Best-in-class content is the key value that we are able to provide our customers. As we continue to think of ways we can improve our content, we are actively integrating artificial intelligence into multiple aspects of our products and development practices. By continuously analyzing user interactions and feedback, AI algorithms can dynamically identify training deficits visually and by correlation of multiple data points in near real time, then adjust and fine-tune the training experience for the specific trainee. This adaptive learning capability ensures that our simulators remain relevant, engaging, and effective for each user, maximizing their training outcomes. The utilization of AI in purchase content creation and data analytics processes has changed the trajectory of our product roadmaps, user interactions, development techniques, and timelines for delivering product. By harnessing the power of advanced algorithms and machine learning, we are poised to deliver even more immersive and effective training experiences. These AI-driven data analytics we will gain valuable insight that will guide our decision-making and ensure we remain at the forefront of the industry. AI is also speeding up our content creation workflows, allowing us to create more content without adding significantly more work. The industry is starting to recognize the value proposition of our technology. Our sales reps are no longer selling a product. They provide an experience. They no longer sell the product based on cost. They sell value of the experience, creating the need for our solution at any cost. Our mission remains clear to equip those who serve with the best training tools available, helping them become the best trained versions of themselves to make critical decision that saves lives and protects communities. With the improvements we've made to our operations, sales methodology, at product and content development, we've laid a strong foundation for success in the coming year. While some of these changes, specifically in the sales department, take longer to gain footing, we believe we are positioned to experience strong growth, specifically in the back half of the year when many agencies receive their budgets. Our ongoing focus is to fortify our business pipeline across key markets, uphold a standard of world-class operations, and consistently deliver superior quality to our customers. As we move throughout 2024, we are confident in our opportunities that lie ahead and expect a strong, continued pace of growth. And with that, we'll open up the call for your questions. Operator, please provide the appropriate instructions.

Thank you. Ladies and gentlemen, at this time, we'll be conducting a question and answer session. If you'd like to ask a question, you may press star 1 on your telephone keypad. A confirmation tone will indicate your line is in the question queue. You may press star 2 if you would like to remove your question from the queue. For participants using speaker equipment, it may be necessary to pick up your handset before pressing the star key. Our first question comes from the line of Jason Schmidt with Lake Street. Please proceed with your question.

Hey guys, thanks for taking my questions and congrats on a strong finish to the year. John, just want to start with sort of your comments on government funding. Just sort of given the government funding impact on both your businesses, law enforcement and military, can you discuss how the continuing resolution has impacted the business?

Yeah, Jason, thanks for that question. Well, we had expected an even stronger fourth quarter, but The way the continuing resolution works is that any project or grants or any funding that was currently in place, they will still fund. So it kept us from having a poor quarter. But all of those that we have, there's some international where the government funds, there's some military contracts, and then there's other grants for police departments that need and rely on federal funding. that was held up because of the continuing resolution. And then it takes a bit of time for them once they've solved it to get those funds out. So it has impacted us, but we've navigated through it and we had enough backlog to be able to have another double digit quarter. But we see that now that it has been fixed, it'll make second quarter and beyond much better.

Got it. Appreciate that color. And then wondering if you could discuss some of the initiatives around focusing on the grant programs. That seems like a good opportunity for you guys.

Yeah. You know, there's 18,000 police departments in the United States and probably of those, you know, you have a handful like New York, LA and Dallas, you know, some bigger ones that have a much larger budget and can fund a a unit at $300,000, $400,000, $500,000. But then you have a lot of small agencies. You know, the bulk of it, 70%, are much lower in required funds. And with all the cuts and all the funding that's being spent on other items, just keeping police on the street, cars moving, and munition for them, training usually takes a back seat. So they rely heavily on grants. There's quite a few grants out there from multiple different agencies, but again, they're strapped with staffing. So beat cops and others have to end up writing the grants. So we have one of the, an industry leading trainer who is also an educator and in that space. So we're looking at once we've gone through the sales process and fund, and they're unable to fund, we now have all the requirements to, And we help look and identify grants that are out there that they can apply to and kind of do some of that matching work for them what they normally couldn't. They still have to apply for the grants and go through the process, but at least they have someone on their team that they can go back to and get a little help and a little bit of research.

Okay, that makes sense. And then just the last one from me, and I'll jump back into Q. You noted some strong traction with the VXR. Just curious if you could talk a little bit about the current customer pipeline and how we should think about the timeline to a more sizable revenue impact.

Yeah, so what we did is we did a proper product release. So we came out back in October was the first time that we showed the product. And that was to gain the interest and start that process of collecting orders. But at that time, we were also collecting requirements. So we put out there a base product and said, okay, now, Mr. Customer, customers at large, what do you think? And then in a bunch of different areas as well. And we got a lot of feedback, and we changed and added some things to it. And so our release was always set for Q2, and we're still on that trajectory for Q2. The one people that are most upset at me are sales because I'm not allowing them to do quotes because we've changed things so much in the fill of material. But we will be releasing within the queue, and we do have multiple orders, customers waiting so that they can purchase. So we're there. Thinking about it in the long term, I do want to make one thing clear is that because we're not a shoot, don't shoot, and we're focused more on the training, the soft skills, it will not cannibalize our B300 sales. However, as I talked about the much smaller organizations, as they're going through their grants, they do have operational funds that they can spend on a headset, and Virtra's in there, and they're seeing the impact of the company, the product, and their training skills. and training for the missions and the different situations that they're dealing with in their specific areas while they're waiting on their grant. So it keeps a customer warm as we go through this grant process to get them a much larger SIM. So we do think the sales will be a good portion of revenue in the future.

Okay. Got it. Appreciate the color. Thanks a lot. Thank you, Jason.

There are no further questions in the queue. I'd like to hand the call back to Mr. Givens for closing remarks. Thank you.

As our results show, Virtue's dedication to our customers and their crucial mission is as strong as ever. The passion, hard work, and dedication of our team are the cornerstone of our success, and I'm confident in our ability to provide thought leadership to our customers continuing the innovation at the top of the industry, and making a meaningful difference. As we move into the rest of 2024 and beyond, I'm looking forward to sharing our progress. We'll be back to report Q1 2024 results in just a few short weeks. Thank you all for your ongoing support. Operator?

Ladies and gentlemen, this does conclude today's teleconference. Thank you for your participation. You may disconnect your lines at this time and have a wonderful day.