VirTra, Inc. — Form 10-Q Summary
Business Context and Reporting Period
VirTra develops and sells use-of-force and firearms training simulators, software, accessories, installation, training and warranties for law enforcement, military and commercial customers. It also licenses technology to That’s Eatertainment Corp. The filing covers the three and six months ended June 30, 2018. The unaudited statements were prepared under U.S. GAAP. VirTra adopted ASC 606 revenue recognition using the modified retrospective method; management reported no material adoption impact.
Financial Performance and Position
| Metric | Three Months Ended June 30 | Six Months Ended June 30 |
|---|---|---|
| Total revenue | $8.70 million, versus $5.25 million | $11.95 million, versus $9.46 million |
| Gross profit | $5.74 million, versus $3.75 million | $7.96 million, versus $6.18 million |
| Gross margin | 66%, versus 71% | 67%, versus 65% |
| Income from operations | $2.96 million, versus $1.62 million | $2.80 million, versus $2.09 million |
| Net income | $2.11 million, versus $1.65 million | $2.03 million, versus $2.05 million |
| Diluted EPS | $0.26, versus $0.20 | $0.25, versus $0.24 |
| Adjusted EBITDA | $3.19 million, versus $1.77 million | $3.15 million, versus $2.38 million |
- Quarterly revenue increased approximately 66%; year-to-date revenue increased approximately 26%.
- Quarterly operating margin was approximately 34%, compared with 31% in the prior-year quarter. Year-to-date operating margin was approximately 23%, compared with 22%.
- Operating expenses increased 31% in the quarter and 26% year to date, driven by staffing, payroll and benefits, professional fees, public-company costs and a $134,140 impairment of the TEC investment.
- Income tax expense was $864,941 in the quarter and $835,747 year to date, compared with zero and $78,000, respectively, in the prior-year periods. Management attributed the increase primarily to its assessment of deferred tax assets related to federal net operating loss carryforwards.
- Cash and cash equivalents were $4.90 million at June 30, 2018, compared with $5.08 million at December 31, 2017. Working capital was $8.34 million, compared with $5.71 million.
- Net cash provided by operating activities was $172,816 year to date, compared with $749,610 in 2017. Capital expenditures were $287,773, compared with $70,923, and net cash used in financing activities was $66,400.
- Total liabilities were $4.17 million and stockholders’ equity was $12.40 million at June 30, 2018. Debt consisted primarily of a $22,500 note payable, split between current and long-term portions.
- Accounts receivable increased to $4.22 million from $1.48 million at year-end. The company converted $693,044 of accounts into notes receivable, including a customer note bearing 10% interest and a $292,138 convertible note from TEC bearing 5% interest.
Material Changes Versus the Prior Comparable Period
- Revenue growth reflected higher simulator, accessory, warranty and service sales. Domestic simulator and accessory revenue increased substantially, while international simulator and accessory revenue also increased for the six-month period.
- Gross profit increased, but quarterly gross margin declined to 66% from 71% because of differences in the mix and quantity of systems and accessories sold. Year-to-date gross margin improved to 67% from 65%.
- Quarterly net income increased 28%, while six-month net income declined approximately 1% because of higher taxes and operating expenses.
- Cash flow conversion weakened despite profitability, primarily because of increases in receivables and inventory, reductions in deferred revenue and higher capital expenditures.
- Accrued compensation increased to $1.15 million from $593,491, including higher profit-sharing accruals. Accrued manufacturer warranty obligations increased to $390,488 from $135,000.
- The company recognized a $134,140 impairment loss on its investment in TEC, which was carried at $1.24 million at June 30, 2018.
- Shares outstanding were 7,911,807 at June 30, 2018, compared with 7,904,307 at December 31, 2017. The company completed a 1-for-2 reverse stock split on February 12, 2018.
Guidance, Outlook, Risks and Unusual Items
- No formal revenue or earnings guidance was provided. Management stated that current capital resources should support operations and the current business strategy for more than 12 months.
- VirTra received $3.3 million of new signed bookings during the second quarter and ended the quarter with approximately $5.2 million of backlog. Management expects more than 50% of second-quarter bookings to convert to revenue by December 31, 2018, although delivery schedules and contract terms may change.
- The company’s TEC relationship involves related-party licensing, royalty obligations, minimum royalty provisions, an investment carried at cost less impairment and notes receivable. On July 23, 2018, VirTra amended the co-venture agreement to address a minimum royalty deficiency, payment terms, exclusivity and royalty calculations.
- VirTra initiated an Arizona declaratory judgment action involving a former customer’s breach-of-contract and warranty allegations. Management believes the matter will not materially affect operations; a probable estimated loss contingency of $40,000 was accrued.
- The company entered into lease amendments extending its corporate-office lease through September 2023 and adding a machine-shop lease beginning October 1, 2018. Future minimum operating lease payments total approximately $1.93 million.
- Management identifies accounts receivable collectibility, inventory reserves, warranty reserves, long-lived assets, income taxes, stock-based compensation and the TEC investment as significant estimates. No material off-balance-sheet arrangements were reported.
- The company is assessing the effect of the lease standard, ASC 842, effective January 1, 2019. The filing states that disclosure controls were effective and that no material change occurred in internal control over financial reporting.
Most Important Facts to Verify
- Whether the $5.2 million backlog converts to revenue as management expects and whether customer delivery changes affect timing.
- Collection performance for the $4.22 million accounts receivable balance and the unsecured customer and TEC notes receivable.
- The recoverability and future impairment risk of the $1.24 million TEC investment and the collectibility of TEC-related royalties.
- The sustainability of the company’s elevated quarterly revenue and margins given product-mix variability and higher operating expenses.
- The cash-flow impact of receivables, deferred revenue, inventory, warranty accruals and planned capital expenditures.
- The ultimate cost and resolution of the former-customer litigation and the $40,000 accrued contingency.
- The balance-sheet impact of adopting ASC 842 and the company’s future lease commitments.