VirTra, Inc. 2019 Form 10-K Summary
Reporting period: Fiscal year ended December 31, 2019, compared with fiscal 2018. This is an annual filing; the filing separately reports fourth-quarter bookings.
Business Context
VirTra provides judgmental use-of-force, firearms, driving and related training simulators, software, content, accessories, warranties and subscription-based training services to law enforcement, military, educational and commercial customers. Operations are based in Tempe, Arizona, with sales and warranty activity in the United States and 33 foreign countries. The company had 88 full-time employees at year-end.
Government customers represented approximately 82% of 2019 revenue, creating significant exposure to government budgets, appropriations, contract timing and procurement decisions.
Key Financial Metrics
| Metric | 2019 | 2018 | Change |
|---|---|---|---|
| Total revenue | $18.712 million | $18.080 million | Up 3.5% |
| Net sales | $18.559 million | $17.523 million | Up 5.9% |
| Cost of sales | $8.998 million | $7.030 million | Up 28.0% |
| Gross profit | $9.714 million | $11.050 million | Down 12.1% |
| Gross margin | 51.9% | 61.1% | Down 9.2 percentage points |
| Operating income | $262,318 | $999,901 | Down 73.8% |
| Net income (loss) | $(75,277) | $818,092 | Declined to a loss |
| Adjusted EBITDA | $1.068 million | $1.949 million | Down 45.2% |
| Cash flow from operations | $(1.432) million | $1.828 million | Declined by $3.260 million |
Income tax expense was $446,725 in 2019 versus $309,998 in 2018. The increase was attributed primarily to deferred tax asset and temporary difference true-ups, partially offset by prior-year tax adjustments.
Cash and cash equivalents were $1.415 million at December 31, 2019, compared with $2.500 million in 2018. Short-term certificates of deposit totaled $1.915 million versus $3.490 million. Working capital increased to $7.173 million from $6.769 million.
Total assets were $17.460 million and total liabilities were $7.279 million at year-end. The balance sheet reflects operating lease liabilities of $1.472 million following adoption of the lease accounting standard. The filing reports no material bank debt; the remaining machine-shop note payable was repaid during 2019.
Capital expenditures and intangible-asset purchases contributed to $699,165 of net cash provided by investing activities. Financing activities used $352,104, including $318,204 for treasury-stock purchases and $34,076 for option repurchases.
Material Changes Versus 2018
- Revenue increased modestly, driven by higher simulator, accessory, curriculum, training and extended-warranty sales.
- Cost of sales increased substantially faster than revenue, reducing gross margin from 61.1% to 51.9%.
- Operating expenses decreased 6.0%, principally because of lower stock-option compensation, professional-services and public-company expenses. The improvement was insufficient to offset the gross-profit decline.
- The company recorded a $280,000 impairment of its investment in related party That’s Eatertainment Corp. and a $119,750 allowance for bad debt on accounts and notes receivable. The 2018 comparable amounts were $254,933 and $317,967, respectively.
- Government revenue increased to $15.338 million from $14.586 million, while commercial revenue declined to $869,126 from $1.140 million. International revenue increased to $2.505 million from $2.354 million.
- Fourth-quarter bookings totaled approximately $4.2 million. Year-end backlog was approximately $9.6 million, and revenue plus backlog totaled $28.3 million versus $24.9 million in 2018. Management expected most fourth-quarter bookings to convert to revenue in 2020.
- Accounts receivable and unbilled revenue increased materially, with unbilled revenue rising to $3.580 million from $689,153, contributing to negative operating cash flow.
- The company adopted lease accounting guidance in 2019, recording a $1.391 million right-of-use asset and $1.472 million of related lease liabilities at year-end.
Outlook, Risks, Contingencies and Unusual Items
Management stated that existing capital resources were expected to support operations and the current strategy for more than 12 months from the filing date. Management remained open to raising capital to expand production, sales and marketing, products and services, or pursue acquisitions, but provided no formal revenue or earnings guidance.
- COVID-19: The filing identified potential disruption to manufacturing, suppliers, sales, marketing, customer demand and government spending. The ultimate impact was described as uncertain.
- Government concentration: Government agencies generated substantially all revenue. Two agencies represented 18% and 12% of 2019 revenue; one federal agency and one international customer represented 30% and 20% of year-end accounts receivable, respectively.
- Internal controls: Management concluded that disclosure controls and internal control over financial reporting were not effective at December 31, 2019 because of material weaknesses involving insufficient management review of complex matters and inadequate system and manual controls. The independent auditor did not provide an internal-control effectiveness opinion.
- Related party exposure: VirTra recognized $130,625 of royalties from TEC in 2019, held a $840,000 TEC investment after impairment, and held a related-party convertible note with principal and accrued interest of approximately $296,811 due in 2020. The note maturity was extended to August 1, 2020, and TEC paid $16,000 during 2019.
- Receivable loss: A customer note receivable was subject to a court judgment, but the customer dissolved and approximately $102,473 was written off in 2019.
- Litigation: The company paid a $76,250 settlement in May 2019 relating to a former-customer contract and warranty dispute. The settlement did not constitute an admission of wrongdoing.
- Competition and regulation: The company faces larger competitors, product and technology risks, export-control requirements, government-contract termination risk, supplier disruption, product liability and intellectual-property litigation risks.
- Shareholder returns: VirTra has never paid cash dividends and stated that it does not expect to do so in the foreseeable future.
Important Facts for Investors to Verify
- Whether backlog converts to revenue on the anticipated schedule and whether government procurement activity remains stable.
- Whether gross margin recovers from the 2019 decline and whether cost inflation or product mix continues to pressure profitability.
- Whether operating cash flow improves as accounts receivable and unbilled revenue are collected.
- The extent of COVID-19 and subsequent public-sector budget effects on orders, manufacturing, supply chain and customer activity.
- Management’s remediation of the reported material weaknesses in internal control over financial reporting.
- Collectability and ultimate resolution of the TEC convertible note, TEC investment and related-party royalty arrangements.
- The company’s liquidity after considering cash, certificates of deposit, lease obligations, working-capital needs and potential capital raises.
- Customer concentration, export approvals, government-contract renewals and competitive developments.