VirTra, Inc. — Form 10-Q Summary
Reporting period: Three and nine months ended September 30, 2020; filed November 10, 2020. VirTra develops and sells judgmental use-of-force, firearms, driving and related training simulators for government, military, educational and commercial customers. The unaudited interim statements are prepared under U.S. GAAP.
Key Financial Metrics
| Metric | Q3 2020 | Q3 2019 | 9M 2020 | 9M 2019 |
|---|---|---|---|---|
| Total revenue | $6.414 million | $6.713 million | $12.522 million | $12.819 million |
| Gross profit | $3.967 million | $3.756 million | $7.140 million | $7.071 million |
| Gross margin | 61.9% | 55.9% | 57.0% | 55.2% |
| Operating income (loss) | $1.219 million | $1.246 million | $(0.115) million | $(0.094) million |
| Net income (loss) | $0.868 million | $0.937 million | $(0.123) million | $(0.010) million |
| Adjusted EBITDA | $1.594 million | $1.362 million | $0.615 million | $0.339 million |
| Operating cash flow | Not separately provided for the quarter | $(0.167) million | $0.283 million |
Q3 revenue declined 4%, while nine-month revenue declined 2%. Gross profit increased 6% in Q3 and 1% year to date, primarily reflecting lower direct material and travel costs and a more favorable mix. Operating expenses increased 10% in Q3 and 1% year to date. Q3 results included a $266,000 impairment of the related-party That’s Eatertainment investment; the nine-month impairment was $406,000.
Liquidity, Debt and Balance Sheet
- Cash and cash equivalents were $4.097 million at September 30, 2020, compared with $1.415 million at December 31, 2019. Certificates of deposit declined from $1.915 million to zero.
- Working capital was $7.724 million, compared with $7.173 million at year-end 2019.
- Total assets were $19.524 million and total liabilities were $9.472 million at September 30, 2020.
- Inventory increased to $3.442 million from $1.949 million, and unbilled revenue was $3.689 million.
- The company recorded a $1.321 million Paycheck Protection Program loan, with $601,696 classified as current and $724,265 as long-term debt, including accrued interest. The loan bears interest at 1% and matures in May 2022. Forgiveness had not been assured.
- Operating lease liabilities totaled $1.251 million. The company reported no finance leases and no material off-balance-sheet arrangements.
Material Changes Versus Prior Comparable Period
- COVID-19 travel restrictions reduced equipment shipments and installations. Management reported delayed orders rather than cancellations, with delayed orders remaining in backlog.
- Government customers represented 96% of Q3 revenue versus 81% in the prior-year quarter; international revenue fell to less than 1% from 12%.
- Q3 bookings were $6.5 million and reported backlog was $14.4 million at September 30, 2020. Management expected most Q3 bookings to convert to revenue during 2020, subject to customer and pandemic-related changes.
- Operating cash flow turned negative year to date, primarily due to higher inventory, accounts receivable and other operating assets.
- The company suspended its stock repurchase program while the PPP loan remained outstanding. It issued 22,500 shares from option exercises during the first nine months.
- The carrying value of the related-party That’s Eatertainment investment declined to $434,000 from $840,000 after impairment charges. The related unsecured convertible note had principal and accrued interest of $307,728 and a maturity extended to August 2023.
Outlook, Risks and Unusual Items
- Management stated that current capital resources should support operations and the existing strategy for more than 12 months from the filing date, but additional financing may be pursued for growth, acquisitions and expanded sales and marketing.
- The duration and ultimate financial impact of COVID-19 could not be reasonably estimated. Further shipment or installation delays could reduce recognized revenue and gross margin.
- Revenue is highly concentrated in government customers and a small number of federal agencies. Two federal agencies accounted for 42% of Q3 revenue; one federal agency and one state agency represented 45% and 18% of accounts receivable, respectively.
- The PPP loan may be forgiven in whole or in part, but no assurance was provided. Any unforgiven amount would require repayment under the loan terms.
- The company recorded a deferred tax asset of $1.712 million and concluded that full realization was more likely than not; no valuation allowance was recorded.
- Management concluded that disclosure controls and procedures were not effective as of September 30, 2020 because of previously identified material weaknesses. No material change in internal control over financial reporting occurred during the quarter.
- No threatened litigation was reported, and no material legal contingencies were identified.
Investor Verification Checklist
- Confirm the status and ultimate forgiveness amount of the $1.321 million PPP loan.
- Assess whether the $14.4 million backlog and $6.5 million of Q3 bookings converted to revenue as projected.
- Monitor COVID-19 effects on customer installations, shipment timing, gross margins and government procurement.
- Evaluate customer and government-agency concentration, including collection risk in accounts receivable.
- Review the recoverability of the That’s Eatertainment investment and related-party convertible note.
- Review remediation of the disclosed material weaknesses in internal controls.
- Reconcile non-GAAP adjusted EBITDA to GAAP results and consider the effects of the related-party impairment and other adjustments.