VirTra, Inc. Form 10-K Summary
Reporting period: Fiscal year ended December 31, 2021; the filing was signed August 2, 2022. The requested “2021 Q4” period is covered through full-year results, with fourth-quarter bookings also disclosed.
Business Context
VirTra provides judgmental use-of-force, firearms and driving training simulators, software, content, accessories, installation, training, warranties and subscription-based STEP services. Its primary markets are law enforcement and military customers, with additional commercial and international sales. Government customers represented 68.9% of 2021 revenue, while commercial and international customers represented 13.0% and 18.1%, respectively.
Financial Results and Key Metrics
| Metric | 2021 | 2020 | Change |
|---|---|---|---|
| Revenue | $24.434 million | $19.088 million | +28.0% |
| Gross profit | $11.405 million | $11.900 million | -4.2% |
| Gross margin | 46.7% | 62.3% | -15.6 percentage points |
| Income from operations | $1.454 million | $1.226 million | +18.6% |
| Net income | $2.540 million | $1.478 million | +71.8% |
| Adjusted EBITDA | $2.054 million | $2.791 million | -26.4% |
| Net income per diluted share | $0.25 | $0.19 | Increase |
| Cash and cash equivalents | $19.709 million | $6.842 million | +188.3% |
| Working capital | $25.945 million | $10.269 million | +152.5% |
Approximate calculated margins were 5.9% for operating income and 10.4% for net income in 2021. Revenue growth reflected higher simulator, STEP, accessory, curriculum, training and extended-warranty sales. Cost of sales increased 81.3% to $13.029 million, driven by higher material, labor and travel costs, causing gross profit and gross margin to decline despite higher revenue.
Net other income was $1.332 million, primarily from the one-time $1.321 million gain on forgiveness of the PPP loan. Excluding this unusual item, reported net income and EBITDA would have been lower than the headline figures suggest. Research and development expense increased to $1.866 million from $1.603 million.
Cash Flow, Liquidity and Debt
- Operating cash flow was negative $125,743, compared with positive $2.246 million in 2020, primarily reflecting increases in accounts receivable and inventory and reductions in deferred revenue.
- Investing cash flow was negative $3.736 million, including $3.449 million of property and equipment purchases.
- Financing cash flow was positive $16.728 million, mainly due to $16.795 million of net proceeds from a registered direct offering of 3.0 million shares.
- The company purchased a Chandler, Arizona facility for $10.8 million, funded with cash and an $8.6 million mortgage loan. The mortgage bears fixed interest at 3%, with a $5.957 million balloon payment due in August 2031.
- At year-end, notes payable totaled approximately $8.517 million, including $8.280 million long term and $236,291 current. The PPP loan was fully forgiven in July 2021.
- Management stated that existing capital resources should support operations and the current strategy for more than 12 months from filing, although additional financing may be pursued for acquisitions, capacity, products and sales initiatives.
Material Changes Versus 2020
- Revenue increased 28.0%, but gross profit declined 4.2% as product mix and substantially higher production-related costs compressed margins.
- Operating expenses declined 6.8%, partly because 2020 included an $840,000 impairment of the TEC investment and a $346,477 bad-debt allowance.
- Net income increased primarily because of higher operating income and the $1.321 million PPP forgiveness gain.
- Adjusted EBITDA declined 26% after removing the PPP forgiveness gain and other unusual items, indicating weaker underlying profitability than GAAP net income growth implies.
- Government revenue declined to $16.836 million from $17.351 million, while international revenue increased to $4.431 million from $443,163 and commercial revenue increased to $3.167 million from $1.293 million.
- STEP revenue increased to $1.964 million from $794,524, representing 8.0% of 2021 revenue versus 4.2% in 2020.
- Backlog was $23.1 million at December 31, 2021, including extended warranty and STEP agreements. Fourth-quarter bookings were $8.4 million, and management expected most new fourth-quarter bookings to convert to revenue in 2022.
- Shares outstanding increased to 10.807 million from 7.775 million, primarily because of the 3.0 million-share offering.
Outlook, Risks and Unusual Items
Management did not provide quantitative revenue or earnings guidance. Its stated strategy is to expand the core law-enforcement and military businesses, broaden the addressable market and product portfolio, increase marketing and sales activity, and consider partnerships or acquisitions.
- COVID-19 and related supply-chain, shipment, installation and customer-budget disruptions could delay revenue recognition and reduce gross margins. Management reported delays rather than order cancellations, with delayed orders remaining in backlog.
- The company depends substantially on government contracts and budgets. Appropriations delays, cancellations, changing procurement policies or reduced state and local spending could materially affect revenue, cash flow and backlog.
- Competition includes larger or better-resourced companies such as Axon, Cubic, Laser Shot, InVeris, MILO and Ti Training. Product obsolescence, pricing pressure and new VR technologies could reduce market share.
- Export controls, ITAR licensing, sanctions and other regulatory requirements may delay or restrict international sales and expose the company to penalties for noncompliance.
- Supplier, manufacturing, logistics, cybersecurity, product-liability and safety issues could disrupt operations or result in claims exceeding insurance coverage.
- Management concluded that disclosure controls and internal control over financial reporting were not effective at December 31, 2021 because of material weaknesses involving insufficient management review of complex accounting matters and inadequate system and manual controls. The filing states that the 2021 audit was delayed by implementation of a new ERP system and COVID-related personnel limitations.
- The independent auditor did not provide an internal-control attestation because VirTra qualifies as an emerging growth and smaller reporting company. The company changed auditors during the reporting process, ultimately appointing Haynie & Company for the 2021 audit.
- The filing reports no material pending legal proceedings and no material off-balance-sheet arrangements.
Investor Verification Checklist
- Verify whether the $23.1 million backlog converted to revenue as projected and assess delivery, installation and customer-requested schedule changes.
- Reconcile reported net income and adjusted EBITDA for the one-time PPP forgiveness gain and evaluate recurring profitability.
- Monitor gross margin recovery, material and labor costs, inventory growth and negative operating cash flow.
- Review the $8.6 million mortgage, balloon payment exposure and the financial effect of the new Chandler facility.
- Assess customer and government-contract concentration, including budget, appropriation and procurement risks.
- Track remediation of the material weaknesses in internal controls and any future auditor or filing delays.
- Evaluate dilution from the 2021 equity offering, restricted stock awards and other equity incentives.
- Confirm the effect of COVID-19, supply-chain constraints and export licensing on shipments, international revenue and margins.