VirTra, Inc. Form 10-Q Summary
Reporting period: Three and nine months ended September 30, 2022. Filed November 14, 2022. VirTra provides use-of-force, firearms, driving, software, training and related simulator products to law enforcement, military, educational and commercial customers.
Financial Highlights
| Metric | Q3 2022 | Q3 2021 | Nine months 2022 | Nine months 2021 |
|---|---|---|---|---|
| Revenue | $4.90 million | $6.09 million | $19.65 million | $15.79 million |
| Gross profit | $2.52 million | $2.88 million | $10.95 million | $8.58 million |
| Gross margin | 51% | 47% | 56% | 54% |
| Operating income (loss) | $(1.07) million | $0.27 million | $0.68 million | $1.65 million |
| Net income (loss) | $(0.80) million | $1.34 million | $0.56 million | $2.53 million |
| Adjusted EBITDA | $(0.47) million | $0.52 million | $1.66 million | $2.27 million |
| Diluted EPS | $(0.07) | $0.12 | $0.05 | $0.25 |
At September 30, 2022, cash and cash equivalents were $15.67 million, working capital was $25.73 million, and total assets were $51.06 million. Total liabilities were $18.80 million and stockholders’ equity was $32.27 million.
Debt consisted primarily of an $8.34 million mortgage balance, including current and long-term portions, secured by the Chandler, Arizona property. The mortgage bears fixed interest at 3% and matures in August 2031, with a balloon payment of approximately $5.96 million at maturity. Operating lease liabilities totaled $1.40 million.
Cash used in operating activities was $1.45 million for the first nine months of 2022, compared with $1.36 million provided in the prior-year period. Cash used in investing activities was $2.44 million, including $2.32 million of property and equipment purchases. Cash used in financing activities was $0.14 million. Cash declined by $4.04 million from year-end 2021.
Material Changes Versus Prior Comparable Period
- Third-quarter revenue declined 19.5%, primarily because sales remained unbilled and had not yet been recognized. Unbilled revenue was $4.11 million at September 30, 2022.
- Nine-month revenue increased 24.5%, driven by more simulator systems and accessories completed, delivered and recognized.
- Nine-month gross margin improved to 56% from 54%, reflecting product mix. Third-quarter gross margin improved to 51% from 47%.
- Operating expenses increased 48.2% for the nine-month period, primarily due to the move into the new building, the Orlando location and higher payroll costs.
- Third-quarter and nine-month profitability declined substantially. The 2021 periods benefited from a $1.32 million gain from forgiveness of a PPP loan; no comparable gain occurred in 2022.
- Inventory increased to $9.77 million from $5.01 million at December 31, 2021, contributing significantly to operating cash use.
- Property and equipment increased to $14.59 million from $12.86 million, while the company added a new Orlando operating lease with a 61-month term beginning June 1, 2022.
- Common shares outstanding increased to 10,898,259 from 10,807,130 at year-end 2021, primarily from stock option exercises and equity-based awards.
Business, Outlook and Risks
- Bookings were $26.63 million for the first nine months of 2022, and reported backlog was $28.30 million at September 30, 2022. Management expected most first-nine-month bookings to convert to revenue in 2022 and early 2023, subject to customer delivery-date changes.
- Government customers represented 75% of nine-month revenue and 87% of third-quarter revenue. One federal agency represented 11.3% of nine-month revenue, 29.2% of third-quarter revenue and 36.3% of accounts receivable at September 30, 2022.
- Management stated that current capital resources should support operations and the current strategy for more than 12 months from the filing date, but noted that additional financing may be pursued for expansion and that financing may not be available on acceptable terms.
- COVID-19 restrictions and supply-chain and staffing challenges caused shipment and installation delays. Delayed orders generally remained in backlog, but management warned of possible lower revenue, lower gross margins and order cancellations.
- The company reported no significant direct exposure to Russia or Ukraine but stated that it could not evaluate the potential effects of the conflict.
- There was no pending litigation and no material off-balance-sheet arrangement reported.
- Management concluded that disclosure controls and procedures were not effective as of September 30, 2022 because of material weaknesses previously identified in the 2021 Form 10-K. The company stated that it was implementing more formal workflow review and documentation and additional ERP training.
Important Facts to Verify
- Whether the $4.11 million of unbilled revenue and the $28.30 million backlog convert to recognized revenue on the expected schedule.
- Whether elevated inventory levels normalize without increased reserves, write-downs or additional working-capital requirements.
- Whether operating expenses associated with the Chandler and Orlando facilities produce the expected capacity and revenue benefits.
- The concentration and collection risk associated with government customers, particularly the federal agency representing 36.3% of accounts receivable.
- Remediation progress and effectiveness of the company’s internal control improvements.
- The company’s ability to maintain liquidity while reporting negative operating cash flow and funding capital expenditures, lease commitments and mortgage obligations.
- The impact of supply-chain, staffing, installation and customer-delivery delays on revenue timing and gross margins.