VirTra, Inc. Form 10-Q Summary
Business context and reporting period
VirTra develops and sells use-of-force and firearms training simulators, software, content, accessories and related services for law enforcement, military and commercial customers. It also licenses technology to Modern Round Entertainment Corporation (MREC) for indoor shooting-experience locations.
The filing covers the three and nine months ended September 30, 2017, compared with the corresponding 2016 periods. The financial statements are unaudited. VirTra identified itself as a smaller reporting company and emerging growth company. The filing states that required Exchange Act reports had not all been filed during the preceding 12 months.
Financial performance and liquidity
| Metric | Q3 2017 | Q3 2016 | 9M 2017 | 9M 2016 |
|---|---|---|---|---|
| Total revenue | $4.686 million | $3.042 million | $14.147 million | $12.650 million |
| Gross profit | $3.113 million | $1.697 million | $9.294 million | $7.793 million |
| Gross margin | 66% | 56% | 66% | 62% |
| Operating income/(loss) | $752 thousand | $(4) thousand | $2.846 million | $2.429 million |
| Net income/(loss) | $742 thousand | $(10) thousand | $2.792 million | $2.361 million |
| Adjusted EBITDA | $874 thousand | $93 thousand | $3.259 million | $2.690 million |
| Cash flow from operations | Not separately provided | Not separately provided | $2.550 million | $2.570 million |
Q3 revenue increased approximately 54%, while nine-month revenue increased approximately 12%. Nine-month net income increased approximately 18%. Revenue growth reflected higher simulator, accessory, warranty and service sales, together with increased royalty revenue.
Gross margin expansion was attributed to lower manufacturing costs, favorable raw-material pricing and a greater mix of higher-margin training, service and warranty revenue. Operating expenses increased to $2.361 million in Q3 and $6.447 million for the nine-month period, primarily because of higher staffing, compensation, sales and marketing, research and development, and information-technology costs.
Cash and cash equivalents were $5.106 million at September 30, 2017, compared with $3.704 million at December 31, 2016. Working capital was $7.360 million versus $5.269 million. Net cash increased $1.403 million during the first nine months, after $83 thousand of investing outflows and $1.064 million of financing outflows.
Total liabilities were $4.931 million, including $22.5 thousand of notes payable and $2.753 million of deferred revenue. The company reported no material off-balance-sheet arrangements. Management stated that existing capital resources were expected to support operations for more than 12 months, but indicated that additional financing may be sought to expand products, sales and marketing.
Material changes versus the prior comparable period
- Revenue increased from $3.042 million to $4.686 million in Q3 and from $12.650 million to $14.147 million for the first nine months.
- Gross margin improved from 56% to 66% in Q3 and from 62% to 66% for the first nine months.
- Operating results improved from near break-even in Q3 2016 to $752 thousand of operating income in Q3 2017.
- Cash from operations remained broadly stable year over year despite higher reported net income, partly reflecting a $1.617 million increase in unbilled revenue.
- Investment in MREC increased to $1.988 million, including $1.516 million of noncash value assigned to vested VirTra warrants associated with the MREC investment.
- VirTra repurchased 20,939 shares for approximately $96.6 thousand during the first nine months. The repurchase program was suspended on October 18, 2017 in connection with a planned Regulation A offering.
Outlook, commentary, risks and unusual items
The filing provides no specific revenue, earnings or margin guidance. Management cited opportunities to expand products and services, sales and marketing efforts, and market participation, but warned that financing may not be available on acceptable terms. If financing is unavailable, expansion plans may be reduced.
MREC-related items were significant. VirTra recognized $245 thousand of royalty revenue during the first nine months, compared with $48 thousand in the prior-year period. In August 2017, VirTra agreed to repurchase two tranches of MREC-related warrants for $773 thousand; after applying a $118 thousand minimum royalty payment, the net cash payment was $655 thousand. The agreement also established minimum royalty requirements of $560 thousand for the June 2017–May 2018 period to preserve MREC’s exclusive license.
VirTra settled an employment-related wage lawsuit involving a former employee and additional opt-in parties. The filing contains inconsistent settlement totals of $100,300 and $106,030. Management stated that the matter was not expected to materially affect earnings, cash flows or financial position.
Operating lease commitments totaled approximately $518 thousand through 2019. The company disclosed estimates and judgments involving stock compensation, receivables, inventory reserves, warranty obligations, long-lived assets, income-tax valuation allowances and the MREC investment. Revenue recognition and lease accounting standards were pending adoption; management did not expect the revenue standard to materially affect current revenue streams.
Disclosure controls and internal control over financial reporting had not yet been evaluated because of a transition period for newly public companies. No material change in internal control was reported during the quarter.
Facts investors should verify
- Reconcile the filing’s inconsistent employment-litigation settlement amounts and confirm all payments and accounting treatment.
- Assess the collectability and timing of the $1.725 million of unbilled revenue and the $2.753 million of deferred revenue.
- Review MREC’s ability to satisfy the $560 thousand minimum royalty requirement and the valuation and related-party implications of the MREC investment and warrant transactions.
- Confirm the company’s delinquent filing status, the timing of subsequent filings and the status of its disclosure-control evaluation.
- Verify the availability of financing for planned expansion and the effect of the suspended repurchase program and planned Regulation A offering.
- Evaluate the sustainability of the 66% gross margin given increased operating expenses and the company’s dependence on simulator sales, government and institutional customers, and licensing activity.