Notes on Conference Call. (I missed one question, and these notes are not verbatim; hear the playback for the reality.)
Haag: Major General Dalby has seen battle, has extensive experience in contracts.
Dalby: Expect many meetings over the next year. My goal is to grow the company by supporting and assisting sales, R&D, creating new markets, personal hands-on involvement with worldwide contacts especially in Middle East, as in anti-terrorist training.
I entertain mergers, joint ventures, acquisitions of complementary business units, and any growth strategy. We have entered into a critical time, with opportunities for growth. Sales are growing. We are near the max in shares of reserved stock and must request an increase in authorized shares.
I value each of you as a shareholder. The proxy vote schedule is for the 27th of November and we're asking for 400 million shares more. Why that number? Expensive and time-consuming to ask for another proxy. I'd just as soon ask for the entire amount and ask you to trust me to use the shares as you would expect me to do.
Seventy million of the current (nearly) one-hundred million are free-trading shares.
When we went forward, the price was 2-3 cents and we blew through many shares quickly. Having the extra shares would be helpful to me. I have no plans to increase the float by any great extent. I want to protect the issuance of stock and to place restrictions to the extent that I can. I have shares, too, and have a vision of a strong, diversified company. Before I would ever enter into mergers, and so forth, I'd want the shareholders' consent.
Great damage would come to this company in the absence of shares. Two critical needs. Duchess issues debentures, which go back to 2002. The cost to service this debt has been hard to sustain. We owe about 1/2 million dollars to pay the Duchess debt. They've been issued and sold about 30 million shares, in open market. Many purchase orders are lined up, but it's hard to overcome that number of shares in the open market.
We've paid $4 million to Duchess. Am not sure what it will cost to pay this off. Retirement of the debt will rid us of penalties and fees. We are close to going into the penalty box with Duchess debentures. Must raise equity in a private placement or issue them more shares until we can pay them off.
Second, we have an IRS obligation, created many years ago and left unresolved by previous management. We have been notified and must settle up with the IRS. Can't pay off that debt without a private placement of stock.
Third, we are addressing a recent lawsuit from Jones & Cannon. Our position is that we vigorously defend the shareholders. Our lawyers Provost Humphreys advise us not to comment on this case.
Fourth, we need working capital to handle 2.5 million dollars in purchase orders, from every major branch of the armed services, from police departments, and from overseas; and we see the trend continuing.
We have certain long-lead inventory items that must be paid for upfront. I'd like to maintain an inventory for quick turnaround, to improve cash flow. Would meet the needs of our joint venture with TI Training, as many as 100 single-screen products in the first year. These are small-margin systems, but in aggregate, this is $2 million in this joint venture alone.
We enjoy tech superiority but must obtain an R&D program, which is non-existent now. Must improve margins, reliability. We want to meet the need of our current customer base. Now have one vendor for certain inputs. If something happens to that vendor, we're shut down for that product.
Finally, trade shows have been almost non-existent. We need to advertise along with our competitors to increase sales and improve our bottom line.
I have no plans to issue other shares and will work hard to ensure that any shares issued are restricted.
We need to register about 40 million shares now to handle the need. Am quite concerned about future prospects if we cannot register those now.
I cannot take credit for activity and sales of late. Virtra Systems had the best 3rd and 4th Q ever. POs are more than what the firm has received in last 2 years.
Have met a number of potential clients in the Middle East. Bob Ferris is a great young man. Other folks, too, including expert salesmen in the field: Tom Milkes (Immersadome) and Kitchen. Steve Haag and Edie Seville. These are the people who make the company a success.
Q: Why not bank financing?
A: Little can be obtained from a purchase order financing. Third-tier lending interest rates are excessive. We've tried, looked at every possible source.
Q: Why so many, so soon?
A: Best to have the known quantity in place. No value in going back month after month, year after year. While we have the opportunity, let's do it now. Trust. We could go through at 2 cents a share pretty quick.
Q: Won't the increased AS lower the PPS? And would it be expensive to go piecemeal?
A: I'll get back to shareholders on the rationale.
Q: If you'll issue 40 million now. Where will they go?
A: We can't move forward until we have the right. No shares are promised for compensation.
Q: Are we at risk at not fulfilling the orders?
A: Yes. We have pretty good margin for buying product. Our terms and conditions are payment net 30.
Q: What about the reverse merger?
A: All I know is what shares we have.
Q: How much do we owe the IRS?
A: We don't know the exact amount. It's sizeable. A fairly serious amount for this company, in payroll taxes.
Q: If the Board members acted against the best interests of the shareholders re the events that led to Kelly's resignation, what protects us now?
A: I have a new Board, only one of whom was there before: Bob Ferris. We now have Michael Kitchens and Frank Stanley, with Cushman and Wakefield. Nothing sinister about the 400 million shares because I felt that with that, I can use them wisely and move forward and not have to raise equity to run the company. Not my private shares of stock, is going into the corporate treasury, to use judiciously.
Q: You might leave. The Board members seem to have acted in a questionable way before.
A: There was a confidentiality agreement on the prior situation, so I'm not at liberty to discuss that. I've never cut and run, and I don't intend to do that now.
Q: Can you give us insight into the sales pipeline beyond the current purchase orders?
A: Greatest percent increase in sales was in Tom Milkes' business. Am going to see him at Case Western. A lot of interest in non-military applications. As we see military budgets being strained, one area that might be left wanting is in the training arena. Interested in domestic law-enforcement, border requirements. I met with the 3 top businesses that deal with security, one of whom had more than 400 trained security officers, 50 sniffer dogs in Kuwait alone. They would be a prime prospect for numerous systems, and their training requirements would be significant. Terrorism will be here for a long time. We seek a certification process for our systems and to joint venture with entities that do drug screening and background investigations, as would be useful to Middle East.
Q: Is it safe to say that 1/3 of the 40 million is for Duchess, 1/3 for IRS?
A: Pretty perceptive, but we just don't know. Not cash out of our account to move the product out the door. If we can get past this first funding, we can leave the stock alone, we can leave the stock alone.
Q: How many of those 400 million will be used up in a merger?
A: Can take care of business with 40 million, can then focus on growing shareholder value by increasing the market cap, to find successful entities and bring them in as business units. I can read a balance sheet pretty well and can hire others to do so, but want entities that can add to cash flow. Hard to sustain stock value more than it is. If we can get $20-25 million yearly sales, would take 2-3 years; but we might be able to do this more quickly with acquisitions.
You've got to trust the Board.
Q: What happened to the purchase of the 3, then 2 companies?
A: The announcements were premature. We have no shares with which to shop. The added AS will not affect the value of the stock; but not handling the situation now will. Are boxed into a corner. I don't want to be faced with any alternatives but success.
Q: How much debt will remain?
A: Should be none. Will be close (in 1Q 2007 at the plus column, as we collect on invoices.
Q: Why not go for 100 million shares now? And what about the fiscal responsibility before? Non-payment of taxes to the IRS, for example.
A: That's conservative logic and has merit. But what if it goes down to 2 cents again? I don't want to breach fiduciary responsibility. If we can't resolve this, I won't be here. Am trying to improve the value of your stock. I want to be here for 2-3 years to see this executed. Would love to hear your thanks.
Q: Wouldn't it increase the negotiating position by being refused? Would this be a terrible situation?
A: I don't think we'd get to another proxy. Not because of me. I want to operate from a position of strength. Don't want to say that we'd have no choice.
Q: Wouldn't you want to grow the company organically and thereby work from a position of strength?
A: Want to be able to go to trade shows, demonstrate products, and this is the first priority. If I can't demonstrate that we have the capability to leverage our own product, why would they trust our products to our management? I'm asking for the leverage as a publicly traded company to look at private companies that are complementary in nature.
Q: What is your vision with the 400 million? And without?
A: Our biggest key to success is the four issues described earlier. You'll see a corresponding value in shares.
Q: Is there a vehicle to hold those shares in some sort of abeyance pending a further approval, as a protection to shareholders?
A: I wouldn't venture to respond. I just don't know.
You've challenged me, and it's been positive. Thanks.
Haag: www.virtra.com or call 832-242-1100.
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