Virtra, Inc. Form 10-Q Summary
Reporting period: Three and six months ended June 30, 2020; filed August 11, 2020. The unaudited statements cover VirTra, a provider of judgmental use-of-force, firearms and driving simulators for law enforcement, military, educational and commercial customers.
Financial Highlights
| Metric | Q2 2020 | Q2 2019 | Six Months 2020 | Six Months 2019 |
|---|---|---|---|---|
| Total revenue | $2.77 million | $3.05 million | $6.11 million | $6.11 million |
| Gross profit | $1.58 million | $1.52 million | $3.17 million | $3.32 million |
| Gross margin | 57.0% | 49.6% | 51.9% | 54.3% |
| Operating loss | $(0.82) million | $(0.88) million | $(1.33) million | $(1.34) million |
| Net loss | $(0.60) million | $(0.63) million | $(0.99) million | $(0.95) million |
| Adjusted EBITDA | $(0.58) million | $(0.68) million | $(0.98) million | $(1.02) million |
Q2 revenue declined 9%, primarily because COVID-19 travel restrictions reduced equipment installations. Six-month revenue was essentially flat, as increased simulator orders and deliveries offset pandemic-related delays. Q2 gross profit increased 4%, supported primarily by lower warranty costs, while six-month gross profit declined 4% because of product mix and sales-volume differences.
Government customers represented 87% of six-month revenue, compared with 87% in the prior-year period. Commercial customers represented 6% and international customers 7%, compared with 4% and 9%, respectively, in the prior-year period.
Cash Flow, Liquidity and Debt
- Cash and cash equivalents were $3.78 million at June 30, 2020, compared with $1.42 million at December 31, 2019. Certificates of deposit were $0.24 million, down from $1.92 million.
- Working capital was $6.86 million, compared with $7.17 million at year-end 2019.
- Six-month operating cash flow was $(0.29) million, compared with $(1.93) million in 2019. Investing cash flow was $1.33 million, primarily from certificate-of-deposit redemptions. Financing cash flow was $1.33 million, primarily from the PPP loan.
- Total debt consisted of a $1.32 million Paycheck Protection Program note, with $0.43 million classified as current and $0.89 million as long-term. The note bears 1% interest, is scheduled to mature in May 2022, and may be forgiven in whole or in part if qualifying expenses and program requirements are satisfied.
- Total liabilities were $9.11 million and stockholders’ equity was $9.20 million at June 30, 2020. Operating lease liabilities totaled $1.33 million.
- Management stated that existing capital resources should support operations and the current business strategy for more than 12 months from the filing date.
Material Changes and Operating Developments
- Bookings totaled approximately $5.9 million in Q2, and reported backlog was approximately $14.3 million at June 30, 2020. Management expected most Q2 bookings to convert to revenue during 2020, subject to customer delivery changes and COVID-19 restrictions.
- The company remained open as an essential business in Arizona, with most employees working remotely and essential personnel operating manufacturing and production facilities.
- COVID-19 caused delayed shipments and installations, but management reported no order cancellations; delayed orders remained in backlog. The company cautioned that further delays could reduce recognized revenue and gross margin.
- VirTra stopped investing in certificates of deposit to increase immediately available cash and suspended its stock repurchase program while the PPP loan remained outstanding.
- VirTra recorded a $140,000 impairment of its investment in related party That’s Eatertainment Corp. The related investment was carried at $700,000 at June 30, 2020, down from $840,000 at year-end 2019.
- The related-party convertible note receivable had principal and accrued interest of $304,089 at June 30, 2020 and was extended after quarter-end from August 2020 to August 2023. The note is unsecured and had a $12,979 collectability reserve.
Outlook, Risks and Unusual Items
- The filing provides no formal revenue or earnings guidance. Management’s outlook assumes continued access to capital resources but acknowledges uncertainty regarding COVID-19 duration and effects on shipments, installations, liquidity and financial results.
- The company is heavily concentrated in government customers and individual agencies accounted for significant portions of revenue and accounts receivable. At June 30, 2020, one state agency represented 41% of accounts receivable, one international customer 14%, and one federal agency 13%.
- PPP loan forgiveness is not assured. Any unforgiven balance could require repayment of principal and interest under the stated loan terms.
- VirTra reported no threatened litigation at the filing date and no material off-balance-sheet arrangements.
- Management concluded that disclosure controls and procedures were not effective as of June 30, 2020 because of material weaknesses previously identified in the 2019 Form 10-K. No material change in internal control over financial reporting occurred during the quarter.
- The company continues to report operating and net losses, and its accumulated deficit increased to $4.70 million from $3.71 million at December 31, 2019.
Investor Verification Points
- Verify the timing of backlog conversion, including whether COVID-19 delays affect 2020 revenue, gross margin or customer installations.
- Confirm the amount of PPP loan forgiveness ultimately obtained and the repayment obligations for any unforgiven balance.
- Assess government-customer concentration and the collectability and timing of significant accounts receivable.
- Monitor the value and collectability of the related-party investment and convertible note receivable from That’s Eatertainment.
- Review remediation of the disclosed material weaknesses in disclosure controls and internal control over financial reporting.
- Evaluate the company’s ability to fund ongoing operating losses and capital needs without additional financing.