VirTra, Inc. 2021 Q3 Form 10-Q Summary
Business Context and Reporting Period
VirTra provides judgmental use-of-force, firearms, driving and related training simulators, software, content, accessories, installation, warranties and STEP subscription services to law-enforcement, military, educational and commercial customers. This unaudited Form 10-Q covers the three and nine months ended September 30, 2021, compared with the corresponding 2020 periods.
Key Financial Metrics
| Metric | Q3 2021 | Q3 2020 | 9M 2021 | 9M 2020 |
|---|---|---|---|---|
| Total revenue | $6.1 million | $6.4 million | $15.8 million | $12.5 million |
| Gross profit | $2.9 million | $4.0 million | $8.6 million | $7.1 million |
| Gross margin | 47% | 62% | 54% | 57% |
| Operating income (loss) | $0.3 million | $1.2 million | $1.7 million | $(0.1) million |
| Net income (loss) | $1.3 million | $0.9 million | $2.5 million | $(0.1) million |
| Adjusted EBITDA | $0.5 million | $1.6 million | $2.3 million | $0.6 million |
| Cash flow from operations | Not separately provided | Not separately provided | $1.4 million | $(0.2) million |
Q3 revenue decreased 5%, while nine-month revenue increased 27%. Nine-month net income benefited materially from the $1.3 million gain on forgiveness of the PPP loan. Q3 adjusted EBITDA declined 67%, primarily because of lower gross profit and the absence of the prior-year impairment adjustment; nine-month adjusted EBITDA increased 232%.
Financial Position, Liquidity and Debt
- Cash and cash equivalents were $21.5 million at September 30, 2021, compared with $6.8 million at December 31, 2020.
- Working capital was $25.8 million, compared with $10.3 million at year-end 2020.
- Total assets increased to $53.6 million from $22.8 million, largely reflecting the Chandler, Arizona property acquisition and higher cash, receivables and inventory.
- Total debt was approximately $8.6 million, consisting primarily of an $8.6 million mortgage loan secured by the Chandler property. The mortgage bears fixed interest at 3%, requires monthly payments and includes a $5.96 million balloon payment due in August 2031.
- The $1.32 million PPP loan was fully forgiven in July 2021 and recognized as other income.
- Operating activities generated $1.4 million of cash, while investing activities used $12.0 million, principally for property and equipment. Financing activities provided $25.4 million, including $16.8 million of net proceeds from a registered direct offering and $8.6 million of long-term debt proceeds.
Material Changes Versus the Prior Comparable Period
- Q3 gross profit fell 28% and gross margin declined to 47% from 62%, despite only a 5% revenue decrease. Management attributed the margin pressure primarily to a higher inventory reserve as operations scaled and to product mix.
- Nine-month revenue rose 27%, driven by more simulators and accessories completed, delivered and recognized as revenue.
- Government revenue remained the largest category but declined to 62% of Q3 revenue from 96% in the prior-year quarter. Commercial revenue increased to 24% from 4%, and international revenue increased to 14% from less than 1%.
- STEP revenue increased to $1.35 million for the nine-month period from $0.6 million, representing 8.5% and 4.4% of revenue, respectively.
- Inventory increased to $5.9 million from $3.5 million, with the inventory reserve increasing to $0.7 million from $0.1 million.
- Property and equipment increased to $12.4 million from $1.4 million following the $10.8 million Chandler property acquisition. Management expects to move operations and headquarters there during 2022; approximately 15,000 square feet is leased to existing tenants.
- Common shares outstanding increased to 10.8 million from 7.8 million, primarily due to the issuance of 3.0 million shares in the April 2021 offering.
Guidance, Outlook, Risks and Unusual Items
- Bookings were $11.0 million in Q3 and $24.4 million for the first nine months. Backlog was $21.7 million at September 30, 2021. Management expects most 2021 year-to-date bookings to convert to revenue in 2021 and early 2022, subject to customer delivery changes and COVID-19-related delays.
- Management stated that current capital resources should support operations and the current strategy for more than 12 months from the filing date, while noting that additional financing may be pursued for growth.
- COVID-19 continued to cause shipment and installation delays. The company reported no order cancellations and stated that delayed orders remained in backlog, but warned that further disruptions could reduce recognized revenue and gross margin.
- Customer and government concentration remains relevant: government customers represented 71% of nine-month revenue, although no single customer represented a significant portion of nine-month revenue or September 30 accounts receivable.
- Cash includes $21.0 million of uninsured cash and cash equivalents, subject to applicable bank and deposit concentration risks.
- Management granted substantial performance-based restricted stock units and restricted shares to the CEO and COO and increased their annual salaries effective August 15, 2021. The principal 2022 vesting threshold requires at least $2.5 million of GAAP net income for the twelve months ending June 30, 2022.
- The company reported no threatened litigation and no material off-balance-sheet arrangements.
- Disclosure controls and procedures were deemed ineffective as of September 30, 2021 because of material weaknesses previously identified in the 2020 Form 10-K. Management reported no material change in internal control during the quarter.
Investor Verification Priorities
- Verify whether backlog and bookings convert to revenue as expected, particularly given continuing shipment and installation delays.
- Assess the sustainability of gross margins after the Q3 inventory reserve and the effect of product and customer mix.
- Separate recurring operating profitability from the nonrecurring PPP forgiveness gain.
- Review cash conversion, receivables, inventory growth and deferred revenue, including the $6.4 million of customer deposits included in deferred revenue.
- Evaluate leverage and refinancing or liquidity implications of the mortgage’s large balloon payment due in 2031.
- Monitor remediation of the material weaknesses in disclosure controls and procedures.
- Assess dilution from the 3.0 million-share offering, executive equity awards and outstanding stock options.