VirTra, Inc. 2020 Form 10-K Summary
Reporting period: Fiscal year ended December 31, 2020. The filing was signed March 29, 2021 and includes audited financial statements for 2020 and 2019. Although the request references 2020 Q4, this filing is an annual Form 10-K; quarterly results are not separately presented in the provided text.
Business context
VirTra provides judgmental use-of-force, firearms and driving simulators, related software, scenarios, training, warranties and accessories to law enforcement, military, educational and commercial customers. Operations are based in Tempe, Arizona, with sales to U.S. and international markets. Government customers represented 91% of total 2020 revenue, creating substantial exposure to government budgets, appropriations and contract timing.
2020 financial and operating metrics
| Metric | 2020 | 2019 | Change |
|---|---|---|---|
| Total revenue | $19.09 million | $18.71 million | +2.0% |
| Gross profit | $11.90 million | $9.71 million | +22.5% |
| Gross margin | 62.3% | 51.9% | +10.4 percentage points |
| Income from operations | $1.23 million | $0.26 million | +367.4% |
| Net income (loss) | $1.48 million | $(0.08) million | Improved by $1.55 million |
| Basic and diluted EPS | $0.19 | $(0.01) | Improved |
| Adjusted EBITDA | $2.79 million | $1.07 million | +161% |
| Cash flow from operations | $2.25 million | $(1.91) million | Improved by $4.16 million |
| Cash and cash equivalents | $6.84 million | $1.42 million | + $5.43 million |
| Working capital | $10.27 million | $7.17 million | +43.1% |
Revenue growth reflected increases in simulator sales, STEP subscription revenue, accessories, curriculum and training, and recurring extended-warranty revenue. Cost of sales declined 20.1% to $7.19 million, reflecting lower material, service, warranty and travel costs and increased STEP sales, for which equipment costs are capitalized and amortized.
Operating expenses increased 12.9% to $10.67 million. The 2020 results included a $840,000 impairment of the TEC investment and a $346,477 allowance for bad debt on accounts and notes receivable. Income tax expense was a benefit of $218,800 in 2020 versus expense of $446,725 in 2019, primarily due to deferred-tax and prior-year tax adjustments.
Liquidity, debt and capital resources
- Cash increased to $6.84 million from $1.42 million. Certificates of deposit declined to zero from $1.92 million as management prioritized liquid cash during the pandemic.
- Operating cash flow was $2.25 million, investing cash flow was $1.85 million and financing cash flow was $1.33 million.
- VirTra received a $1.32 million Paycheck Protection Program loan. At year-end, $266,037 was classified as current debt and $1.06 million as long-term debt. The loan bears 1% interest, matures May 8, 2022, and may be forgiven in whole or in part; the filing states that no assurance exists that forgiveness will be obtained.
- Management believes existing capital resources are adequate to continue operations and the current strategy for more than 12 months from filing, but may seek additional capital for acquisitions, capacity, products, sales and marketing.
- No cash dividends were paid or planned. The $2 million authorized stock repurchase program was suspended while the PPP loan remains outstanding, and no shares were repurchased in 2020.
Material changes versus 2019
- Revenue increased modestly, while gross profit, operating income and net income improved substantially due mainly to lower cost of sales and a more favorable sales mix.
- Government revenue increased to $17.35 million, or 91% of total revenue, from $15.34 million, or 82%, in 2019. International revenue declined to $443,163 from $2.51 million.
- STEP revenue increased to $794,524, or 4% of total net sales, from $191,289, or 1%.
- Fourth-quarter bookings were $5.5 million and year-end backlog was $14.6 million. Management expects most fourth-quarter bookings to convert to revenue in 2021, subject to delivery and installation changes.
- The TEC investment was fully impaired in 2020, with an $840,000 charge, compared with a $280,000 impairment in 2019. The related note receivable and accrued interest, totaling $311,367, were fully reserved due to collectability concerns.
- VirTra increased inventory to $3.52 million from $1.95 million and deferred revenue to $6.63 million from $4.24 million, reflecting changes in production, customer deposits, warranties and subscription arrangements.
- Management reported material weaknesses in internal control over financial reporting and concluded that disclosure controls were not effective as of December 31, 2020.
Outlook, risks and unusual items
- COVID-19 reduced customer shipments and system installations and delayed revenue recognition, although management reported no order cancellations and stated that delayed orders remained in backlog. The ultimate effect on revenue, margins, liquidity and capital resources could not be reasonably estimated.
- Key risks include dependence on government contracts, government budget reductions or procurement delays, competition from larger companies, supplier and manufacturing disruptions, export-control requirements, product liability, intellectual-property disputes and dependence on key executives.
- The company faces customer and receivable concentration. One agency represented 16% of 2020 revenue; one federal agency and one state agency represented 8.5% and 31% of accounts receivable, respectively, at year-end.
- The TEC relationship generated $45,247 of royalty revenue in 2020 versus $130,625 in 2019. TEC ceased to be a related party in October 2020 following the death of former director and TEC majority stockholder Mitchell Saltz.
- The filing provides no formal revenue, earnings or margin guidance. Management’s stated strategy is to build the core business, expand the addressable market, broaden products and pursue partners or acquisitions.
- The independent auditor issued an unqualified opinion on the financial statements but was not engaged to audit internal control effectiveness because VirTra qualified as a smaller reporting company and emerging growth company.
Investor verification checklist
- Verify the extent and timing of PPP loan forgiveness and any remaining repayment obligations.
- Assess whether the $14.6 million backlog and $5.5 million of fourth-quarter bookings converted to revenue during 2021.
- Review remediation plans and subsequent disclosures concerning the reported material weaknesses in internal controls.
- Evaluate the sustainability of the 62.3% gross margin and the effect of STEP equipment capitalization and amortization.
- Monitor government funding, contract awards, customer concentration and international sales recovery.
- Assess collectability of customer receivables and the financial condition of TEC, including the fully reserved note receivable and impaired investment.
- Review COVID-19 effects on supply chains, installations, customer budgets and future demand.