VirTra, Inc.
Q4 2020 Earnings Call Transcript

Published: 29 Mar 2021

[Operator:]

Good afternoon. Welcome to VirTra's Fourth Quarter and Full-Year 2020 Earnings Conference Call. My name is John 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 Fox. 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.

[Robert Ferris:]

Thank you, John. Good afternoon, everyone, and thank you for joining us today for VirTra's fourth quarter and full-year 2020 earnings call. I'm also joined today by our new Chief Accounting Officer, Marcia Fox. When we held our 2019 earnings call one year ago, we had all just begun to experience dramatic shifts in our daily lives as COVID-19 spread across the United States and our federal government, states and local communities responded to the pandemic. Fear and uncertainty were rampant. And at that time, as markets decline, schools closed and businesses shutdown, the idea that VirTra could produce record financial results in 2020 would have been met with healthy skepticism to say the least. Yet, we did. In fact, by many metrics, 2020 was the most successful financial year in our company's history, which you'd expect for a growing business during normal times. Despite pandemic headwinds and against the odds, our tenacious staff grew revenue for the 15th consecutive year. The $6.6 million in revenue we produced in the fourth quarter of 2020 ensured a strong finish, as we produced $19.1 million in revenue for the full-year 2020. We earned $1.5 million in net income and our adjusted EBITDA decreased 161% to – I’m sorry, increased to 161% to $2.8 million in 2020. Even with the positive results in the fourth quarter, our backlog increased to $14.6 million in December – at December 31 2020. It's natural to ask why VirTra flourished in a year that was incredibly challenging for so many. First, we serve a need that proved to be integral for law enforcement and military requirements. Our highly effective simulation products improve the training, which improves the performance of law enforcement and military personnel. Second, we have great people who are unusually dedicated to our mission to save and improve lives through uniquely effective high-tech products. Lastly, regardless of being the largest police simulation company in the world, we very much operate like a nimble company with a flexible organizational structure, quickly adapting to change in circumstances and foreseen in the midst of them. Despite the number of challenges posed over the past year, canceled trade shows, travel restrictions that impacted installations and international sales calls to defund the police and fears of budget constraints within our core customer group. Despite all of it, VirTra not only persevered, but thrived in 2020. With the lack of trade shows and conferences, which we traditionally rely on to generate leads and demo new products to current and prospective clients, our sales team adapted by switching to web-based tools, which were timely deployed by our marketing team.

[Marsha Fox:]

Thank you, Bob, and good afternoon, everyone. It's a pleasure to be speaking to you today for the first time as a member of the VirTra team. Our total revenue for the fourth quarter of 2020 was $6.6 million. This was an 11% increase from the $5.9 million of revenue we recognized in Q4 of last year. For the full-year ended December 31, 2020, our total revenue was $19.1 million. This was a 2% increase from the $18.7 million we reported in 2019. The increase in revenues in both periods was the result of an increase in sales and subscriptions of simulators, accessories, curriculum and training and recurring extended warranty revenue in 2020. Our gross profit for the fourth quarter of 2020 increased 80% to $4.8 million or 72.5% of revenue from $2.6 million or 44.8% of revenue in the fourth quarter of 2019. For the full-year, our gross profit increased 23% to $11.9 million or 62.3% of total revenue from $9.7 million or 51.9% of total revenue. In both periods, the increase in gross profit was primarily due to differences in the quantity and type of simulator systems, type of accessories and variety of services sold, combined with a decrease in the cost of sales. Our operating expense for the fourth quarter of 2020 was $3.4 million a 50% increase from the $2.3 million we reported in Q4 of last year. For the full-year 2020, our operating expense increased 13% to $10.7 million from $9.5 million in the same period a year ago. The increase in operating expense for the three months ended December 31, 2020 was due to $434,000 impairment in the investment in The Eatertainment Corp or Modern Round, which was recorded as an operating expense as well as a $307,000 allowance for bad debt on accounts and notes receivable. The full-year results included an $840,000 impairment in the investment of That's Eatertainment, recorded as an operating expense as well as a $346,000 allowance for bad debt on accounts and notes receivable. Turning now to our profitability measures. Income from operations for the fourth quarter of 2020 was $1.3 million, a 276% increase from income from operations of $356,000 in Q4 of last year. For the full-year 2020, income from operations was $1.2 million, a 367% increase from the income from operations of $262,000 we reported in 2019. Our net income for the fourth quarter of 2020 totaled $1.6 million or $0.21 per diluted share. This compares to the net loss of $66,000 or $0.10 per diluted share in Q4 of last year. For the full-year ended December 31, 2020, our net income totaled $1.5 million or $0.19 per diluted share compared to a net loss of $75,000 or $0.10 per diluted share in 2019. Our adjusted EBITDA, a non-GAAP financial measure increased 119% to $2.2 million in the fourth quarter of 2020 from $729,000 in Q4 last year. For the full-year 2020, our adjusted EBITDA increased 161% to $2.8 million from $1.1 million in 2019.

[Robert Ferris:]

Thanks, Marsha. As Marsha mentioned, we had a substantial write-off in our investments in Modern Round, whereby we licensed some of our technology in exchange for part of their revenue. As you can imagine, the pandemic has had a negative impact on both the entertainment and restaurant industries, which means it uniquely impacted the business strategy of Modern Round last year. Please know that we remain a large shareholder and Modern Round staff are working incredibly hard to succeed, so that they can enjoy the potential upside post-pandemic. But as an audited public company, we must be prudent in error on the side of caution. We chose to take a one-time write-off of our ownership in Modern Round. Had it not been for the write-off, 2020 would have been the most profitable year in VirTra's history and from a cash flow perspective, it still was. If we can generate these results in such a difficult operating environment, we have even higher hopes as the world begins to open back up. Our core competencies are desperately needed and we understand where they are needed most

[Operator:]

Thank you. Ladies and gentlemen, the floor is now open for questions. And your first question is coming from Jaeson Schmidt from Lake Street. Jaeson, your line is live.

[Jaeson Schmidt:]

Hey, guys. Thanks for taking my questions. Early strong finish to 2020. Bob, not looking for specific guidance on Q1, but could you just talk about if the order momentum you saw at the last year continued here in the first three months of 2021?

[Robert Ferris:]

Hello, Jason. Thanks for the question. We are seeing continued strength on the sales order front. But it can, of course, come in spurts. So – but we are happy with the deal flow on the sales pipeline. Yes.

[Jaeson Schmidt:]

Okay, that's helpful. And just curious if you're seeing any concerns or pushback from customers on potential budgetary pressures?

[Robert Ferris:]

That obviously is very much a client-specific situation. But I know your question is getting more of an industry move. We're not seeing a major industry move right now either to expanded budgets or constrained budgets. So, I think our issue is more just in the mechanics of how we close a sale and how we work with a client and making sure that they know that they have a subscription option available to them and navigating with them any grant programs that might apply or helping them in any way we can. There's a lot more for us to work on how do we improve that side of the business than we're really encountering people who say, “Listen, I simply can't. My budget was removed from me unexpectedly and I can't buy your product.” We're not seeing that. Of course, those conversations can and do occur not just for our company, but any company in this market. But I think we have a lot of room to just improve our process to try to ensure that when people do have budget, we can convert them to a sale, whether that be a purchase or a subscription.

[Jaeson Schmidt:]

Okay. And last one from me and I'll jump back into queue. A pretty significant step up in gross margin sequentially. How should we think about gross margin going forward? Is this sort of 70%-plus type figure sustainable?

[Robert Ferris:]

It’s - over the years, our comment on gross margin is really focused on historical long-term trends. Our one of the most reliable things to look at because we have had margins push up. We've had margins push down some. But if you look historically, we're usually right around 60% gross margin and we try to stay in that range. But things - there are situations where that can vary somewhat. But I think investors are well-advised to look at overall historical margins for VirTra.

[Jaeson Schmidt:]

Okay. Thanks a lot, guys.

[Robert Ferris:]

Thank you so much.

[Operator:]

And your next question is coming from Richard Baldry from ROTH Cap. Richard, your line is live.

[Richard Baldry:]

Thanks. Can you talk about the implementation, sort of environment as it's beginning to ease up as some states seem to be opening up a bit? What - and how do you expect that to play into the backlog as 2021 unfolds?

[Robert Ferris:]

Yes, thank you for the question. We are seeing a bit more easing on COVID-19 restrictions. That does directly help us in being able to recognize revenue when there is an easing of restrictions, although we still maintain vigilance on the health of our staff. So even if a client wants us to deliver, if we feel it's unsafe, we will hold back. But in general, our staff is eager to install and eager to get people trained and very dedicated to having our equipment be placed in the right hands. So, we do see a bit easier time of recognizing revenue in 2021, with a major assumption that COVID-19 restrictions do ease up on a trajectory that's pretty consistent. In other words, not a major snapback to heavy restrictions, like what we saw in 2020. So there is a correlation definitely between less travel restrictions and less mandates on our staff being able to install equipment and recognize revenue as you would likely suspect.

[Richard Baldry:]

And can you talk maybe from broad perspective, of any changes in sort of your opportunity pipeline from the unfortunately increasing rates of murders in major cities or a lot of discussion around the use of force, which could argue in a good way to try to drive more training into the forces now that are deployed? Sort of from a high-level, do you see any changes overall that might impact 2021 productivity?

[Robert Ferris:]

Well, first, let me say that I'm really happy with the pipeline that we have right now. It's tremendous. I will caution you that it's hard for me to really discern out why that pipeline is strong. Is it because more groups are worried about having high-quality training be it because the headlines are not that -- is very hard to discern. So we're not exactly sure the exact cause that could be. It is logical that with more pressure from the public to want a certain outcome all the time in police encounters and a scrutiny of any and all use of force encounters, there is a logical conclusion that they would want high-end training and effective training to avoid negative consequences and loss of life. That would all make sense – but – and that could very well be why our pipeline is robust as it is right now. So – but we do know that our pipeline is strong, there's a lot of opportunities that are forming in 2021. That – and we've got work cut out for us during those opportunities for VirTra shareholders.

[Richard Baldry:]

Last one for me. The – you’ve had some - you talked in the past about increasing your digital marketing to sort of adjust to the environment and doing more virtual sales. Can you talk about how well you think your end customers have also adjusted to doing things more virtual versus in person? Because this has lasted longer than I think a lot of people expected. Are some of those motions becoming more consistent? Or do you feel like some people are just kind of waiting to get back to normal in-person and that maybe second-half of 2021 could be better if that indeed develops? Thanks.

[Robert Ferris:]

Sure, great question. I think that -- and this is very much a personal opinion of Bob Ferris, but I think that the trade shows have really been impacted. The virtual trade shows are just not nearly the same as an actual physical trade show. So, I do think that any buyers who really want to go to a physical trade show and check out VirTra's simulator and then check out competitive competing simulators and compare the differences which are enormous, tremendous differences. They are there in different leagues many times. But that kind of situation is very hard to do digitally. We were very fortunate to have had our marketing team already in the process of launching an entirely new digital sales process prior to COVID. So, there was really a lot of luck involved in that. I wish I could say I was preparing for a potential pandemic, but we were not. We just happen to be focused on visual communication and being better on the web. And so, we were very well-prepared digitally with online materials and capabilities and our sales team and marketing team did a phenomenal job in that regard. So, I do think our customers responded well. I think so many areas of their life, they were expected to switch into a digital domain and they did that very, very well. The only area, like I said was I think trade show; the effectiveness of trade shows was really decimated by the COVID-19 and will continue to be as long as in-person trade shows are trying to shift to digital. In my personal opinion, it just doesn't work well unless it's a physical event.

[Richard Baldry:]

Maybe one last one, too. If you look at sort of the revenue plus growth in backlog, the overall growth could feel closer to a 20% level if you had been able to shift out of that backlog. Do you feel like that's a sustainable growth forward? And there's obviously some growth inhibitors in 2020 even. Or were there some sort of one-time events in there that we have to sort of put to the side? Thanks.

[Robert Ferris:]

Yes. That's a really good question at the heart of a lot of the matter of what we're talking about today. I think it's interesting that you don't see a lot of big press releases in 2020 where VirTra had in the past where we might have a $4.6 million sale or a big multimillion-dollar sale. It does give a sense that 2020 was really VirTra just doing the basics really well, just doing the blocking and tackling and just growing the business. So that would make someone think that there is a potential for this company to continue at a solid growth pace. But as we mature in the market, it's going to become more important that we look at where we expand beyond just law enforcement and we still believe there's tremendous room to grow in law enforcement. There are a lot of people right now that are not being trained at the level that they should be trained and that number is pretty enormous in just the United States of America, let alone in other countries. So, the police market that we have not tapped is still massive and then there are certainly, like the military market and others that we have not fully tapped as well. So I think if we were pretty much fully-deployed in police and in military, then it would be very hard for anyone to expect double-digit growth out of the company. But that's not the case.

[Richard Baldry:]

All right. Congrats on a good close to a tough year.

[Robert Ferris:]

Thank you very much, appreciate that.

[Operator:]

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

[Robert Ferris:]

Thank you, John. We really appreciate everyone taking the time today to join us. I want you to know that our staff of 100 talented professionals are hard at work building the world's most effective simulation training products, so that the war fighter and the peace officer can serve their country, accomplish their mission and make it home safely. We are at our best when we perform at higher standards for both our customers and our shareholders. I firmly believe the best days for VirTra are ahead of us. Be safe, take care and God bless.

[Operator:]

Thank you for joining us today for VirTra's fourth quarter and full-year 2020 conference call. You may now disconnect.