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Mr. Market Needs A Math Tutor: VirTra Systems Is Due A Major Revaluation



Use-Of-Force Training Simulation Is Set To Grow Exponentially, And VirTra Systems Products Offer A Definite Competitive Advantage Over All Of Its Competitors Products.

VirTra's Revenue & Market Share Growth Has Significantly Outpaced Its Competitors, And A Major Recent Homeland Security Contract Win Should Conservatively Grow 2015 Revenue By At Least 55%.

VirTra Is Worth At Least 180% More Than The Current Price Based On Undeniably Comparable M&A transactions.

VirTra recently partnered with the CEO of Smith & Wesson to open upscale shooting lounges across the country. This could be huge and it isn't being priced into Virtras stock.

VirTra is a profitable high growth company with the valuation of a very low growth company. The current valuation discrepancy provides a big margin of safety and significant upside potential.

What Does VirTra Systems Do?

VirTra Systems (OTCQX:VTSI) makes extremely innovative and realistic virtual use-of-force firearm & judgement training simulators, combat training simulators, and virtual shooting ranges for international and domestic law enforcement agencies and military customers.

According to Strategic Defence Intelligence, "the global military simulation and virtual training market is currently worth $10.4 billion dollars, and is expected to increast in size to $15.8 billion dollars by 2025, representing CAGR of 4.2% during that period." Strategic Defence Intelligence also estimates that 20% of this amount is combat simulators. These findings can be found here.

The shooting ranges market is expected to grow by a CAGR of 8.35% from now through 2020 according to this industry report. The shooting ranges market is divided into indoor and outdoor shooting range companies. VirTra is operates in the indoor market. According to the above report, "the indoor shooting range market is projected to grow at a higher CAGR in the next five years, owing to advanced technologies in target simulations. Also, with further advancement in range designs, the indoor shooting range segment is projected to achieve substantial growth in the future."

This insightful report also points out that, "The virtual simulators segment held the largest market share in the indoor shooting range market, in 2014. It is also projected to grow at the highest CAGR of 12.49% by 2020. The military application segment is projected to account for a large market share of 59.81% during the forecast period."

VirTra systems seems to be in quite an attractive environment given its position in this niche market.

VirTra has a quickly growing presence as a virtual training simulator providor to military clients all around the world. Most recently, VirTra won a contract with the Department Of Homeland Security worth $5.96 million dollars. This is a monumental feet, considering the fact that company-wide revenue for all of 2014 was $9.8 million dollars. Things are definitely looking up for the military segment of VirTra's business.

As far as VirTra's law enforcement business goes, recent political developements and public outrage with police relations with the public should significantly fuel demand for these state of the art training simulators. I don't think that I need to go into any of the specific controversial instances from recent times of questionable police interractions with society to illustrate the point that police officers training methods and actions are being scrutinized with great skepticism currently in the United States.

On his tv show AC360 in February of this year, Anderson Cooper recently did a 4 to 5 minute segment on excessive police use of force and how the VirTra Simulator presents a very real solution to some of the problems currently facing law enforcement agencies. Mr. Cooper says in his show, the video of which can be found here, that it is a "new way to let officers train to make the most important decision that they will ever face".

In his show on MSNBC ALL IN, Chris Hayes also recently aired a 19 minute segment in the middle of May this year on how to better train police officers in light of all of the huge demonstrations recently from the public towards the police. In the video/discussion they talk about the growing use and importance of VirTra's simulators. This video can be found here. A past NYPD trainer in the video is quoted saying that VirTra's simulator is, "a phenomenal piece of equipment".

Laws have swiftly been enacted by different states recently in light of widespread public loss of trust in the police. Connecticut recently passed legistlation requiring stricter and more effective use-of-force judgement training for all police officers in the state. Ohio is also making moves to go down a similar path.

The current economic and political backdrop are setting the stage for VirTra to capitalize on many opportunities in the current marketplace and take its growth to the next level.

About The Company

The company was formed in 1993 and it is currently headquartered in Tempe, Arizona. Its corporate headquarters are shown below.

As I stated earlier, VirTra Systems has traditionally had two main business segments/divisions: Law Enforcement & Military. More recently, VirTra partnered with the CEO of Smith and Wesson (SWHC) to form Modern Round, LLC. With this investment/partnership, VirTra has entered into the consumer leisure segment. I will explain the recent Modern Round Investment in much greater detail further along in the article.

In relation to the Law Enforcement division, according to the company, "VirTra offers a full line of the very best judgmental use of force training simulators along with full weapons simulator training capability. VirTra offers portable single-screen firearms simulators all the way up to the most challenging and advanced use-of-force simulator in the world - the V- 300™ LE. Our customers enjoy the only upgrade path in the market, they can upgrade from 1 screen to 3 screens or even upgrade to 5 screens (300 degrees) as their future budgets permit. In the top-of-the-line 300-degree wrap-around simulator, police can train for the most difficult real-world situations, such as ambushes, active shooters, and maintaining situational awareness during extreme stress. Officer presence, verbal skills, less lethal force options, and deadly force, are all available for simulation use."

You can watch a great video demonstration of VirTra's law enforcement simulators here.

In relation to the Military division, according to the company, "VirTra offers a full line of firearms training and combat simulators from portable single-screen simulators all the way up to the world's most challenging and advanced combat training simulator - the V-300™ MIL. Military engagement skills training has never been more realistic than with VirTra's latest small arms training simulator. Inside a 300-degree, wraparound screen, teams can train for the most difficult real-world situations, ambushes, and situational awareness during extreme stress."

You can watch a video of a demonstration of the Marksmanship training abilities of VirTras firing range products here.

Some Of VirTra's Major Products

All of VirTras products can be found here, in its GSA advantage government contracting product catalog.

Here is an aerial photograph of the 300 degree V-300 simulator designed for law enforcement agencies:

Here is a snapshot of a 180 degree military combat simulator and also a snapshot of the new V-ST Pro:

VirTra creates and offers hundreds and hundreds of different highly customizable use of force and combat training scenarios for military and law enforcement all over the world. According to this interview with Brian Wardell, VirTra simulator purchasers are entitled to receive all new scenarios that the VirTra development team creates for one year following its purchase for free, and after that all newly created scenarios must be purchased from VirTra. Software updates are always free for VirTra simulator owners.

Non-lethal tasers made by Taser International (TASR) are calibrated to function with the VirTra simulators, and non-lethal pepper spray cannisters are also calibrated to function with VirTra simulators. These customized items can be purchased from about $3,000 to $4,000 apiece.

Many weapon add ons are avilable for purchase. VirTra's simulators have been made to where they are compatible with almost any type of gun after the purchase and installation of a number of VirTra's adaption accessories.

VirTra also offers training and installation services, extended warranties, and various other value added items and services.

VirTra also sells a very special accessory called a Threat Fire device, and this device leads me to the next topic of competitive advantage and how VirTra's products stack up with its competitions' products.

VirTra has partnered with and made many repeat sales to many of the large defense contractors here in the U.S. and abroad. Lockheed Martin (NYSE:LMT) has placed many orders for VirTras threatfire devices and other advanced simulation equipment.

VirTra's Competitive Position & Its Value Proposition

VirTra's main direct competitors are Firearms Training Systems Inc, which is owned by U.K. based Meggitt PLC (OTCPK:MEGGY), FAAC & IES, which are both owned by publicly traded Arotech (NASDAQ:ARTX), Lasershot Inc, which is a private company, Cubic Defense Applications, which is owned by publicly traded Cubic Corporation (NYSE:CUBE), and Ti Training Corp, which is a private company.

VirTra's simulators are the most realistic and advanced simulators amongst all of the competing products, thus VirTra's products are much more expensive than its competitors products.

VirTra currently holds 2 patents. One of these is on its internally developed Threat Fire device. This device delivers an electronic shock to the side area of simulator participants to recreate the effect of being shot. This device adds consequences to bad decisions in the simulator and greatly increases the realism and effectiveness of the training programs. A brief video displaying the threat fire device can be viewed here. This threat fire device offers a major competitive advantage for VirTra.

VirTra is also the only company that offers 300 degree full wraparound simulations. This is another major competitive advantage for the company.

From all of the customer commentary and industry data that I have gathered, if money were no object and purchasing decisions were only based on the quality and realism of the simulators, VirTras simulators would be purchased every single time over any available alternatives. That being said, cash strapped and smaller law enforcement agencies may opt for the lesser quality training simulators solely based on the relative affordability of said simulator.

Here you can find a sole source justification that directly compares VirTras simulators to its competitors simulators. The City of Everett was looking for a training simulator that had all of the following capabilities/characteristics:

A. Is upgradeable from 180 degrees through 300 degrees.

B. Is displayed in High Definition video quality.

C. Must have wireless shootback capability.

D. Must have elevated training stand with integrated 3-D spatial audio system.

E. Must have non-tethered weapons with multiple options (recoil piston, rifle, Taser, OC spray & baton)

It examined simulators from AIS, IES, FATS, Laser Shot, & VirTra. AIS only met requirements B, D, & E. IES only met requirements B, C, & E. FATS only met requirement E. Laser Shot only met requirements B & E. VirTra met all of the requirements. The city of Everett in the above link directly stated that, "VirTra Systems is the only one that offers the level of realism and the features that they require". They also commented on the benefits that come from the Threat Fire device. They stated that the, "shoot back capability requires less operator involvement than other available simulators", and also that, "other vendors had shoot back systems, however, they utilize projectile firing devices which had to be aimed by the operator." They then commented that the Threat Fire belt only needs to be initially activited by the operator and that this enables the operator to, "remain focused on the actions of the student, rather than dividing attention while trying to aim a projectile".

Taking a different route than its low cost competitors, VirTra's focus is on making the most effective and realistic training simulators. VirTra is a differentiator, not a low cost operator.

Unfortunately, cost considerations can be very influential determinants of purchsing behaviour, especially when it comes to small and budget constrained local law enforcement agencies.

This article here takes the words from numerous police chiefs who have experienced both VirTra and its competitors simulators. All of them agree that the VirTra is the best and most realistic, but some of them have opted for the cheaper alternatives because they havent been able to justify the price of the VirTra simulator in the past.

Many law enforcement jurisdictions across the country are starting to rethink training and looking to purchase only the best and most advanced training equipment. VirTra should benefit from this trend greatly if it continues.

Even budget strapped law enforcement agencies are starting to find ways to purchase VirTras state of the art training equipment despite its relatively high price tag.

On May 1st of this year, NBC aired a special segment on how and why the Milford, CT police department just purchased a 300 degree simulator from VirTra. This can be viewed here. To summarize what happened, the city of Milford recently partnered with 8 other local law enforcement agencies in neighboring towns and they all came together and used money from seized assets to collectively share the upfront and upkeep costs of this VirTra simulator.

It is definitely a good sign that VirTra's simulators create such realistic training environments that customers will pay 2 to 3 times more than they would have to pay to buy an inferior simulator from one of VirTras competitors.

In November of 2014, the State Of Washington State Patrol awarded VirTra a sole source contract and made the following comments in relation to VirTra's simulators and the threat fire device, "VirTra Incorporated is the only Law Enforcement simulator manufacturer which currently offers a 300-degree simulator system which surrounds the trainee. The system is compatible with the weapons systems in use by our agency and has the ability to offer recoil feedback for each of the weapons systems used. The system utilizes a patented ability to generate negative feedback which will shock or vibrate indicating to the trainee negative feedback based upon their performance. This feedback system adds an unsurpassed level of realism which adds to the training value. The system features the ability to record a trainee's performance for later debriefing. The audio and high resolution video creates unsurpassed realism." This sole source posting was made pubic and can be viewed here.

VirTra's Financial Progress

2008-Present Day Revenue & Gross Profit Growth

Revenue has grown at a CAGR of 22.78% since 2008 and Gross Profit has grown at a CAGR of 27.23%.

First Quarter Of 2015 Revenue & Gross Profit Y-O-Y Comparison

Revenue grew 31.77% in the most recently announced quarter compared to the same quarter in the previous year and gross profit grew 24.93% year over year.

2011-Present Day Income Statement


Valuation By M&A Multiples Of Comparable Firms

I believe that the best proxy for value for a company is the price that a businessperson would pay to acquire 100% control of the company. This better approximates value than comparable industry trading ratios, IPOs, or anything else that doesn't involve 1 party acquiring 100% control of a company. It is for this reason that I am valuing VirTra Systems based on the acquisition multiples of comparable companies.

Before I get into the comparable M&A transaction multiples, please note that these transactions were selected based upon how similar the targets operations are to the operations of VirTra. Some of them date as far back as 2002, but these are included and extremely appropriate because they were acquisitions of the companies that are now VirTras direct competitors. VirTra operates in a pretty specific field making a very specific product and the fact that we know what multiples have been paid for all of its direct competitors is vital information in relation to determining how much a potential suitor would pay for VirTra. VirTra essentially has 6 competitors, and I have provided definitive 100% control acquisition multiples for 3 of these companies below. After providing all of the relevant transaction multiples, I will adjust these multiples to account for the appropriate change in M&A multiples over each of the respective specific time periods through present day. Things such as changes in interest rates and other economic conditions and industry specific considerations have caused changes in acquisition multiples over time and this is why we must adjust multiples that were paid a few years back to reflect the economic conditions of today.

1. In January of 2004, Arotech purchased FAAC for about $15 million dollars plus a big earnout based upon hitting certain profit targets. FAAC is currently a direct competitor of Virtra. As of August 13th of 2007, Arotech had paid $28,960,403 for FAAC including the payment for the earnout. This figure can be found on page F-18 of the following link. In page 108 from the same link, you can calculate that FAAC was generating gross profit margins of about 28%. Pre-Tax Profit for FAAC in 2003 was forecast to come in at $1.6 million on revenue of around $14 million based on this SEC filing. All of these things lead us to the following acquisition multiples:

- EV/Net Income = 27.8

- EV/Gross Profit = 7.3

- EV/Forecasted Sales = 2.07

- EV/Forecasted EBITDA - 16.5 (approximate based on $4.8 mil in tang. assets - assumes $150,000 for D&A expense)

2. In 2002, Arotech also purchased use-of-force simulator maker IES electronics. IES was later merged with FAAC and is currently a direct competitor with Virtra. IESs detailed historical financial information and information about the acquisition can be found here. On page 34 from the previous link, you can see that Arotech paid $8,554,000 for IES.

IES generated revenue over the trailing twelve months of $5,206,430. At first glance, it looks like IES generated $542,453 in EBITDA over the trailing twelve months but that is far from accurate. The following adjustments need to be made: There was a $39,915 gain from the reversal of a previously written off bad debt that should be removed. There were also $225,000 worth of in process R&D costs that were not included in the presented financials but were be immediately expensed when the acquisition closed. This little important tidbit is hidden on page 34 of the previous link. After making these adjustments you can see that EBITDA is really closer to $277,538. EBITDA before any R&D expenses would have been $602,538.

Gross profit was All of these things lead us to the following acquisition multiples:

- EV/EBITDA = 30.8

- EV/EBITDA (before r&d expense) = 14.2

- EV/Fwd Revenue = 1.65

- EV/Gross Profit = 3.34

3. In October of 2006, Meggitt acquired Firearms Training Systems, Inc. for $144 million. Just like the previous 2 transactions, Firearms Training Systems is currently a direct competitor of Virtra. This represented acquisition multiples of:

- EV/Fwd Revenue = 1.84

- EV/Fwd EBIT = 16.4

- EV/Actual EBIT = 25.3

4. In March of 2014, Cubic Corporation purchased Intific for $12.6 million. Intific is a virtual reality development company that focuses on human to virtual interface interactions. This extremely similar to the technology that VirTra continues to develop and utilize. The details about this transaction can be found on page 66 of the SEC filing located here. This represented the following transaction multiples based on annualizing the 7 months of Intifics financial statements that were provided in the previous link:

- EV/Fwd Revenue = 1.4

- EV/Fwd EBITDA = 16.2

5. On August 7th of 2012, L-3 Communications (NYSE:LLL) acquired the training and simulation division from the France based Thales (OTC:THLEY) for $134 million. The details of this transaction weren't made public directly, but after some financial manipulation, you can determine the transaction multiple pretty accurately. In the sec filing here, you can calculate that this acquisition generated $12 million in revenue for the 53 days which its results were included with L-3s results. If you annualize this number, you end up with an annual revenue run rate of $83 million for the acquired business. You can also calculate, after adding in the extra income from continuing operations that the acquisition would have added to the trailing 9 months, that this company added between $501,000 and $1,499,000 to L-3s income from continuing operations over the first 220 days of 2012 if included. Then you have to add back the $1.2 million in amortization ($2 million on an annualized basis) that L-3 incurred from the acquired intangibles in the transaction. This indicates that the company was generating between $1.7 and $2.69 million in net income over the first 220 days of 2012. After annualizing this and accounting for the amortization, we can determine that the company is generating between $2.82 and $4.48 million in net income on an annualized basis. This leads to the following transaction multiples:

- EV/Fwd Revenue = 1.61

- EV/Net Income (using average NI) = 36.7

Based on the fact that the target company had net tangible assets worth $49 million and based on the relative depreciation amounts incurred by other simulator companies on an annual basis (on average based on net tangible assets), we can surmise that the target has annual depreciation expense of around $3.45 million or 7% of net tangible assets. This leads to the following transaction multiple:

- EV/EBITDA = 18.8


  FEbit Ebitda-RD FEbitda NI FRev Gprofit Ebitda
FAAC na na 16.5 27.8 2.07 7.3 na
IES na 14.2 na na 1.65 3.33 30.8
FATS 16.4 na na na 1.84 na na
Intific na na 16.2 na 1.4 na na
Thales na na na 36.7 1.61 na 18.8
Avg 16.4 14.2 16.35 32.25 1.71 5.31 24.8

Adjustments That Need To Be Made To Above Table

The above table isn't adjusted to account for the fact that a few of these transactions took place 10 years ago. According to the chart on page 9 of Exveres industry publication on the aerospace & defense industry and the history and development of related M&A transactions that can be found in this link, the following adjustments are necessary to the above transaction multiples:

- 2002 sales multiples are now 25% higher and income based multiples are now 35% higher

- 2004 sales multiples are now 15% lower and income based multiples are now 5% lower

- 2006 sales multiples are now 5% higher and income based multiples are now 7.5% lower

- 2012 sales multiples are now 12.5% higher and income based multiples are now 40% higher

- 2014 doesn't represent a time period far enough away to merit adjusting any multiples

Another set of adjustments that needs to be made to the above table is based upon the fact that large acquisitions receive premium multiples to small acquisitions. According to this summary of aerospace and defense transactions closed in 2014, deals with an enterprise value of less than $100 million were based off of an average income based multiple that was 82.5% of the average multiple paid for companies with an enterprise value of greater than $100 million. Based on this fact, the referenced Thales training segment acquisition and the FATS acquisition should have their non-revenue multiples reduced by 17.5%. Here is the adjusted M&A transaction value table:

  FEbit Ebitda-RD FEbitda NI FRev GProfit EBITDA
FAAC na na 15.67 26.4 1.76 6.93 na
IES na 19.17 na na 2.06 4.49 41.58
FATS 12.52 na na na 1.93 na na
Intific na na 16.2 na 1.4 na na
Thales na na na 42.38 1.61 na 21.71
Avg 12.52 19.17 15.93 34.39 1.75 5.71 31.64

Since some of the above numbers were based on forward looking numbers, we must make a 2015 forecast for VirTra's income statement. I am always leary of putting any emphasis on the forecasts of others or even making my own forecasts for that matter. That being said, it is a necessary evil in this certain case. Below is my 2015 forecast followed by an overview of how it was derived.

How I Determined Revenue In Forecast

First off, I took a look at VirTras revenue growth over the past 4 years with all 10% or larger customers sales removed. I removed large customer orders because this allows us to see the better underlying growth rate of VirTras business and its ability to grow through many small orders. Extremely large and potentially non-recurring orders can seriously distort financial analysis if not removed. Here is what that breakdown looks like:

VirTra has been able to grow its business without major orders at a compound growth rate of 32% per year over the past 4 years. Since I want to error on the side of extreme conservatism, I cut that rate in half to 16% growth going forward. I took 2014 sales without any sales from 10% or greater customers, which was $8,761,044, and I increased it by 16% (half the rate at which VirTra has actually been growing). This gives us 2015 base revenue of $10,162,811 excluding any orders from customers that place huge orders.

Now for the easy part... As stated at the beginning of this article, late last year VirTra won a huge contract with the Department of Homeland Security. The contract is worth $5,962,044. VirTra recognized $800,000 worth of this revenue in the first quarter of this year. The completion date of the contract specified in the contract award and later amendments is September 16th, 2015. Hence, all of this revenue will be recognized in fiscal 2015.

That should very easily explain my revenue forecast for 2015.

Explanation Of Costs In My Forecast

I assumed r&d expense will approximate 12% of revenue. I assumed advertising expense will approximate 3% of revenue. These are based on recent trends in the relative amounts and general direction of advertising and r&d expense VirTra has been incurring. I assumed rent expense to be $193,172 because the number is given in their most recent annual report. I based depreciation expense off of the recent upward trend in capital expenditures. I based my adjusted sg&a expense off of the following calculation. I took the adjusted sg&a amount from 2014 and removed CEO and COO compensation, increased it by 35%, then added back CEO and COO compensation. I increased it by 35% because the company recently stated that they have expanded their workforce by 34% year over year. I realize that not all of that adjusted sg&a expense number is payroll and employee related expense, but that is the best forecasting method I could come up with based on the information that is currently public. I assumed gross margin is 58% based on average historical margins under normal selling conditions (not highly customized contracts).

Back to the valuation...

Valuation Multiple VirTra Enterprise Value
EV/Forward EBIT = 12.52 $41,403,000
EV/EBITDA before R&D = 19.17 $50,364,000
EV/Forward EBITDA = 15.93 $58,581,000
EV/Current Net Income = 34.39 $43,374,000
EV/Forward Revenue = 1.75 $28,218,000
EV/Current Gross Profit = 5.71 $53,402,000
EV/Current EBITDA = 31.64 $49,081,000

Comparable transaction analysis gives us an intrinsic enterprise value = $46,346,000 for VirTra Systems.

We then must add cash net of debt after working capital adjustments to arrive at the value of VirTras equity. This means we would add roughly $2.4 million to the above number.

Based on what I have talked about so far and the information I have provided, we can finally arrive at a valuation.

Based on these M&A valuations, VirTras market cap should be $48.746 million, and based on 158 million shares outstanding, VirTra should be trading at $0.31.

Snapshot Of Similar Company Current Valuation

Another Company That Benefits From Increasing Law Enforcement Oversight

Digital Ally (NASDAQ:DGLY)

Digital Ally is a company that makes body worn cameras for police officers. They are seeing a big order surge due to increasing oversight of U.S. and foreign law enforcement agencies. They are extremely unprofitable. The company hemorrhages cash at a very alarming rate. They are currently doing about $17.8 million in revenue and losing about $3.7 million per year on a EBITDA basis. They have lost money historically, and its cash burn has actually gotten worse even as sales have improved in light of recent events and the new surge in demand.

They are comparable to VirTra from 2 real world perspectives. First of all, they generate roughly comparable gross margins to VirTra. Second of all they, will benefit from the same trend towards more police training and oversight. It has the same customer set as VirTra, and it will directly benefit from the same federal funds matching programs that VirTra will and has been benefiting from.

On May 14th of this year, an article came out that highlighted Digital Allys continuous inability to generate profit, and also that it has confirmed revenue guidance for the following year of $25 million. It has historically generated gross margins of around 55%. Its sales have been on a steep decline from $33 million in 2008 to the current level today of around $17.8 million as stated earlier.

If we assume that SG&A and R&D expense only increase by 5% each over the next year to equate for the 40% increase in sales that is forecasted (which is more than conservative)

It is currently trading at:

- EV/FSales = 2.2

- EV/FEbitda (before r&d) = 17.6

- EV/FEbit = N/A - DGLY will not generate positive EBIT

This would value VirTra Systems market cap at an average of $69.5 million which equates to an average stock price of $0.44.

I don't think that Digital Ally should garner anywhere near its current valuation, and therefore I am not insisting that this is what VirTra is worth. I am just showing how some of the companies benefiting from this current law enforcement oversight trend are being valued and how it relates to VirTras current stock price and valuation.

Additional Stock Upside Potential From Recent Developments

Up until this point in the article, I have only discussed the historical operations of VirTra. There are two things that have recently happened to VirTra, both of which could be great. Even if these things don't turn out like I am anticipating, I am still comfortable owning shares because I am not even accounting for these items in my valuation analysis.

1. As I explained earlier, VirTra holds 2 patents. Last year, VirTra sued FAAC for patent infringement. On April 22 of this year a settlement was announced. The exact details weren't disclosed but VirTra stated that FAAC paid VirTra a lump sum of cash and agreed to stop its actions that were infringing on VirTras patents.

This could create a nice cash inflow that should appear out of nowhere in the next quarter. It also confirms the value of VirTras intellectual property and further confirms that this IP creates barriers to entry for would be competitors.

2. This next development is one that could really add significant future earnings accretion potential for VirTras shareholders. As I mentioned earlier, VirTra recently invested in a private company with the CEO of Smith & Wesson. This company is called Modern Round.

According to VirTras most recent audited annual report, "On January 21, 2015, the Company entered into a Co-Venture Agreement with Modern Round, a privately-held company, to develop a simulator-based shooting lounge, where customers may enjoy a fun and safe entertainment experience. The Company's role is focused on the shooting simulator portion both at store opening and with ongoing, regular updates and maintenance. The Company received a 5 percent ownership stake in Modern Round and will have the right to purchase up to an additional 5 percent of Modern Round stock, if certain conditions are met in the future, for a potential total ownership of 10 percent. Modern Round affiliates will have the right to purchase up to a 10 percent ownership interest in the Company if certain conditions are met in the future. As part of the agreement, the Company will receive ongoing royalty payments from each Modern Round location."

In VirTras press release it was stated that this will be, "the world's first simulator-based shooting lounge, where customers will enjoy a fun, safe and highly-engaging experience along with world-class amenities. The facility will not permit live firearm shooting.

Patrons will be treated to exceptional food and drinks brought right to their personal shooting bay. Each welcoming location will be climate-controlled, have no loud gunshot noise, and through the use of 100 percent simulated weapons, ensure maximum safety. The facility and amenities are thoughtfully designed to cater to women, men, families and for corporate events. In many ways, this first of its kind experience will be similar to the growing number of simulated golf ranges, with one key difference being that Modern Round does not require as large of a facility or as much land.

"We are dedicated to creating the most enjoyable, non-threatening, and safe shooting and entertainment experience available anywhere in the world," said Barry Monheit, Chief Executive Officer and Co-Founder of Modern Round, who has been Chairman of Smith & Wesson since 2005.

"One exciting element is the potential to train both women and men in learning to shoot and the safe handling of simulated firearms, prior to using a real firearm. Also, we think the combination of a welcoming, friendly, safe and uniquely fun shooting lounge with exceptional food and drink in an entertainment environment will be a winning combination throughout the U.S. We have aggressive goals and high expectations for this concept and VirTra's expertise is invaluable in this endeavor. We are pleased to have them as a partner. We have concluded Modern Round is the right business concept, at the right time and for the right reasons. We anticipate strong customer demand, and if our assumptions are correct, we have the capability and interest in establishing Modern Round locations throughout the United States and beyond in the years to come," Monheit added."

The similarities between Modern Round and Topgolf are striking. I definitely like the fact also that Modern Round facilities require significantly less land and significantly less square feet than Topgolf facilities. This could be a hugely important investment and steady income earning partnership for VirTra Systems going forward.

The website is currently under construction, but at an initial glance it looks like it is something that could attract very large crowds if executed correctly. Have a look at the website under development here.

The website notes that the first location will be opening in Scottsdale soon, but it doesn't give a definitive date yet.

Over the past few years, Callaway Golf (NYSE:ELY) has invested an aggregate of about $50 million into Topgolf and owns about 20% of the company currently. Callaways investment could now be worth around $220 million according to various analysts.

Although I think that it would be silly to assign any value to this investment at this early of a stage, it is definitely nice to have that chance of major upside without having to pay anything at all for it.

Company Management/Board

Bob Ferris is the CEO. He has been the CEO since 2008. His base salary is $195,000. He owns 10.1% of VirTras stock. His stock has a current market value of approximately $1.8 million. Bob Ferris is also the Chairman Of The Board.

He is the only 10% or greater holder of VirTras stock.

Matt Burlend is the COO. He has been the COO since 2008. His base salary is $175,000. Matt is also a board member.

Jeff Brown is also a member of the board of directors. He was recently added to the board towards the end of 2011. He has a background in financial advisory, reporting, and analysis.

Balance Sheet

VirTra has a strong balance sheet and liquidity/solvency should not be an issue for the company. Here is a snapshot of Virtras balance sheet as of the end of March of 2015:

Main Risks Specific To VirTra/Things I Don't Like

- A big risk here in my opinion is the risk that VirTra can't continue to drive sustainable or consistent revenue and cashflow growth. Albeit, the recurring part of VirTras business is growing, most revenue is based on large individual orders. Even if the long term trend of revenue is positive which I think it will be, it could be a very bumpy ride since the timing of orders can widely swing quarter over quarter results.

- Another potential risk is corporate governance. I don't typically like instances when the CEO is also the chairman of the board. This essentially defeats the entire purpose of having a chairman, who is supposed to be there to evaluate, motivate, and provide guidance to the executives. I could provide advice to myself all day and I guarantee that it wouldn't increase the effectiveness of my decisions in any way. There is really only one financially inclined individual on the board. VirTra needs at least 2 independent board members, and they should preferably both have financially based backgrounds in my opinion. Don't get me wrong, I think management has done a great job growing and running the company thus far. I just think VirTra could become a much more dynamic and well rounded organization with a more balanced board. VirTras ability to grow may be hampered without the proper balance on the board that ensures that VirTra takes advantage of capital markets to the best of its ability.

- The following isn't a risk, but more of an opinion. VirTra could be more detailed in the presentation of its financial statements. Specifically in relation to the breakdown of different streams and types of revenue and also by breaking out line item expenses such as payroll and other major components of SG&A. This would not take any additional effort on the part of the company and would greatly increase transparency with investors. I would also like to hear some more insight into the different routes and ways VirTra is specifically trying to win customers. IE we use sales reps to monitor U.S. government grant and contract availability and we typically use this type of medium to win international government contracts and so on and so forth. I would also like to see more information on VirTras order backlog and other things to give more forward looking insight to investors.

- I think the fact that there is not a lot of recurring revenue coupled with the companys small size could lead to increased risk in an economic collapse. That being said, VirTras conservative historical use of cash and strong balance sheet alleviate my concerns in relation to this being much of a risk.


I think management has done a great job running the company and growing the business profitably. They have created, hands down an amazing and state of the art product. More important than that, is the fact that they have created it and sold in an extremely profitable fashion. It wasn't the technology that attracted me to VirTra, it was VirTras valuation. Only after the valuation did I discover the amazing technology that VirTra has developed. I think VirTra shares are severely undervalued based on M&A activity and the market will wake up to this very soon. I like the potential upside of Modern Round. Who would turn away a free lottery ticket? Despite the risks to the investment I find an investment in VirTra a compelling opportunity at the moment. I think that these $0.11 shares should conservatively be trading at $0.31 a year from now, representing 180% upside.

Disclosure: I am/we are long VTSI.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.