VirTra, Inc. Form 10-K Summary
Reporting period: Fiscal year ended December 31, 2017. Although the request identifies 2017 Q4, this filing is an annual report and provides full-year results, with selected fourth-quarter items. Financial statements were audited by Friedman LLP.
Business Context
VirTra develops, sells and supports use-of-force and firearms-training simulators, software, scenario content, simulated weapons and accessories for law-enforcement, military, educational and civilian customers. The company operates primarily from Tempe, Arizona, employs approximately 80 full-time employees and sells domestically and internationally through its direct sales force and distributors.
Government-related customers generated substantially all fiscal 2017 revenue. VirTra also licenses technology to Modern Round Entertainment Corporation, or MREC, for virtual shooting-lounge facilities.
Key Financial Metrics
| Metric | 2017 | 2016 | Change |
|---|---|---|---|
| Total revenue | $16.524 million | $15.652 million | Up 5.6% |
| Net sales | $16.234 million | $15.562 million | Up 4.3% |
| Royalties and licensing fees | $0.290 million | $0.090 million | Up $0.200 million |
| Gross profit | $10.233 million | $9.682 million | Up 5.7% |
| Gross margin | 61.9% | 61.9% | Flat |
| Income from operations | $1.307 million | $2.126 million | Down 38.6% |
| Net income | $3.262 million | $2.050 million | Up 59.1% |
| Basic diluted EPS | $0.41 / $0.39 | $0.26 / $0.24 | Improved |
| Adjusted EBITDA | $1.809 million | $2.512 million | Down 28.0% |
| Cash flow from operations | $2.652 million | $1.755 million | Up 51.1% |
Liquidity and debt: Cash and cash equivalents were $5.080 million at December 31, 2017, compared with $3.704 million at year-end 2016. Working capital was approximately $5.710 million versus $5.269 million. Total debt was $22,500, consisting of $11,250 current and $11,250 long-term notes payable. Management stated that existing capital resources should support operations and the current strategy for more than 12 months from the filing date.
Balance sheet: Total assets were $14.850 million and stockholders’ equity was $10.386 million at December 31, 2017. Deferred revenue totaled $2.993 million, including $2.157 million related to extended warranties. Inventory increased to $1.720 million, including a $105,031 reserve.
Material Changes Versus 2016
- Revenue increased primarily from a broader customer base, partly offset by the absence of a $2.7 million international order recorded in 2016.
- Gross margin remained stable at 61.9%, while operating expenses increased $1.371 million to $8.927 million. Increases reflected higher staffing and compensation, expanded sales and marketing, research and development, information-technology spending and public-company costs.
- Research and development expense increased to approximately $1.285 million from $1.100 million.
- Operating income declined despite higher revenue because expense growth outpaced gross-profit growth.
- Net income benefited from a $2.505 million income-tax benefit, primarily from reversing the previously recorded valuation allowance on deferred tax assets. The benefit substantially increased reported earnings and is not representative of recurring operating performance.
- Other expense included a $613,241 impairment loss on the MREC investment. The company continued to hold approximately 3.353 million MREC shares at year-end.
- Adjusted EBITDA declined to $1.809 million, reflecting the weaker operating result and excluding the MREC impairment and tax effects.
- Operating cash flow increased to $2.652 million, aided by collections of accounts receivable and higher deferred revenue, partially offset by increases in inventory, unbilled revenue and deferred tax assets.
- Financing cash outflows increased to $1.141 million, primarily from repurchases of stock options, warrants and treasury stock.
Guidance, Outlook, Risks and Unusual Items
Management did not provide specific revenue, earnings or margin guidance. Its strategy is to expand the core simulator business, increase the addressable market, broaden product offerings, strengthen sales and marketing and pursue partners or acquisitions. Management stated that it may seek additional capital to support expansion, although no assurance was provided that financing would be available on acceptable terms.
- Customer concentration: Government agencies accounted for substantially all revenue. Two federal agencies each represented 11% and 12% of 2017 sales, and one state agency represented 12%.
- Government dependence: Budget reductions, appropriations delays, contract cancellations, recompetes, procurement changes or delayed payments could materially reduce revenue, cash flow and backlog.
- Competition: The company competes with larger and better-capitalized providers, including Arotech, Cubic, Laser Shot, Meggitt Training Systems and Ti Training.
- Export and regulatory risk: International sales are subject to U.S. export-control, ITAR, sanctions and other regulations. Loss or delay of required authorizations could delay shipments or prevent sales.
- MREC exposure: MREC paid $289,947 in royalties in 2017, but VirTra recorded a $613,241 impairment of its MREC investment. Related-party governance and the company’s ownership interest in MREC warrant attention.
- Warrant transaction: VirTra repurchased two tranches of MREC-affiliate warrants for an aggregate $773,495. The transaction reduced potential dilution but used cash and involved a related party.
- Tax items: The company recorded $2.710 million of net deferred tax assets after reversing its valuation allowance and remeasuring deferred taxes following the Tax Cuts and Jobs Act. The filing states that aspects of the tax-law analysis were still being refined.
- Legal matter: An employment-related wage lawsuit was settled in 2017 for total payments, including legal fees, of $106,030. The company stated that the matter was not material and all required payments were completed.
- Public-company transition: The filing did not include management’s assessment of internal control over financial reporting or an auditor attestation because of applicable transition exemptions. The company remained a smaller reporting company and emerging growth company.
- Subsequent events: A 1-for-2 reverse stock split became effective in March 2018. A Regulation A offering seeking $5 million to $10 million was terminated on March 29, 2018, with no shares sold. The stock began trading on Nasdaq under the symbol VTSI on that date.
Most Important Facts to Verify
- Whether future revenue growth can be sustained without reliance on a small number of government customers or large international orders.
- The recurring operating earnings and cash-generation profile excluding the $2.505 million tax benefit and the $613,241 MREC impairment.
- The recoverability and future realization of the $2.710 million deferred tax asset, including potential limitations on net operating-loss utilization.
- The financial condition of MREC, expected royalty growth, exclusivity requirements and the carrying value of VirTra’s remaining MREC investment.
- Customer deposits, extended-warranty obligations and other deferred revenue that may defer future revenue recognition and require service spending.
- Potential dilution from the 531,667 outstanding stock options and the 1.1875 million shares reserved under the 2017 Equity Incentive Plan.
- Compliance with Nasdaq continued-listing requirements and the company’s ability to obtain additional capital if expansion requires it.
- The impact of government-budget cycles, procurement delays, export licensing and competitive pricing on backlog, margins and cash flow.