Virtra, Inc. — Form 10-Q Summary
Reporting period: Three and nine months ended September 30, 2019; filed November 12, 2019. The unaudited interim statements cover VirTra, a provider of use-of-force, firearms, driving, software and related training simulators for law enforcement, military, educational and commercial markets.
Financial Performance and Position
| Metric | Q3 2019 | Q3 2018 | 9M 2019 | 9M 2018 |
|---|---|---|---|---|
| Total revenue | $6.71 million | $3.55 million | $12.82 million | $15.55 million |
| Gross profit | $3.76 million | $2.09 million | $7.07 million | $10.09 million |
| Gross margin | 55.9% | 58.8% | 55.2% | 64.9% |
| Operating income (loss) | $1.25 million | $0.08 million | $(0.09) million | $2.88 million |
| Net income (loss) | $0.94 million | $0.06 million | $(0.01) million | $2.09 million |
| Adjusted EBITDA | $1.36 million | $0.17 million | $0.34 million | $3.32 million |
| Operating cash flow | Not separately provided | Not separately provided | $0.28 million | $3.12 million |
Q3 revenue increased 89%, primarily because more simulator systems and accessories were completed, delivered and recognized. Nine-month revenue declined 18% because the prior-year period included a large 49-simulator order that did not recur. Product mix and volume contributed to the lower year-to-date gross margin.
At September 30, 2019, cash and cash equivalents were $3.38 million, certificates of deposit were $1.92 million, and working capital was $6.40 million. Total current assets were $12.17 million versus current liabilities of $5.77 million. The company reported no material bank debt; the prior-year current note payable was fully paid. Lease liabilities totaled $1.54 million following adoption of the new lease standard.
Total assets were $18.89 million and stockholders’ equity was $10.26 million. Inventory increased to $2.82 million from $1.61 million at December 31, 2018, while unbilled revenue increased to $2.11 million from $0.69 million. Deferred revenue totaled $4.61 million, including $3.01 million current and $1.60 million long-term.
Cash Flow, Liquidity and Capital Allocation
- Net cash provided by operating activities was $0.28 million for the first nine months, down from $3.12 million in the prior-year period.
- Investing activities provided $0.93 million, reflecting net certificate-of-deposit redemptions, partly offset by $0.49 million of capital expenditures and a $0.16 million intangible-asset purchase.
- Financing activities used $0.33 million, principally for $0.32 million of treasury-stock purchases.
- Cash increased by $0.88 million from December 31, 2018 to $3.38 million at September 30, 2019.
- Management stated that existing capital resources should support operations and the current strategy for more than 12 months, while noting that additional financing may be pursued for expansion.
Material Changes Versus Prior Comparable Period
- Q3 revenue, operating income and net income improved substantially, but nine-month revenue, gross profit, operating income and net income were materially below 2018 levels.
- Q3 gross margin declined 290 basis points; nine-month gross margin declined 970 basis points.
- Q3 operating expenses increased 25% to $2.51 million, primarily from labor, benefits, professional services, sales and marketing, and research and development. Nine-month operating expenses were essentially flat.
- International revenue increased to $0.82 million, or 12% of Q3 revenue, from $0.05 million, or 1%, in the prior-year quarter. Government customers remained the primary market, representing 82% of Q3 net sales and 84% of nine-month net sales.
- The company adopted ASC 842 on January 1, 2019, recording operating lease right-of-use assets and lease liabilities. It also purchased patents and relocated its machine shop within the Tempe business complex.
- Shares outstanding declined to 7,745,030 from 7,816,944 at December 31, 2018, reflecting treasury-stock purchases and cancellation, partly offset by option exercises.
Outlook, Commentary, Risks and Unusual Items
- Bookings were $7.8 million in Q3, and reported backlog was $11.3 million at September 30, 2019. Management estimated that the majority of Q3 bookings would convert to revenue during 2019, subject to customer delivery-date changes.
- No formal revenue or earnings guidance was provided. Management described plans to expand the core business, broaden product offerings and address new customer markets, with potential additional investment in sales, marketing and products.
- Customer concentration is significant: one federal agency represented 34% of Q3 net sales; one federal agency represented 41% of accounts receivable at quarter-end, and one international customer represented 24%.
- A trade note receivable was in default. VirTra obtained a September 2019 judgment for $396,575, but had an allowance of $369,286 against the receivable and suspended interest accrual after the last payment in February 2019.
- The company settled a former-customer dispute for $76,250; the settlement was fully paid by September 30, 2019.
- VirTra holds a related-party investment in That’s Eatertainment Corp. carried at $1.12 million and a related-party convertible note with principal and accrued interest of approximately $0.29 million. The note maturity was extended to August 2020.
- Internal controls over financial reporting were not effective as of September 30, 2019 because of material weaknesses previously identified in the 2018 Form 10-K. Management reported no material changes to remediation efforts during the quarter.
- Management identified significant estimation areas, including receivable collectability, inventory reserves, warranty obligations, deferred tax assets, long-lived assets, related-party investments and revenue allocation. Interim results may be seasonally variable.
Most Important Facts to Verify
- Whether the $11.3 million backlog and $7.8 million of Q3 bookings converted to revenue as management expected.
- The sustainability of the Q3 revenue rebound after the prior-year 49-simulator order created a difficult comparison for the nine-month period.
- Gross-margin recovery, given the decline to 55.2% for the first nine months from 64.9% in the prior-year period.
- Collection prospects for the defaulted trade note despite the court judgment and substantial allowance.
- The recoverability of the $2.38 million deferred tax asset and the $1.12 million related-party investment.
- Progress in remediating material weaknesses in internal controls.
- Customer concentration, inventory growth, unbilled revenue and deferred-revenue balances, which affect liquidity and revenue timing.