VirTra, Inc. 2019 Second-Quarter Form 10-Q Summary
Business Context and Reporting Period
VirTra provides judgmental use-of-force, firearms and driving simulators, related software, training, warranties and accessories to law-enforcement, military, educational and commercial customers. The filing covers the three and six months ended June 30, 2019, compared with the corresponding 2018 periods. The financial statements are unaudited. VirTra is a smaller reporting company and emerging growth company.
Key Financial Metrics
| Metric | Three Months Ended June 30, 2019 | Three Months Ended June 30, 2018 | Six Months Ended June 30, 2019 | Six Months Ended June 30, 2018 |
|---|---|---|---|---|
| Total revenue | $3.05 million | $8.71 million | $6.11 million | $12.00 million |
| Gross profit | $1.52 million | $5.74 million | $3.32 million | $8.01 million |
| Gross margin | 49.6% | 66.0% | 54.3% | 66.7% |
| Operating income (loss) | $(0.88) million | $2.96 million | $(1.34) million | $2.80 million |
| Net income (loss) | $(0.63) million | $2.11 million | $(0.95) million | $2.03 million |
| Adjusted EBITDA | $(0.60) million | $3.19 million | $(0.88) million | $3.15 million |
| Operating cash flow | Not separately provided | Not separately provided | $(1.93) million | $0.13 million |
Net sales were $3.00 million in the second quarter and $6.01 million for the first six months. Related-party royalties and licensing fees declined to $32,795 in the quarter and $72,432 year to date, compared with $427,433 and $473,401, respectively, in the prior-year periods.
At June 30, 2019, cash and cash equivalents were $1.39 million and certificates of deposit were $1.88 million, compared with $2.50 million and $3.49 million, respectively, at December 31, 2018. Working capital was $4.78 million, down from $6.77 million. Current assets were $9.52 million against current liabilities of $4.73 million.
Total debt was limited: the balance sheet reported a current note payable of $11,250 and no disclosed long-term borrowing. Operating lease liabilities totaled $1.61 million following adoption of the new lease standard. Total liabilities were $7.25 million and stockholders’ equity was $9.33 million.
Material Changes Versus the Prior Comparable Period
- Revenue decreased 65% in the quarter and 49% for the six-month period. Management attributed the decline primarily to fewer simulator and accessory systems completed, delivered and recognized as revenue.
- The 2018 comparison benefited from recognition of a large federal order for 49 simulators and accessories, valued at approximately $4.2 million.
- Gross margin declined by 16.4 percentage points in the quarter and 12.4 percentage points year to date, reflecting product mix and the volume of systems, accessories and services sold.
- Operating expenses decreased 14% in the quarter and 11% year to date, primarily because of lower selling, general and administrative costs. Research and development expense increased to $353,665 in the quarter and $709,306 year to date.
- The company moved from profitability to losses. The tax benefit was $217,248 in the quarter and $324,248 year to date, principally reflecting tax effects of current-period net operating losses and increases in deferred tax assets.
- Operating cash flow turned negative, driven principally by the net loss, inventory purchases and increases in accounts receivable. Inventory increased to $2.51 million from $1.61 million at year-end, while accounts receivable increased to $2.07 million from $1.30 million.
- VirTra repurchased 82,689 shares during the first six months at an average cost of $3.85 per share. All treasury shares outstanding at year-end were cancelled by June 30, 2019.
Guidance, Outlook, Risks and Unusual Items
- Second-quarter bookings were $4.1 million and backlog was $10.1 million at June 30, 2019. Management estimated that most second-quarter bookings would convert to revenue during 2019, although delivery dates may change at customer request.
- Management stated that existing capital resources should support operations and the current strategy for more than 12 months from the filing date. It remained open to additional financing to expand products, sales and marketing, but cautioned that financing may not be available on acceptable terms.
- A customer trade note was in default. The company demanded repayment, suspended interest accrual after the last payment in February 2019, filed suit and maintained a full allowance against the $369,286 balance.
- VirTra held a $292,138 principal related-party convertible note from That’s Eatertainment Corp.; its maturity was subsequently extended from August 1, 2019 to August 1, 2020. No collectability reserve was recorded for this note.
- VirTra recognized $76,250 for settlement of a former-customer dispute and paid the full amount by June 30, 2019.
- Customer concentration remained significant. Two federal agencies represented 32% of second-quarter net sales, and three federal agencies represented 55% of accounts receivable at quarter-end.
- VirTra reported that its disclosure controls and procedures were not effective as of June 30, 2019 because of material weaknesses previously identified in its 2018 Form 10-K. No material changes to internal control over financial reporting were reported during the quarter.
- The company adopted the new lease accounting standard on January 1, 2019, recording a $1.53 million operating lease right-of-use asset and $1.61 million of lease liabilities at June 30, 2019.
- The filing states that interim results may be subject to seasonal variation and are not necessarily indicative of full-year results.
Facts Investors Should Verify
- Whether the $10.1 million backlog and $4.1 million of second-quarter bookings convert to revenue as management expected.
- Customer delivery timing, product mix and the extent to which gross margins recover from the 2019 levels.
- Working-capital needs, particularly inventory growth, accounts receivable collections and continued negative operating cash flow.
- Collectability and legal recovery prospects for the defaulted trade note, and repayment or conversion of the related-party convertible note.
- Remediation of the reported material weaknesses in disclosure controls and procedures.
- Ongoing exposure to federal and state agency concentration and dependence on government purchasing cycles.
- The impact of share repurchases and the remaining authorization under the company’s repurchase program.