VirTra, Inc. Form 10-Q Summary
Business Context and Reporting Period
VirTra develops and sells judgmental use-of-force and firearms training simulators, software, accessories, training, installation and warranties for law enforcement, military and commercial customers worldwide. It also licenses technology to Modern Round Entertainment Corporation. This unaudited quarterly report covers the three months ended March 31, 2018, compared with the three months ended March 31, 2017.
Key Financial Metrics
| Metric | Q1 2018 | Q1 2017 | Change |
|---|---|---|---|
| Total revenue | $3.244 million | $4.209 million | Down $965,098 |
| Gross profit | $2.218 million | $2.430 million | Down $212,309 |
| Gross margin | 68% | 58% | Up 10 percentage points |
| Operating income/(loss) | $(158,213) | $473,655 | Declined $631,868 |
| Net income/(loss) | $(85,787) | $401,888 | Declined $487,675 |
| Adjusted EBITDA | $(46,362) | $617,436 | Declined $663,798 |
| Cash flow from operations | $(395,335) | $955,017 | Declined $1.350 million |
| Cash and equivalents | $4.518 million | $4.563 million | Period-end comparison |
Net sales were $3.198 million and royalties/licensing fees were $45,968. Basic and diluted loss per share was $0.01, compared with earnings per share of $0.05 in the prior-year quarter.
At March 31, 2018, working capital was $5.292 million, down from $5.710 million at December 31, 2017. Total liabilities were $4.071 million, including $22,500 of current and long-term notes payable. The company reported no material off-balance-sheet arrangements.
Material Changes Versus the Prior Comparable Period
- Revenue decreased 23%, primarily because simulator revenue declined $715,310 and accessories revenue declined $379,131. Higher scenario, warranty and licensing revenue partially offset the decline.
- Cost of sales decreased 42% to $1.026 million, reflecting lower volume, greater use of the company’s machine shop and favorable supplier pricing.
- Gross margin expanded to 68% from 58% because of lower production costs and a higher-margin product mix.
- Operating expenses increased 21% to $2.376 million. General and administrative costs rose due to higher staffing, compensation, professional services and public-company expenses, including approximately $132,000 of non-recurring legal and public-company costs related to the Regulation A+ offering, SEC registration and Nasdaq listing.
- The company adopted ASC Topic 606 using the modified retrospective method on January 1, 2018. Management stated that adoption did not materially affect the financial statements.
- Cash declined $562,825 during the quarter, compared with an increase of $859,742 in Q1 2017. Investing cash use increased primarily because property and equipment purchases rose to $167,490.
- A customer converted a $400,906 past-due trade receivable into an unsecured promissory note bearing 10% annual interest. No allowance was recorded against the note at March 31, 2018.
Guidance, Outlook, Risks and Unusual Items
- Management stated that current capital resources are expected to support operations and the current business strategy for more than 12 months.
- The company received $8.6 million of new signed bookings during the quarter, including $247,000 of extended warranties. Management estimated that more than 50% would convert to revenue within six months; reported backlog at March 31, 2018 was approximately $8.3 million.
- Backlog conversion depends on customer delivery schedules and contract modifications. Extended-warranty revenue is recognized over one to four years.
- Liquidity risk is highlighted by negative operating cash flow, increased inventory, reduced deferred revenue and the conversion of a past-due receivable into a note.
- The company’s investment in Modern Round is accounted for using a cost-minus-impairment approach. A $613,241 impairment was recorded in 2017; no additional impairment was recorded in Q1 2018.
- Operating leases for the corporate office and machine shop expire in April 2019 and September 2018, respectively. Remaining minimum lease payments disclosed at quarter-end totaled $366,244.
- Management reported no material litigation, threatened litigation that may materially affect the company, defaults, unregistered equity sales or material changes in internal controls. Disclosure controls were deemed effective.
- The company cautioned that quarterly results are not necessarily indicative of future periods and that forward-looking statements are subject to execution, customer demand, delivery timing and other risks.
Important Facts for Investors to Verify
- Verify the timing and collectability of the $400,906 customer note, including the absence of a recorded allowance.
- Monitor conversion of the $8.3 million backlog and the $8.6 million of first-quarter bookings into recognized revenue and cash collections.
- Assess whether the improved gross margin can offset lower volume and the expanded operating expense base.
- Track operating cash flow, inventory growth, deferred revenue reductions and remaining cash liquidity.
- Review the valuation and potential impairment risk of the Modern Round investment.
- Confirm the effect of the February 2018 one-for-two reverse stock split on historical share and per-share information.