VirTra, Inc. Form 10-Q Summary
Business Context and Reporting Period
VirTra develops and sells use-of-force and firearms training simulators, software, accessories, installation, training and warranties for law enforcement, military and commercial customers. The company also licenses technology to That’s Eatertainment Corp. (TEC), formerly Modern Round Entertainment Corp. The unaudited report covers the three and nine months ended September 30, 2018, filed November 13, 2018. VirTra was a smaller reporting company and emerging growth company.
Key Financial Metrics
| Metric | Q3 2018 | Q3 2017 | 9M 2018 | 9M 2017 |
|---|---|---|---|---|
| Total revenue | $3.55 million | $4.69 million | $15.50 million | $14.15 million |
| Gross profit | $2.08 million | $3.11 million | $10.04 million | $9.29 million |
| Gross margin | 59% | 66% | 65% | 66% |
| Operating income | $79,538 | $751,818 | $2.88 million | $2.85 million |
| Net income | $61,000 | $742,125 | $2.09 million | $2.79 million |
| Adjusted EBITDA | $173,542 | $874,356 | $3.32 million | $3.26 million |
| Diluted EPS | $0.01 | $0.09 | $0.25 | $0.33 |
For the nine months, net cash provided by operating activities was $3.16 million, compared with $2.55 million in the prior-year period. Capital expenditures were $292,827, compared with $83,410. Cash increased to $7.87 million from $5.08 million at December 31, 2017. Working capital was $9.27 million, compared with $6.31 million at year-end.
Total liabilities were $4.88 million and stockholders’ equity was $12.46 million at September 30, 2018. Debt was minimal: the remaining note payable was $11,250, classified as current. Current assets were $13.33 million versus current liabilities of $4.06 million.
Material Changes Versus the Prior Comparable Period
- Third-quarter revenue declined 24% year over year, primarily because of lower simulator, accessory and scenario sales. Nine-month revenue increased 10% due to higher simulator, accessory, licensing, warranty and service revenue.
- Third-quarter gross margin decreased to 59% from 66%, reflecting changes in the mix and quantity of systems and accessories sold. Nine-month gross margin was 65%, compared with 66%.
- Third-quarter operating expenses declined 15%, mainly because of lower accounting, legal and consulting costs. Nine-month operating expenses increased 11% because of higher staffing, payroll, benefits, professional fees, public-company costs and a $134,140 impairment of the TEC investment.
- Net income declined 92% in the third quarter and 25% for the nine-month period. The nine-month decline was principally attributable to a $769,462 increase in income tax expense, primarily related to reversal of the income tax valuation allowance and recognition of deferred tax assets associated with net operating loss carryforwards.
- Operating cash flow improved despite lower net income, supported by changes in receivables, unbilled revenue, deferred taxes, accrued expenses and other working-capital accounts.
- The company adopted ASC 606 revenue recognition guidance and ASU 2016-01 during 2018; management reported no material impact from adoption.
Outlook, Commentary, Risks and Unusual Items
- Management stated that existing capital resources should support operations and the current business strategy for more than 12 months.
- VirTra received $5.1 million of signed bookings during the third quarter and ended the quarter with approximately $6.8 million of backlog. Management expected more than 50% of third-quarter bookings to convert to revenue by December 31, 2018, although delivery dates and customer contract terms may change.
- TEC royalties recognized were $512,545 for the first nine months, compared with $245,082 in the prior-year period. VirTra held approximately 8.4% of TEC’s outstanding common shares and recorded a $134,140 impairment during 2018.
- Notes receivable totaled $678,810, including a $400,906 customer note bearing 10% interest and a $292,138 TEC convertible note bearing 5% interest. No allowance for uncollectibility was recorded for these notes.
- The company had a probable and estimated legal loss contingency of $40,000 related to a declaratory judgment action involving a former customer’s breach-of-contract and warranty allegations. Management did not expect a material adverse effect.
- VirTra entered into leases extending certain facilities through 2023, with future minimum operating lease payments totaling $1.85 million as of September 30, 2018. The company expected adoption of the new lease standard on January 1, 2019 to have a significant balance-sheet impact but no material income-statement impact.
- Subsequent events included a two-month extension of the former machine-shop lease and the October 2018 cash redemption of 10,000 employee stock options, resulting in $15,500 of additional compensation expense.
Most Important Facts for Investors to Verify
- Whether the approximately $6.8 million backlog converts to revenue on the expected schedule and at anticipated margins.
- Whether the sharp third-quarter revenue and gross-margin declines reflect timing and mix effects or a broader demand or execution issue.
- The collectability and terms of the $678,810 of notes receivable, particularly the unsecured TEC convertible note.
- The valuation and future royalty economics of the TEC investment and collaboration agreement after the $134,140 impairment.
- The sustainability of operating cash flow and the impact of receivable, deferred revenue and other working-capital movements.
- The effect of the income tax valuation allowance reversal and future cash tax requirements.
- The balance-sheet impact of adopting ASC 842 lease accounting and the company’s facility relocation costs.
- The outcome and potential costs of the former-customer litigation and the adequacy of warranty and other loss-contingency reserves.