VirTra, Inc. 2018 Form 10-K Summary
Reporting period: Fiscal year ended December 31, 2018. The filing is an annual report, not a standalone fourth-quarter report. VirTra develops and sells use-of-force and marksmanship training simulators, software, accessories, installation, training and warranty services for law enforcement, military, educational and civilian customers. The company also licenses technology to That’s Eatertainment Corp. (“TEC”), formerly Modern Round Entertainment Corp.
Financial performance and position
| Metric | 2018 | 2017 | Change |
|---|---|---|---|
| Total revenue | $18.08 million | $16.52 million | Up 9% |
| Gross profit | $11.05 million | $10.23 million | Up 8% |
| Gross margin | 61.1% | 61.9% | Down 0.8 percentage points |
| Operating income | $999,901 | $1.31 million | Down 23% |
| Net income | $818,092 | $3.26 million | Down 75% |
| Basic diluted EPS | $0.10 / $0.10 | $0.41 / $0.39 | Lower year over year |
| Adjusted EBITDA | $1.95 million | $1.81 million | Up 8% |
| Cash flow from operations | $1.83 million | $2.65 million | Down 31% |
| Cash and cash equivalents | $2.50 million | $5.08 million | Down $2.58 million |
| Certificates of deposit | $3.49 million | None reported | New balance in 2018 |
| Working capital | $6.77 million | $5.71 million | Up $1.06 million |
| Total debt | $11,250 | $22,500 | Substantially repaid |
Revenue growth was driven by higher simulator sales, recurring extended-warranty revenue and royalty/licensing fees. Product and related sales were $17.52 million, TEC royalties were $549,568 and other royalties were $7,645. One federal agency represented 34% of total 2018 net sales, indicating significant customer concentration.
Cash flow, liquidity and capital allocation
- Operating cash flow was positive at $1.83 million.
- Investing cash outflow was $3.78 million, primarily reflecting purchases of certificates of deposit and $292,827 of property and equipment.
- Financing cash outflow was $625,312, primarily reflecting treasury-stock purchases, stock-option repurchases and debt repayment.
- Management stated that existing capital resources were adequate to support operations and the current strategy for more than 12 months from the filing date, while noting that additional financing may be pursued for expansion.
- The company reported approximately $6.8 million of backlog at year-end and $2.3 million of new signed bookings during 2018. Management estimated that more than half of fourth-quarter 2018 bookings would convert to revenue by March 31, 2019.
Material changes versus 2017
- Revenue increased 9%, but operating expenses rose 13% to $10.05 million, reflecting higher staffing, related costs, research and development and bad-debt allowances.
- Operating margin declined as cost of sales and operating expenses grew faster than revenue.
- Net income fell sharply primarily because 2017 included a $2.71 million income-tax benefit from reversing a deferred-tax valuation allowance. In 2018, the company recorded $309,998 of tax expense.
- The 2018 results included a $254,933 impairment of the TEC investment, recorded in operating expenses. The comparable 2017 impairment was $613,241 and was recorded outside operating income.
- Adjusted EBITDA increased despite lower GAAP net income, reflecting the tax-benefit comparison and other adjustments.
- Cash declined, but the company shifted $3.49 million into short-term certificates of deposit and increased working capital.
- VirTra adopted ASC 606 revenue recognition and stated that adoption did not materially affect its financial statements.
- VirTra’s common stock began trading on Nasdaq under “VTSI” on March 29, 2018, following a 1-for-2 reverse stock split effective March 2, 2018.
Related-party matters and unusual items
- VirTra owns approximately 5.9% of TEC and recognized $549,568 of TEC royalty income in 2018, up from $289,947 in 2017.
- At December 31, 2018, VirTra held a $292,138 principal balance under a convertible TEC note, with principal and accrued interest due no later than August 1, 2019; the filing reports no reserve against this note.
- VirTra recorded a $266,813 allowance against an unsecured customer note receivable converted from a past-due trade receivable.
- The company repurchased 98,063 shares in 2018 at an average price of $3.89 per share and reported approximately $506,000 remaining under the repurchase plan at year-end.
- In January 2019, the board authorized an additional $1 million for repurchases. By March 28, 2019, an additional 68,239 shares had been purchased at an average cost of $3.82 per share.
- In February 2019, VirTra completed an asset purchase from Tiberius Technology, LLC involving certain patents, inventory and consulting services; purchase consideration was not provided in the filing text.
Outlook, risks and contingencies
- Management’s strategy centers on expanding the core simulator business, increasing the addressable market, broadening products and using partners or acquisitions.
- Substantially all revenue is derived directly or indirectly from government agencies. Budget reductions, delayed appropriations, contract cancellations, shorter awards and changes in procurement practices could materially affect revenue and cash flow.
- The company faces competition from larger and better-resourced providers, including Arotech, Cubic, Laser Shot, Meggitt Training Systems and Ti Training.
- International sales are subject to export controls, ITAR, licensing requirements, sanctions and anti-bribery laws. Licensing delays or noncompliance could delay shipments, restrict exports or result in penalties.
- Supplier interruptions, product liability claims, intellectual-property disputes, inability to protect proprietary technology and dependence on key executives are identified risks.
- VirTra reported material weaknesses in internal control over financial reporting as of December 31, 2018, citing insufficient levels of management review for complex accounting issues and inadequate system and manual controls. Management concluded that disclosure controls and internal control over financial reporting were not effective.
- The company initiated a declaratory judgment action against a former customer concerning breach-of-contract and warranty allegations. Management recorded a probable estimated loss contingency of $40,000 and stated that the matter was not expected to have a material adverse effect.
- VirTra had approximately $1.96 million of future minimum operating lease payments as of December 31, 2018. It expected adoption of ASC 842 in 2019 to add approximately $400,000 of right-of-use assets and lease liabilities.
- The company has never paid cash dividends and does not expect to pay dividends in the foreseeable future.
Most important facts for investors to verify
- Whether simulator bookings and the approximately $6.8 million backlog convert to revenue as expected.
- The sustainability of revenue growth given government-customer concentration, including the 34% contribution from one federal agency.
- Whether operating expenses can be controlled while VirTra expands staffing, research and development, sales and marketing.
- The collectability and repayment or conversion of the TEC note and the customer note subject to the $266,813 allowance.
- The carrying value and future royalty economics of the TEC investment and related-party licensing arrangement.
- Management’s remediation of the reported material weaknesses in internal controls.
- The terms and strategic impact of the February 2019 Tiberius Technology asset acquisition.
- Actual cash availability after certificates of deposit, stock repurchases, lease commitments and other working-capital requirements.