VirTra, Inc. 2022 Q2 Form 10-Q Summary
Business context and reporting period
VirTra provides judgmental use-of-force, firearms and driving training simulators, software, content, installation, training and extended warranties to law-enforcement, military, educational and commercial customers worldwide. The filing covers the three and six months ended June 30, 2022, with comparative periods ended June 30, 2021. The financial statements are unaudited.
Financial performance and liquidity
| Metric | Three months ended June 30, 2022 | Three months ended June 30, 2021 | Six months ended June 30, 2022 | Six months ended June 30, 2021 |
|---|---|---|---|---|
| Revenue | $8.0 million | $5.3 million | $14.8 million | $9.7 million |
| Gross profit | $4.7 million | $3.1 million | $8.4 million | $5.7 million |
| Gross margin | 59% | 60% | 57% | 59% |
| Operating income | $1.0 million | $0.8 million | $1.8 million | $1.4 million |
| Net income | $0.8 million | $0.5 million | $1.4 million | $1.2 million |
| Adjusted EBITDA | $1.3 million | $1.0 million | $2.3 million | $1.8 million |
- Revenue increased 52% in both the quarter and year-to-date period, driven primarily by more simulators and accessories completed, delivered and recognized as revenue.
- Six-month customer mix shifted materially: government represented 44% of revenue versus 77% in the prior year; commercial represented 35% versus 9%; and international represented 20% versus 14%.
- Six-month gross margin declined to 57% from 59%, reflecting higher costs and product mix. Operating expenses increased 55%, primarily because of the move into a new building and higher payroll costs.
- Six-month net income increased 15%, while quarterly net income increased 49%. Basic and diluted earnings per share were $0.07 for the quarter and $0.13 year to date.
- Net cash used in operating activities was $2.8 million for the six months, compared with $0.9 million of cash provided in the prior-year period. Working-capital investment included increases of $2.5 million in accounts receivable and $3.8 million in inventory.
- Capital expenditures and intangible-asset purchases used $1.8 million of cash. Financing activities used $0.1 million, primarily for debt principal payments.
- Cash and cash equivalents were $15.0 million at June 30, 2022, down from $19.7 million at December 31, 2021. Reported working capital was $27.0 million.
- Total debt was approximately $8.4 million, consisting primarily of a 3% mortgage loan secured by the Chandler, Arizona property. The loan includes a $5.96 million maturity payment due August 23, 2031.
- Total assets were $53.1 million and stockholders’ equity was $33.0 million at June 30, 2022. Inventory increased to $8.8 million from $5.0 million at year-end 2021.
Material changes versus the prior comparable period
- Revenue growth was strong across the quarter and first half, but cost of sales grew faster than revenue in the first half, contributing to lower gross margins.
- Operating expenses increased substantially due to facility-related costs and payroll expansion, limiting operating-income growth to 27% for both reported periods.
- Cash conversion weakened because of increased receivables, inventory and unbilled revenue. The company also invested more heavily in property and equipment.
- VirTra issued 64,815 restricted common shares valued at $350,001 as a signing bonus to Co-Chief Executive Officer John F. Givens II and granted him performance-based restricted stock units.
- Common shares outstanding increased to 10,876,945 at June 30, 2022 from 10,807,130 at December 31, 2021.
- The company’s stock repurchase program remained suspended, despite forgiveness of the related PPP loan.
Guidance, outlook, risks and unusual items
- Bookings totaled $9.9 million in the first six months of 2022, and backlog was $16.5 million at June 30, 2022. Management expects the majority of first-half bookings to convert to revenue during 2022, although delivery dates may change at customer request.
- Management stated that existing capital resources should support operations and the current business strategy for more than 12 months from the filing date. It remains open to raising additional capital to expand products, sales and marketing.
- COVID-19-related shipment and installation delays remain a risk. Management reported no order cancellations, but delayed shipments could reduce the timing of revenue recognition and potentially lower gross margins. The ultimate effect cannot be reasonably estimated.
- The company reported no threatened litigation and no material off-balance-sheet arrangements. It stated that it has no significant direct exposure to Russia or Ukraine.
- Performance-based restricted stock units are tied to net-profit thresholds. The company determined that achieving $2.5 million of net income for the twelve months ended June 30, 2022 was probable and recorded $70,497 of related expense year to date.
- Disclosure controls and procedures were reported as ineffective because of material weaknesses identified in the prior Form 10-K. The filing states that subsequent to June 30, 2022, the company implemented more formal workflow reviews and increased ERP training. The filing refers to the evaluation date as June 30, 2021, which appears inconsistent with the reporting period and should be verified.
Important facts for investors to verify
- Whether the $16.5 million backlog and $9.9 million of bookings convert into revenue as management expects, particularly given shipment and installation delays.
- The sustainability of the 57% year-to-date gross margin amid higher material costs, facility expenses and changing customer mix.
- Working-capital requirements, especially the sharp increases in inventory, accounts receivable and unbilled revenue, and their effect on operating cash flow.
- Future cash requirements associated with the mortgage, including the $5.96 million balloon payment due in 2031.
- Progress in remediating the reported material weaknesses in internal control over financial reporting.
- Potential dilution and compensation expense from performance-based restricted stock units and other equity awards.
- The filing’s inconsistent reference to the internal-control evaluation date and whether any additional control disclosures are required.