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spk01: Good afternoon. Welcome to Vertra'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 Farris, and chief accounting officer, Marsha Fox. Following their remarks, we will open the call for questions from the Vertra'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.Vertra.com. Now I would like to turn the call over to Vertra's chairman and CEO, Mr. Bob Ferris. Sir, please proceed.
spk04: Thank you, John. Good afternoon, everyone, and thank you for joining us today for Virtua'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 declined, schools closed, and businesses shut down, the idea that Virtua 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 two point, I'm sorry, increased 161% to 2.8 million in 2020. Even with a positive result in the fourth quarter, our backlog increased to 14.6 million in December, at December 31, 2020. It's natural to ask why VRCHA flourished in a year that was incredibly challenging for so many. First, we serve a need that proved to be integral to 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 changing circumstances and flourishing 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, Virgin 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. As COVID restrictions lift, our regional sales staff are performing in-person sales calls and demos whenever deemed safe for both parties. They've really done an excellent job throughout the year performing demos and converting them into sales, and in the fourth quarter alone, we generated $5.5 million in new bookings. However, the primary reason for the strong financial end of the year was that our team went above and beyond in converting a good portion of the $14.4 million backlog we had at the end of the third quarter into revenue. The combination of our salespeople continuing to pound the pavement in their respective regions coupled with our ability to effectively convert our backlog into recognized revenues, has led to the rare accomplishment of 15 years of consecutive top-line growth. At December 31, 2020, our backlog and our revenue both climbed, which demonstrates that we not only ended the year on a high note, but that there is strong momentum for 2021. While we've had to adjust some of our tactics given the state of the world, Our fundamental strategy remains unchanged. Innovate and launch solutions that serve the current and future needs of our core customer base to build our reputation as an industry leader in marksmanship skills and use of force training, and then capitalize on that reputation to expand our foothold within the law enforcement and the military markets. During 2020, we excelled in each of these areas. We enhanced our BVICTA training curriculum with content for autism awareness training We expanded our deployments of our new driving simulators through an IDIQ contract from the Department of State for the Republic of Mexico. As a result, we now have a total of 77 simulators deployed in 10 different states within Mexico, just to name one contract. We received follow-on orders from Customs and Border Protection, which is a long-standing PURCHA client. And we received a major follow-on order from the Federal Law Enforcement Training Center, or FLETC, in September of last year. Through our relationship with PLETSI, there's now the potential for thousands of additional federal officers to be exposed to Birch's industry-leading products each year as we help modernize their programs with the latest technology, with certified use-of-force and decision-making training, and with interactive content that contains the highest quality branching scenarios on the market. In the military market specifically, we secured a $1.9 million contract to support the Air Force Research Laboratory Admire program, which is intended to develop technology that improves our military warfighters' decision-making and marksmanship skills. While our 2020 results are very encouraging, we did face headwinds last year, particularly in the foreign markets. Selling internationally in 2020 was an enormous challenge due to extensive travel restrictions. But our ability to continue to grow despite these headwinds demonstrates how robust our core customer base is and the growing scale of our business. As the world changed around us, Virta experienced its own internal changes as well this past year. Our business has grown along with the opportunities in front of us. We've increased our personnel to ensure we have the right people in place to meet the growing demand we see in our pipeline. In fact, for the first time in our company's history, we have reached 100 employees. As part of the growing process, we decided to invest in our infrastructure and prepare to transition to a new ERP or enterprise resource planning system. Not so long ago, our company was about one fifth the size it is today. And we could get by with various systems that weren't fully integrated with each other, sometimes doing manual work to bridge the gap. However, as we've grown in staff and revenues, it became clear that we needed to better handle our current business and prepare for future growth. And so we moved to a robust ERP that went live in early 2021. Such transitions are logistically challenging in the short term, but necessary for sustained long-term returns. Also, it was a difficult time for us in October of 2020 with the passing of Mitch Salts, a long-time VRTHA board member. His vacancy on our board was filled by John Given's appointment, whose expertise and connections in the military market have already proven to be beneficial to VRTHA. The military, as I'll discuss in a moment, remains one of the largest potential growth drivers for VRTHA, and by having John on our team, we're that much better positioned to capitalize on those opportunities. As you likely recall, our former CFO, Judy Henry, retired in November of 2020. Her vacancy was filled by our new Chief Accounting Officer, Marsha Fox. Marsha originally joined us in an interim capacity, but I'm pleased to report that she'll be staying on full time. She brings over 20 years of experience in financial operations, business transformation strategies, and all phases of the accounting process and controls to our team. She's held multiple senior leadership positions in various industries, including our own. She's been doing an excellent job since taking the reins from Judy, and we're very happy to have her on board. So with that introduction, I'm going to turn the call over to Marcia to provide an overview of the financial results for the fourth quarter and full year 2020. Marcia.
spk00: 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 VRTRA 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 31st, 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 a $434,000 impairment in the investment in Nats Entertainment 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 VASI Entertainment, 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 21 cents per diluted share. This compares to the net loss of $66,000 or one penny per diluted share in Q4 of last year. For the full year ended December 31st, 2020, our net income totaled $1.5 million or 19 cents per diluted share compared to a net loss of $75,000 or one penny 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. Turning to our bookings and backlogs. We define bookings as the total of newly signed contracts and purchase orders received in a time period. For the three months ended December 31st, 2020, we received bookings totaling $5.5 million. We define backlog as the accumulation of bookings from signed contracts and purchase orders that are not started or are uncompleted performance objectives and cannot be recognized as revenue until delivered in a future period. Backlog also includes extended warranty agreements, and step agreements that are deferred revenue recognized on a straight-line basis over the life of each respective agreement. As of December 31, 2020, our backlog was $14.6 million, which is up 52% from the $9.6 million we reported a year ago and up from the $14.4 million at September 30, 2020. And finally, to our balance sheet. At December 31st, 2020, we had approximately $6.8 million in cash and cash equivalents, which was up from the $3.3 million in cash, cash equivalents, and certificates of deposit at December 31st, 2019. Accounts receivable in unbilled revenue combined to total approximately $6.8 million at year end compared to 5.9 million at December 31st, 2019. From a working capital standpoint, we ended the full year 2020 with 10.3 million in working capital compared to 7.2 million in working capital at December 31st, 2019. For additional details of our financial results, please reference our Form 10-K, which was filed earlier today. That concludes my prepared remarks. I'll now turn it back to Bob.
spk04: Thanks, Marcia. As Marcia mentioned, we had a substantial write-off in our investment 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 and err 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 Birch'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. Effective, certified training working alongside experts, having training that can improve skills in the real world. That's the key of everything we do, whether it's applying point of need training for the military market or simulators for law enforcement. On our last call, we discussed how the ADMIRE contract demonstrates the military's appetite for our solutions, as well as our ability to customize our product's functionality to seamlessly integrate with the military's training programs. Companies partner with us because we have a key piece to the puzzle that they lack. We can leverage our industry expertise and IP portfolio to partner with a larger player who has already built a relationship with key decision makers. That sales strategy of supplying a critical missing piece to help a large player better perform on a contract is one that we believe will continue to be an effective way for Virtua to expand further into the military market. and indeed, we've already seen evidence of it in 2021. Due to the sense of nature of some of our current work, we're constrained in what we can disclose at this time, but we hope to provide more details on the strategy and our progress later in the year, so please stay tuned. Two things remain clear. The world needs quality training for those whom we endow with the incredible responsibility of using force, if and when necessary, and the world will buy simulators to help train those who serve. Our performance this past year demonstrates that as long as that need for quality training exists and as long as we're able to execute on our strategy, virtual will continue to perform well. Our increased backlog plus last year's revenues would indicate that we are growing at a healthy pace. Our balance sheet has only gotten stronger as we continue to carry no debt other than our PPP loan and our cash position continues to increase. And with the tailwinds in both the law enforcement and military market that we're currently experiencing, that's exactly what we plan to do in 2021 and beyond. With that, I'm going to wrap up my prepared remarks and we'll open the call up for your questions. Operator, please provide the appropriate instructions.
spk01: Thank you. Ladies and gentlemen, the floor is now open for questions. If you have any questions or comments, please press star one on your touchstone phone at this time Pressing star 2 will remove you from the queue should your question be answered. And lastly, while posing your question, please pick up your handset if listening on speakerphone to provide optimum sound quality. Please hold while we poll for questions. And your first question is coming from Jason Schmidt from Lake Street. Jason, your line is live.
spk03: 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 end of last year continued here in the first three months of 2021?
spk04: Hello, Jason. Thanks for the question. We are seeing continued strength on the sales order front. But it can, of course, come in spurts. But we are happy with the deal flow on the sales pipeline, yes.
spk03: Okay, that's helpful. And just curious if you're seeing any concerns or pushback from customers on potential budgetary pressures.
spk04: Okay. 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 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 Of course, those conversations can and do occur, not just for our company, but any company in this market. I think we have a lot of room to just improve our process to try to ensure that when people do have a budget, we can convert them to a sale, whether that be a purchase or a subscription.
spk03: Okay. And the last one from me, and I'll jump back into Q, 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?
spk04: Over the years, our comment on gross margin is really focused on historical long-term trends are 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 there are situations where that can vary somewhat. But I think investors are well advised to look at overall historical margins for Virtra.
spk03: Okay. Thanks a lot, guys. Thank you so much.
spk01: Once again, if there are any remaining questions or comments, please indicate so now by pressing star 1 on your touchtone phone. And your next question is coming from Richard Baldry from Rothkapp. Richard, your line is live.
spk02: Thanks. Can you talk about the implementation sort of environment? Is it beginning to ease up as some states seem to be opening up a bit? And how do you expect that to play into the backlog as 2021 unfolds?
spk04: Yeah, 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. We do see a bit easier time of recognizing revenue in 2021 with the 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.
spk02: And can you talk maybe from a broad perspective about any changes in 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 that are deployed. Sort of from a high level, do you see any changes overall that might impact 2021 productivity?
spk04: 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 of the headlines or not? That is very hard to discern. So we're not exactly sure the exact cause. It is logical that with more pressure from the public 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, and that could very well be why our pipeline is robust as it is right now. We do know that our pipeline is strong. There's a lot of opportunities that are forming in 2021, and we've got work cut out for us to earn those opportunities for virtual shareholders.
spk02: Last one for me would be, you've talked in the past about increasing your digital marketing to sort of adjust to the environment and do more virtual sales. Can you talk about how well you think your end customers have also adjusted to doing things more, you know, virtual versus in person? You know, 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 there's some people that are just kind of waiting to get back to normal in person and that maybe second half of 21 could be better if that, you know, indeed develops? Thanks.
spk04: Sure. Yeah, 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 Virtus Simulator and then check out competing simulators and compare the differences, which are enormous, tremendous differences. They're 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 happened to be focused on digital 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 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. 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 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.
spk02: Maybe one last one, too. If you look at the revenue plus growth and backlog, the overall growth could feel closer to a 20% level if you had been able to ship out of that backlog. Do you feel like that's a sustainable, you know, 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.
spk04: Yeah. You know, 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 Virtua had, like we have in the past, where we might have a $4.6 million sale or a big multi-million dollar sale. And so it does give a sense that 2020 was really Virtua just doing the basics really well, just doing the blocking and tackling and just growing the business. 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 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. I think if we were fully, 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.
spk02: All right. Congrats on a good close to our tough year.
spk04: Thank you very much. Appreciate that.
spk01: At this time, this concludes our question and answer session. I'd now like to turn the call back over to Mr. Farris for his closing remarks.
spk04: 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 warfighter 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.
spk01: Thank you for joining us today for Virtra's fourth quarter and full year 2020 conference call.
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