VirTra, Inc. — Q1 2020 Form 10-Q Summary
Business context and reporting period
VirTra provides judgmental use-of-force, firearms and driving simulators, software, training, installation and related services to law enforcement, military, educational and commercial customers. The filing covers the unaudited three months ended March 31, 2020, compared with the three months ended March 31, 2019.
Key financial metrics
| Metric | Q1 2020 | Q1 2019 | Change |
|---|---|---|---|
| Total revenue | $3.338 million | $3.051 million | +9% |
| Gross profit | $1.595 million | $1.800 million | -11% |
| Gross margin | 47.8% | 59.0% | -11.2 percentage points |
| Operating loss | $0.512 million | $0.457 million | Loss increased 12% |
| Net loss | $0.389 million | $0.313 million | Loss increased 24% |
| Adjusted EBITDA | $(0.326) million | $(0.278) million | Loss increased 17% |
| Cash flow from operations | $0.723 million | $(0.901) million | Improved by $1.624 million |
| Ending cash and equivalents | $3.117 million | $1.287 million | Q1 2019 comparison |
Revenue consisted primarily of simulator and accessory sales, warranties, customized software and content, installation and training, and royalties. Government customers represented 87% of total revenue, international customers 10%, and commercial customers 2%. Two government agencies accounted for 17% and 15% of total revenue.
Cost of sales increased 39% to $1.743 million, primarily due to product mix and higher direct material, labor, travel and production supply costs. Operating expenses declined 7% to $2.107 million, largely because of lower labor, benefits, travel and professional-services costs. The tax benefit was $103,000, and diluted loss per share was $0.05.
At March 31, 2020, working capital was $6.683 million, compared with $7.173 million at December 31, 2019. Cash and certificates of deposit totaled $3.837 million, compared with $3.330 million at year-end. Certificates of deposit declined to $720,000 from $1.915 million as the company redeemed deposits to increase liquid cash.
The company had no bank debt at March 31, 2020. Reported liabilities included $1.401 million of operating lease liabilities and $4.820 million of current and long-term deferred revenue. The balance sheet showed total assets of $17.727 million, total liabilities of $7.931 million and stockholders’ equity of $9.795 million.
Material changes versus the prior comparable period
- Revenue increased $286,825, or 9%, driven by more simulator and accessory systems completed, delivered and recognized as revenue.
- Gross profit declined $205,242, or 11%, and gross margin fell from 59.0% to 47.8%, reflecting product mix and investments in production staffing.
- Operating loss increased $54,801, or 12%, despite lower operating expenses.
- Net loss increased $76,508, or 24%, to $389,410.
- Operating cash flow changed from a $900,598 use of cash to $723,364 provided, principally reflecting changes in unbilled revenue, deferred revenue, accounts receivable and working capital.
- Bookings were approximately $5.0 million in Q1 2020, and backlog was approximately $11.3 million at March 31, 2020. Management expected most new first-quarter bookings to convert to revenue during 2020, subject to delivery and customer timing changes.
- Government revenue increased to $2.919 million from $2.617 million, while international revenue increased to $347,120 from $46,499. Commercial revenue declined to $72,350 from $388,025.
Guidance, outlook, risks and unusual items
The company did not provide formal quantitative full-year revenue or earnings guidance. Management stated that existing capital resources were expected to support operations and the current strategy for more than 12 months from the filing date.
COVID-19 materially increased uncertainty. VirTra qualified as an essential business in Arizona, shifted most employees to remote work in mid-March and retained essential personnel at manufacturing facilities. Restrictions had reduced customer shipments and system installations. Management expected delayed recognition of revenue and potentially lower gross margins, although it reported no order cancellations and stated that delayed orders remained in backlog. The ultimate effects on revenue, profitability, liquidity and capital resources could not be reasonably estimated.
In April and May 2020, the company obtained a $1.311 million Paycheck Protection Program loan. The loan bears interest at 1.00%, matures May 8, 2022, and may be forgiven in whole or in part if used for qualifying expenses. No assurance was provided that forgiveness would be obtained. The company suspended its stock repurchase program effective May 11, 2020 to comply with PPP-related requirements.
VirTra reported no threatened litigation and no material off-balance-sheet arrangements. It held a related-party investment in That’s Eatertainment Corp. recorded at $840,000 and a related-party convertible note with principal and accrued interest of $300,450 at March 31, 2020. The note maturity had been extended to August 2020, and its collectability remains a consideration.
Management concluded that disclosure controls and procedures were not effective as of March 31, 2020 because of material weaknesses previously identified in the 2019 Form 10-K. No material changes to internal control over financial reporting occurred during the quarter.
Important facts for investors to verify
- Whether COVID-19 shipment and installation delays translated into lower revenue, gross margin or backlog conversion in subsequent quarters.
- The composition, timing and customer concentration of the $11.3 million backlog, including the ability of government customers to fund and accept deliveries.
- Whether the $1.311 million PPP loan was fully or partially forgiven and the amount, if any, remaining payable.
- Progress remediating the material weaknesses that caused ineffective disclosure controls.
- Collectability and ultimate resolution of the $300,450 related-party convertible note and the carrying value of the $840,000 related-party investment.
- The sustainability of the 47.8% gross margin and the effect of product mix, production staffing and installation timing.
- Accounts receivable concentration, including one state agency representing 34% of accounts receivable at March 31, 2020.