Virtra, Inc. — Form 10-Q Summary
Business Context and Reporting Period
VirTra develops and sells use-of-force, firearms and judgmental training simulators, software, accessories and related services for law enforcement, military, educational and civilian customers. It also licenses technology to That’s Eatertainment Corp. The unaudited report covers the three months ended March 31, 2019, with comparison to March 31, 2018. VirTra is a smaller reporting company and emerging growth company.
Financial Performance and Position
| Metric | Q1 2019 | Q1 2018 | Change |
|---|---|---|---|
| Total revenue | $3.051 million | $3.289 million | Down 7% |
| Gross profit | $1.800 million | $2.263 million | Down 20% |
| Gross margin | 56.3% | 68.7% | Down 12.4 percentage points |
| Operating loss | $457,103 | $158,213 | Loss increased 189% |
| Net loss | $312,902 | $85,787 | Loss increased 265% |
| Adjusted EBITDA | $(278,119) | $(46,362) | Loss increased 500% |
| Net loss per share | $(0.04) | $(0.01) | Unfavorable change |
- Revenue consisted primarily of simulator and accessory sales, extended service warranties, customized software, installation and training, and royalties. Simulator and accessory revenue declined, while extended warranty revenue increased to $510,474 from $486,509.
- Cost of sales increased 22% to $1.251 million, primarily because of the type and quantity of systems sold and higher direct material costs.
- Operating expenses declined 7% to $2.258 million, reflecting lower labor, benefits, professional services, public-company costs, research and development and bad-debt expense.
- Cash used in operations was $900,598, compared with $395,335 used in Q1 2018. Investing cash usage was $52,363, and financing cash usage was $260,842 for treasury-stock repurchases.
- Cash and cash equivalents were $1.287 million at March 31, 2019, compared with $2.500 million at December 31, 2018. Certificates of deposit totaled $3.290 million, producing combined cash and certificates of deposit of approximately $4.577 million.
- Working capital was $5.547 million, down from $6.769 million at December 31, 2018.
- Total assets were $16.763 million and total liabilities were $6.739 million at quarter-end. Stockholders’ equity was $10.024 million.
- Debt was limited: current notes payable were $11,250. Operating lease liabilities totaled $1.664 million after adoption of ASC 842. The filing does not identify material bank debt.
Material Changes Versus the Prior Comparable Period
- Revenue declined 7%, but cost of sales increased 22%, causing gross margin to fall from 68.7% to 56.3% and producing a substantially larger operating and net loss.
- Operating cash usage more than doubled, primarily reflecting the higher net loss and increases in unbilled revenue, prepaid expenses and other working-capital needs.
- The company adopted the new lease standard on January 1, 2019, recording a $1.605 million operating lease right-of-use asset at March 31, 2019 and $1.664 million of lease liabilities.
- VirTra purchased a $160,000 patent-related intangible asset during the quarter.
- The company repurchased 68,239 shares for $260,842, and all 78,946 treasury shares held during the quarter were cancelled. An additional 14,450 shares were repurchased in April 2019.
- New bookings were $5.3 million, down from $8.6 million in Q1 2018, while ending backlog increased to approximately $9.0 million from $8.3 million.
Outlook, Commentary, Risks and Unusual Items
- Management stated that current capital resources should support operations and the current strategy for more than 12 months from the filing date. No formal revenue or earnings guidance was provided.
- Management expects the majority of Q1 2019 bookings to convert to revenue during 2019, although delivery dates and contract terms may change at customers’ requests.
- Management remains focused on expanding the core simulator business, increasing the total addressable market, broadening product offerings, and using partnerships or acquisitions. Additional financing may be pursued, but availability and terms are not assured.
- Customer concentration is material: one federal agency represented 12% of Q1 sales; at March 31, 2019, one federal agency represented 40% of accounts receivable and one state agency represented 14%.
- Cash and cash equivalents included $1.138 million of uninsured amounts at March 31, 2019. Notes receivable are unsecured; the company maintained a $266,813 allowance against certain notes.
- The company held a $1.120 million cost-basis investment in That’s Eatertainment, approximately 5.9% of that company, and a related-party note receivable of $301,876 due August 1, 2019. Q1 royalty revenue from the related party was $39,637.
- VirTra accrued a $76,250 loss contingency related to litigation with a former customer. In April 2019, the customer verbally accepted a $76,250 settlement offer, with a formal agreement in process.
- The company reported that its disclosure controls and procedures were not effective as of March 31, 2019 because of material weaknesses identified in its 2018 Form 10-K. No material change in internal control was reported during the quarter.
- The company records a $2.507 million net deferred tax asset and reported that no valuation allowance was considered necessary. Realization depends on future taxable income.
- Interim results may be seasonally variable and are not necessarily indicative of full-year performance.
Important Facts for Investors to Verify
- Whether the lower Q1 gross margin reflects temporary product mix and shipment timing or a more persistent change in economics.
- Conversion timing and collectability of the approximately $9.0 million backlog, including customer contract modifications.
- Cash-burn trends, working-capital requirements and the company’s ability to fund operations without additional financing.
- Progress in remediating the material weaknesses in disclosure and internal controls.
- Collectability and maturity of the related-party note and the valuation of the That’s Eatertainment investment.
- Resolution and final terms of the former-customer litigation settlement.
- Exposure to federal and state agency concentration and uninsured cash balances.