Notes
To CONDENSED Financial Statements
(
Unaudited
)
NOTE
1.
ORGANIZATION, BUSINESS OPERATIONS and significant accounting policies
VirTra,
Inc. (the “Company” or “VirTra”), located in Tempe, Arizona, is engaged in the sale and development of
judgmental use of force training simulators and firearms training simulators for law enforcement, military and commercial uses.
The Company sells simulators and related products worldwide through a direct sales force and international distribution partners.
The original business started in 1993 as Ferris Productions, Inc. In September 2001, Ferris Productions, Inc. merged with GameCom,
Inc. to ultimately become VirTra Systems, Inc., a Texas corporation. Effective as of October 1, 2016, the Company completed a
conversion from a Texas corporation to a Nevada corporation pursuant to a plan that was approved by the Company’s Board
of Directors on June 23, 2016 and by its shareholders on September 16, 2016. As part of the Plan of Conversion, the Company filed
Articles of Incorporation in Nevada, whereby it changed its name from VirTra Systems, Inc. to VirTra, Inc. and revised its capitalization.
Effective October 20, 2016, the Company effected a 1-for-10 reverse stock split of its issued and outstanding common stock and
effective February 12, 2018, the Company effected a 1-for-2 reverse stock split of its issued and outstanding common stock (together,
the “Reverse Stock Splits”). All references to shares of the Company’s common stock in this report refer to
the number of shares of common stock after giving effect to the Reverse Stock Splits.
Basis
of Presentation
The accompanying unaudited condensed financial
statements have been prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”)
for interim financial information. Certain information and note disclosures normally included in complete annual financial statements
prepared in accordance with GAAP have been condensed or omitted. However, the Company believes that the disclosures included in
these unaudited condensed financial statements are adequate to make the information presented not misleading. In the opinion of
management, the accompanying unaudited condensed financial statements reflect all adjustments, which include normal recurring
adjustments, considered necessary for a fair presentation of such interim results. The results for the three and six months
ended June 30, 2018 are not necessarily indicative of the results for any subsequent period. These unaudited condensed financial
statements should be read in conjunction with the audited financial statements and notes for the year ended December 31, 2017
included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2017, as filed with the Securities
and Exchange Commission (the “SEC”) on March 30, 2018.
Use
of Estimates
The
preparation of financial statements in conformity with GAAP requires management to make estimates that affect the reported amounts
of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and reported
amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.
Reclassifications
Certain
reclassifications have been made to the 2017 financial statements to conform to the 2018 financial statement presentation. These
reclassifications had no effect on net earnings or cash flows as previously reported.
Significant
Accounting Policies
Aside
from the adoption of the Financial Accounting Standards Board’s (“FASB”) Accounting Standards Codification (“ASC”)
Topic 606, “Revenue from Contracts with Customers,” as described below, there have been no other material changes
to the significant accounting policies or recent accounting pronouncements previously disclosed in the annual financial statements
in the Company’s Form 10-K for the fiscal year ended December 31, 2017.
Revenue
Recognition
The
Company records revenue from contract with customers in accordance with ASC Topic 606, “Revenue from Contracts with Customers.”
Under ASC 606, the Company must identify the contract with a customer, identify the performance obligations in the contract, determine
the transaction price, allocate the transaction price to the performance obligations in the contract, and recognize revenue when
(or as) the Company satisfies a performance obligation.
The
Company’s primary sources of revenue are derived from simulator and accessories sales, training and installation, the sale
of customizable software and sale of extended warranties. Sales discounts and bad debt allowance are presented in the financial
statements as reductions in determining net revenues. Credit sales are recorded as current assets. Prepaid deposits received at
the time of sale and extended warranties purchased are recorded as current liabilities until earned. The following briefly summarizes
the nature of our performance obligations and revenue recognition:
Performance
Obligation
|
|
Method
of Recognition
|
|
|
|
Simulator
and accessories
|
|
Upon
transfer of control
|
|
|
|
Installation
and training
|
|
Upon
completion or over period of services being rendered
|
|
|
|
Extended
service-type warranty
|
|
Deferred
and recognized over life of extended warranty
|
|
|
|
Customizable
software
|
|
Upon
transfer of control
|
Disaggregation
of Revenue
Under
ASC 606, disaggregated revenue from contracts with customers depicts the nature, amount, timing, and uncertainty of revenue
and cash flows affected by economic factors. The Company has evaluated revenues, contract assets and liabilities associated with
the revenue recognized and the following table illustrates the disaggregation disclosure by customer’s location and performance
obligation.
|
|
Three
Months Ended June 30,
|
|
|
|
2018
|
|
|
2017
|
|
|
|
Domestic
|
|
|
International
|
|
|
Total
|
|
|
Domestic
|
|
|
International
|
|
|
Total
|
|
Simulators
and accessories
|
|
$
|
6,930,768
|
|
|
$
|
398,029
|
|
|
$
|
7,328,797
|
|
|
$
|
3,028,218
|
|
|
$
|
1,445,501
|
|
|
$
|
4,473,719
|
|
Warranties
|
|
|
481,451
|
|
|
|
52,700
|
|
|
|
534,151
|
|
|
|
395,566
|
|
|
|
45,496
|
|
|
|
441,062
|
|
Customized
software
|
|
|
286,108
|
|
|
|
-
|
|
|
|
286,108
|
|
|
|
103,400
|
|
|
|
107,760
|
|
|
|
211,160
|
|
Installation
and training
|
|
|
93,958
|
|
|
|
32,295
|
|
|
|
126,253
|
|
|
|
3,871
|
|
|
|
(38,664
|
)
|
|
|
(34,793
|
)
|
Licensing
and royalties
|
|
|
429,613
|
|
|
|
-
|
|
|
|
429,613
|
|
|
|
160,417
|
|
|
|
-
|
|
|
|
160,417
|
|
Total
Revenue
|
|
$
|
8,221,898
|
|
|
$
|
483,024
|
|
|
$
|
8,704,922
|
|
|
$
|
3,691,472
|
|
|
$
|
1,560,093
|
|
|
$
|
5,251,565
|
|
|
|
Six
Months Ended June 30,
|
|
|
|
2018
|
|
|
2017
|
|
|
|
Domestic
|
|
|
International
|
|
|
Total
|
|
|
Domestic
|
|
|
International
|
|
|
Total
|
|
Simulators
and accessories
|
|
$
|
7,855,588
|
|
|
$
|
1,950,423
|
|
|
$
|
9,806,011
|
|
|
$
|
6,119,113
|
|
|
$
|
1,732,670
|
|
|
$
|
7,851,783
|
|
Warranties
|
|
|
908,136
|
|
|
|
115,085
|
|
|
|
1,023,221
|
|
|
|
758,122
|
|
|
|
59,691
|
|
|
|
817,813
|
|
Customized
software
|
|
|
401,673
|
|
|
|
11,940
|
|
|
|
413,613
|
|
|
|
154,600
|
|
|
|
107,760
|
|
|
|
262,360
|
|
Installation
and training
|
|
|
148,170
|
|
|
|
82,515
|
|
|
|
230,685
|
|
|
|
366,331
|
|
|
|
(41,664
|
)
|
|
|
324,667
|
|
Licensing
and royalties
|
|
|
475,581
|
|
|
|
-
|
|
|
|
475,581
|
|
|
|
204,229
|
|
|
|
-
|
|
|
|
204,229
|
|
Total
Revenue
|
|
$
|
9,789,148
|
|
|
$
|
2,159,963
|
|
|
$
|
11,949,111
|
|
|
$
|
7,602,395
|
|
|
$
|
1,858,457
|
|
|
$
|
9,460,852
|
|
Adoption
of New Accounting Standards
Between
May 2014 and December 2016, the FASB issued several Accounting Standards Updates (each, an “ASU” and collectively,
“ASUs”) on Revenue from Contracts with Customers (Topic 606). These ASUs supersede nearly all existing revenue recognition
guidance under current GAAP and requires an entity to recognize revenues when promised goods or services are transferred to customers
in an amount that reflects the consideration to which an entity expects to be entitled for those goods or services. The standards
are effective for annual periods beginning after December 15, 2017, and interim periods therein, and permit the use of either
the full retrospective or modified retrospective transition method. This standard was adopted on January 1, 2018 and the Company
elected to use the modified retrospective transition method which requires application of ASU 2014-09 to uncompleted contracts
at the date of adoption. The adoption of the ASUs under 2014-09 did not have a material impact on financial statements.
In January 2016, the FASB issued ASU 2016-01,
“Financial Instruments - Overall (Subtopic 825-10): Recognition and Measurement of Financial Assets and Financial Liabilities”
(“ASU 2016-01”), which requires that equity investments, except for those accounted for under the equity method or
those that result in consolidation of the investee, be measured at fair value, with subsequent changes in fair value recognized
in net income. However, an entity may choose to measure equity investments that do not have readily determinable fair values at
cost minus impairment, if any, plus or minus changes resulting from observable price changes in orderly transactions for the identical
or a similar investment of the same issuer. This standard was adopted on January 1, 2018, including all interim reporting periods
within the fiscal year. The Company wrote-down its investment in That’s Eatertainment Corp., f/k/a Modern Round,
LLC (“TEC”), a wholly owned subsidiary of Modern Round Entertainment Corp., a related party (“MREC”),
to fair value in 2017. The Company believes the adoption of ASU 2016-01 did not have a material impact on its financial statements.
See Note 6. Upon adoption, the Company has elected to utilize the cost minus impairment approach as the investment in TEC does
not have a readily determinable fair value as of the reporting date.
In
November 2016, the FASB issued ASU No. 2016-18, “Statement of Cash Flows (Topic 230): Restricted Cash (a consensus of the
FASB Emerging Issues Task Force),” to provide guidance on the presentation of restricted cash or restricted cash equivalents
in the statement of cash flow. The amendments should be applied using a retrospective transition method, and are effective for
fiscal years beginning after December 15, 2017, including interim periods within those fiscal years. The adoption of this statement
did not have a material impact on the Company’s financial statement presentation.
In
February 2017, the FASB issued ASU No. 2017-05, “Other Income—Gains and Losses from the Derecognition of Nonfinancial
Assets (Subtopic 610-20): Clarifying the Scope of Asset Derecognition Guidance and Accounting for Partial Sales of Nonfinancial
Assets,” to clarify the scope of Subtopic 610-20, “Other Income—Gains and Losses from the Derecognition of Nonfinancial
Assets,” and to add guidance for partial sales of nonfinancial assets. Subtopic 610-20, which was issued in May 2014 as
a part of ASU No. 2014-09, “Revenue from Contracts with Customers (Topic 606),” provides guidance for recognizing
gains and losses from the transfer of nonfinancial assets in contracts with noncustomers. The amendments are effective for fiscal
years beginning after December 15, 2017, including interim periods within those fiscal years, which is the same time as the amendments
in ASU No. 2014-09, and early adoption is permitted. The adoption did not have a material impact on the financial statements.
In
May 2017, the FASB issued ASU No. 2017-09, “Compensation—Stock Compensation (Topic 718): Scope of Modification Accounting,”
to provide clarity and reduce both (1) diversity in practice and (2) cost and complexity when applying the guidance in Topic 718,
“Compensation—Stock Compensation,” to a change to the terms or conditions of a share-based payment award. The
ASU provides guidance about which changes to the terms or conditions of a share-based payment award require an entity to apply
modification accounting in ASC 718. The amendments are effective for fiscal years beginning after December 15, 2017 and should
be applied prospectively to an award modified on or after the adoption date. The Company does not expect this amendment to have
a material impact on its financial statements.
Recent
Accounting Pronouncements
In
February 2016, the FASB issued ASU No. 2016-02 – “Leases (Topic 842),” which requires lessees to put most leases
on their balance sheets by recognizing lease assets and lease liabilities for those leases classified as operating leases under
previous guidance. This ASU will be effective for the Company on January 1, 2019, with early adoption permitted. The Company is
currently in the process of assessing the impact of this ASU on its financial statements.
In
July 2017, the FASB issued ASU No. 2017-11 – “Earnings Per Share (Topic 260); Distinguishing Liabilities from Equity
(Topic 480); Derivatives and Hedging (Topic 815) Part I. Accounting for Certain Financial Instruments with Down Round Features
and II. Replacement of the Indefinite Deferral for Mandatorily Redeemable Financial Instruments of Certain Nonpublic Entities
and Certain Mandatorily Redeemable Noncontrolling Interests with a Scope Exception.” Part I applies to entities that issue
financial instruments such as warrants, convertible debt or convertible preferred stock that contain down round features. Part
II. Simply replaces the indefinite deferral for certain mandatorily redeemable noncontrolling interests and mandatorily redeemable
financial instruments of nonpublic entities contained within ASC Topic 480 with a scope exception and does not impact the accounting
for these mandatorily redeemable instruments. This ASU is effective for public companies for the annual reporting periods beginning
after December 15, 2018, and interim periods within those annual periods, with early adoption permitted. The Company does not
expect this amendment to have a material impact on its financial statements.
In
June 2018, the FASB issued ASU No. 2018-07, “Compensation–Stock Compensation (Topic 718): Improvements to Nonemployee
Share-Based Payment Accounting to simplify the accounting for nonemployee share-based payment transactions resulting from expanding
the scope of Topic 718, Compensation-Stock Compensation, to include share-based payment transactions for acquiring goods and services
from nonemployees. The amendments also clarify that Topic 718 does not apply to share-based payments used to effectively provide
(1) financing to the issuer or (2) awards granted in conjunction with selling goods or services to customers as part of a contract
accounted for under Topic 606, Revenue from Contract with Customers. The amendments are effective for public business entities
for fiscal years beginning after December 15, 2018, including interim periods within that fiscal year, with early adoption permitted.
The Company is currently in the process of assessing the impact of this ASU on its financial statements.
In
July 2018, the FASB issued ASU No. 2018-11, “Leases (Topic 842): Targeted Improvements,” which provides another transition
method in addition to the existing transition method by allowing entities to initially apply the new leases standard at the adoption
date (such as January 1, 2019, for calendar-year-end public business entities) and recognize a cumulative-effect adjustment to
the opening balance of retained earnings in the period of adoption consistent with preparers’ requests. This additional
transition method changes only “when” an entity is required to initially apply the transition requirements of the
new leases standard; it does not change “how” those requirements apply. For entities that have not adopted Topic 842
before the issuance of this ASU, the effective date and transition requirements for the amendments are the same as the effective
date and transition requirements in ASU 2016-02. The Company is currently in the process of assessing the impact of this ASU on
its financial statements.
NOTE
2. NOTES RECEIVABLE
An unsecured promissory note was executed on
March 23, 2018 by a customer converting its past-due trade receivable from the sale of goods and services in the amount of $400,906.
The note bears interest at the rate of ten percent (10%) per annum and requires installment payments of principal and interest
due monthly, including late fees. The amount outstanding including accrued interest at June 30, 2018 is $375,209. The current portion
of the note receivable collectible in one year or less including accrued interest was $203,494. The remaining portion of the note
classified as long-term was $171,715. No reserve for uncollectability has been recorded for the three and six months ended June
30, 2018.
The Company accepted an unsecured convertible promissory note from TEC in the amount of $292,138 for a portion
of their minimum royalty payment due as of May 31, 2018. The note bears interest at the rate of five percent (5%) per annum and
contains a provision requiring remittance of not less than 20% of the net proceeds of any private or public offering of its securities
in reduction of such Note. The note has a conversion right, at the sole discretion of the Company, to convert the outstanding balance
of principle and accrued interest at any time for shares of common stock of TEC. Any unpaid balance of principle and accrued interest
becomes due and collectible on the earlier of (i) August 1, 2019 (maturity date), or (ii) if declared due and payable in the event
of Default. The note principle and accrued interest is classified as current. See Note 6.
NOTE
3. INVENTORY
Inventory
consisted of the following as of:
|
|
June
30, 2018
|
|
|
December
31, 2017
|
|
|
|
|
|
|
|
|
Raw
materials
|
|
$
|
1,906,119
|
|
|
$
|
1,825,469
|
|
Reserve
|
|
|
(105,031
|
)
|
|
|
(105,031
|
)
|
|
|
|
|
|
|
|
|
|
Total
inventory
|
|
$
|
1,801,088
|
|
|
$
|
1,720,438
|
|
NOTE
4.
Property and Equipment
Property
and equipment consisted of the following as of:
|
|
June
30, 2018
|
|
|
December
31, 2017
|
|
|
|
|
|
|
|
|
Computer
equipment
|
|
$
|
1,054,004
|
|
|
$
|
861,925
|
|
Furniture
and office equipment
|
|
|
202,867
|
|
|
|
202,867
|
|
Machinery
and equipment
|
|
|
1,021,188
|
|
|
|
925,494
|
|
Leasehold
improvements
|
|
|
324,313
|
|
|
|
324,313
|
|
|
|
|
|
|
|
|
|
|
Total
property and equipment
|
|
|
2,602,372
|
|
|
|
2,314,599
|
|
Less:
Accumulated depreciation
|
|
|
(1,780,532
|
)
|
|
|
(1,637,326
|
)
|
|
|
|
|
|
|
|
|
|
Property
and equipment, net
|
|
$
|
821,840
|
|
|
$
|
677,273
|
|
Depreciation
expense was $74,587 and $70,572 for the three months ended June 30, 2018 and 2017, respectively. Depreciation expense was $143,206
and $138,957 for the six months ended June 30, 2018 and 2017, respectively.
NOTE
5.
Accrued Expenses
Accrued
compensation and related costs consisted of the following as of:
|
|
June
30, 2018
|
|
|
December
31, 2017
|
|
|
|
|
|
|
|
|
Salaries
and wages payable
|
|
$
|
200,120
|
|
|
$
|
115,481
|
|
401(k)
contributions payable
|
|
|
10,505
|
|
|
|
30,532
|
|
Accrued
paid time off (PTO)
|
|
|
299,131
|
|
|
|
257,751
|
|
Profit
sharing payable
|
|
|
637,547
|
|
|
|
189,727
|
|
|
|
|
|
|
|
|
|
|
Total
accrued compensation and related costs
|
|
$
|
1,147,303
|
|
|
$
|
593,491
|
|
Accrued
expenses and other current liabilities consisted of the following as of:
|
|
June
30, 2018
|
|
|
December
31, 2017
|
|
|
|
|
|
|
|
|
Manufacturer’s
warranties
|
|
$
|
390,488
|
|
|
$
|
135,000
|
|
Loss
contingencies
|
|
|
40,000
|
|
|
|
-
|
|
Taxes
payable
|
|
|
51,138
|
|
|
|
108,573
|
|
|
|
|
|
|
|
|
|
|
Total
accrued expenses and other current liabilities
|
|
$
|
481,626
|
|
|
$
|
243,573
|
|
NOTE
6.
Collaboration Agreement
On January 16, 2015, the Company entered into
a Co-Venture Agreement (the “Co-Venture Agreement”) with TEC, a wholly owned subsidiary of MREC, a related
party. TEC is a restaurant and entertainment concept centered on its indoor virtual reality shooting experience. The Co-Venture
Agreement provides TEC access to certain software and equipment relating to the Company’s products in exchange for royalties.
The Company received 1,365,789 units, representing a 5% ownership interest in TEC on the date of the Co-Venture
Agreement. The Company recorded the investment at the estimated fair value of the units and which were valued at $0.10 per unit
based on TEC’s other membership unit sales.
The Co-Venture Agreement also provides
the Company with conditional warrants to purchase an additional 5% of TEC as of the date of that agreement, at an exercise price
of $0.25.
On
April 14, 2015, TEC issued the Company an option to purchase 125,000 units of TEC. The option fully vested and became exercisable
on the date of grant at an exercise price equal to $0.50 per unit and terminates on the tenth anniversary of the date of grant,
if not earlier pursuant to the terms of the option.
On December 31, 2015, TEC merged with a subsidiary of TEC pursuant to a Plan of Merger (the “Merger
Agreement”) and
each unit of TEC issued and outstanding as of the effective time of
the merger automatically converted into the right to receive approximately 1.2277 shares of TEC common stock. As a result of the
Merger Agreement, the Company held 1,676,748 shares of TEC’s common stock, options to purchase 153,459 shares of TEC common
stock at an exercise price of $0.41 per share, and conditional warrants to purchase 1,676,747 shares of TEC common stock at an
exercise price of $0.20 per share.
On
October 25, 2016, the Company exercised the conditional warrant and purchased 1,676,747 shares of TEC common stock for $335,349,
resulting in the Company’s aggregate holdings of TEC increasing to
3,353,495
common shares representing approximately 8.4444% of the issued and outstanding common shares of TEC
.
The TEC equity securities have been recorded as a cost method investment as the Company does not have the ability to exercise
significant influence over TEC.
As
part of the Co-Venture Agreement, the Company granted 459,691 conditional warrants to affiliates of TEC to purchase 5% of the
Company’s capital stock on a fully diluted basis as of the date of the Co-Venture Agreement. The conditional warrants are
exercisable commencing at the earlier of the first anniversary of TEC opening its first facility utilizing VirTra technology or
after TEC opened its first facility utilizing VirTra technology and made the payment to the Company of all required U.S./Canada
minimum royalty payments during the first 12-month period. TEC opened its first location on June 1, 2016.
The
Company also granted 459,691 of additional conditional warrants to affiliates of TEC to purchase another 5% of the Company’s
capital stock on a fully diluted basis as of the Agreement date. These conditional warrants are exercisable any time subsequent
to TEC payment of $2.0 million in cumulative license fees (royalty). Both conditional warrant issuances were for a period of five
years with an exercise price of $2.72.
These
conditional warrants were considered contingent consideration for the equity investment as they did not meet the definition of
a derivative under ASC 815. Thus, the contingent consideration was not included in the cost of the equity investment until the
contingency was resolved and the warrant became exercisable.
On June 1, 2017,
the warrants related to the opening of the facility vested and became exercisable at an exercise price equal to $2.72 per unit.
On June 1, 2017, these warrants were recorded at the Black-Scholes Merton fair value using annual volatility of 91.5%, an annual
risk-free rate of 1.76%, expected term of five years and a fair value of $4.28 a share for a fair value of $1,516,246 as an additional
investment in TEC. As of June 1, 2017, the total investment in TEC approximated $1,988,800. During the three and six months
ended June 30, 2018, the Company recognized an impairment loss of $134,140. During the year ended December 31, 2017, the Company
recognized an impairment loss of $613,241. The Company is accounting for the investment utilizing the cost minus impairment
approach.
On
July 28, 2017, the Company received Notices of Exercise for all 459,691 warrants then exercisable (the “Tranche 1 Warrants”)
from all the TEC’s affiliate holders electing to purchase warrants pursuant to the terms of the net exercise provision set
forth in the Warrant Agreement. Mr. Saltz (a member of our Board of Directors who is also Chairman of the Board of Directors of
TEC, as well as a majority stockholder of TEC held 398,122 of the Tranche 1 Warrants prior to the assignment of the warrants to
TEC on August 11, 2017. Under the net exercise provision, in lieu of exercising the warrant for cash, the holder may elect to
receive shares equal to the value of the warrant (or the portion thereof being exercised) by surrender of the warrant and the
Company issuing to holder the number of computed shares. Using the July 28, 2017 OTCQX closing price at $4.36 as fair value and
the $2.72 warrant exercise price, upon conversion the 459,691 warrants entitled the holders to receive 172,912 shares of the Company’s
Common Stock without payment of any additional consideration pursuant to the net exercise terms of the Tranche 1 Warrants that
are currently exercisable.
Effective
August 16, 2017, the Company and the TEC affiliate holders entered into an agreement (the “Warrant Buyout Agreement”)
whereby the Company acknowledged that the affiliates of TEC had assigned the Tranche 1 Warrants to TEC and the Company agreed
to repurchase them at a price of $3.924 per share of common stock issuable by the Company pursuant to the net exercise terms of
the Warrants for a total of $678,505.
In
addition, the Company agreed to repurchase from TEC an additional 459,691 warrants held by TEC that are not currently exercisable
(the “Tranche 2 Warrants”). Mr. Saltz held 364,122 of the Tranche 2 Warrants prior to their assignment to TEC on August
11, 2017. The Warrant Buyout Agreement amended the Tranche 2 Warrants to provide for the immediate exercise on a net exercise
basis of 24,208 shares of the Company’s common stock. The aggregate purchase price for the Tranche 2 Warrants is $94,990
based on a price of $3.924 per share of common stock issuable on a net exercise basis and based on 24,208 shares of the Company’s
common stock. The aggregate purchase price of the Tranche 1 Warrants and the Tranche 2 Warrants was $773,495. The balance of the
remaining 1,444,527 warrants were forfeited under the terms of the Warrant Buyout Agreement.
On
August 16, 2017, the Company entered into the first amendment to the Co-Venture Agreement to permit TEC to sublicense the VirTra
Technology to third party operators of stand-alone location-based entertainment companies. TEC agreed to pay us royalties for
any such sublicenses in an amount equal to 10% of the revenue paid to TEC in cases where TEC pays for the cost of the equipment
for such location or 14% of the revenue paid to TEC in cases where it does not pay for the cost of the equipment.
The Co-Venture Agreement grants TEC an exclusive
non-transferrable license to use the Company’s technology solely for use at locations to operate the concept, as defined
in the Co-Venture Agreement. The license would become non-exclusive if the first U.S. location is not opened within 24 months
of the effective date, as well as, other restrictions and respective milestone dates. Throughout the duration of the Co-Venture
Agreement, TEC will pay the Company a royalty based on gross revenue, as defined and subject to certain minimum royalties commencing
with the first twelve-month period subsequent to the respective milestone date of June 1, 2017. If the total royalty payments
for locations in the United States and Canada together do not total at least the minimum royalty amount specified in the agreement,
TEC may pay to VirTra the difference between the amount of total royalty payments and the minimum specified in the agreement to
maintain exclusivity. For the three months ended June 30, 2018 and 2017, respectively, the Company recognized license fee income
(royalties) of $427,718 and $160,417. For the six months ended June 30, 2018 and 2017, respectively, the Company recognized
license fee income (royalties) of $471,506 and $204,229.
On July 23,
2018, the Company entered into the second amendment to the Co-Venture Agreement (see Note 2 and Note 10).
Note
7. Related Party Transactions
During
the three and six months ended June 30, 2018 and 2017, respectively, the Company issued the following options to purchase shares
of the Company’s common stock to the Company’s CEO, COO and members of the Board of Directors. All options are exercisable
within seven years of grant date.
|
|
Three
Months Ended June 30,
|
|
|
Six
Months Ended June 30,
|
|
|
|
2018
|
|
|
2017
|
|
|
2018
|
|
|
2017
|
|
Number
of stock options granted
|
|
|
-
|
|
|
|
13,750
|
|
|
|
-
|
|
|
|
27,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
average purchase price
|
|
$
|
-
|
|
|
$
|
4.30
|
|
|
$
|
-
|
|
|
$
|
4.75
|
|
During
the three and six months ended June 30, 2018 and 2017, respectively, the Company redeemed stock options from the CEO, COO and
an Executive Vice President that had previously been awarded. As a result, the Company recorded additional compensation expense
as follows:
|
|
Three
Months Ended June 30,
|
|
|
Six
Months Ended June 30,
|
|
|
|
2018
|
|
|
2017
|
|
|
2018
|
|
|
2017
|
|
Number
of stock options redeemed
|
|
|
22,500
|
|
|
|
12,500
|
|
|
|
22,500
|
|
|
|
25,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Redemption
value
|
|
$
|
76,900
|
|
|
$
|
36,750
|
|
|
$
|
76,900
|
|
|
$
|
85,250
|
|
Amount
previously expensed (2011 and 2010)
|
|
|
(32,000
|
)
|
|
|
(17,500
|
)
|
|
|
(32,000
|
)
|
|
|
(35,000
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Additional
compensation expense
|
|
$
|
44,900
|
|
|
$
|
19,250
|
|
|
$
|
44,900
|
|
|
$
|
50,250
|
|
During the three and six months ended June 30, 2018, the CEO exercised
7,500 stock options at an exercise price of $1.40 per share. No stock options were exercised during the three or six months ended
June 30, 2017.
Mr.
Mitch Saltz, a member of the Company’s Board of Directors, is also Chairman of the Board of Directors and a majority stockholder
of TEC. The Company entered into the Co-Venture Agreement with TEC as disclosed in Note 6. Through the terms of that agreement,
the Company owns 3,353,495 shares of TEC common stock representing approximately 8.4% of the issued and outstanding shares of
TEC common stock. Mr. Saltz has a beneficial ownership in the Company of less than 1% and TEC has 0% ownership in the Company.
Note
8. Commitments and Contingencies
The
Company currently leases its machine shop building located at 2169 East Fifth St., Tempe, Arizona 85284. The lease obligation
expires in September 2018. The Company plans to relocate its machine shop from the Fifth St. location to the same complex that
its corporate office is located. On May 18
th
, 2018, the Company executed a lease amendment for its existing corporate
office space located at 7970 South Kyrene Road, Tempe, Arizona 85284, to extend its lease obligation from September 2019 to September
2023. Under the terms of the lease amendment, the Company also leased a new machine shop building located at 7910 South Kyrene
Road, Tempe, Arizona 85284 effective October 1, 2018 and through September 2023.
Future
minimum lease payments under non-cancelable operating leases are as follows:
Building Lease Schedule
|
|
|
|
|
|
2018
|
|
|
168,124
|
|
2019
|
|
|
345,331
|
|
2020
|
|
|
362,703
|
|
2021
|
|
|
373,525
|
|
2022
|
|
|
384,776
|
|
2023
|
|
|
295,091
|
|
|
|
|
|
|
Total
|
|
$
|
1,929,550
|
|
The
Company has a deferred rent liability of $49,074 and $75,444 as of June 30, 2018 and December 31, 2017, respectively, relative
to the increasing future minimum lease payments. Rent expense was $105,818 and $92,891 for the three months ended June 30, 2018
and 2017, respectively. Rent expense was $205,595 and $190,282 for the six months ended June 30, 2018 and 2017, respectively.
General
or Threatened Litigation
From time to time, the Company is notified
of threatened litigation or that a claim is being made against it. The Company evaluates contingencies on an on-going basis and
has established loss provisions for matters in which losses are probable and the amount of loss can be reasonably estimated.
As
of June 30, 2018, the Company has initiated a declaratory judgment action
in the Superior
Court of the State of Arizona
.
A
former customer has raised allegations of breach of
contract and breach of warranty and the Company seeks relief and clarification from the Superior Court regarding the allegations
and the Company’s obligations under the contract with the former customer. Management believes that the declaratory judgment
action will not have a material adverse effect on our results of operations and the Company will vigorously defend against any
allegations raised by the former customer. The Company has established a probable and estimated loss contingency of $40,000 as
of June 30, 2018.
Note
9. Stockholders’ Equity
Stock
Options
The
Company previously issued non-qualified incentive stock options to key employees, officers and directors under a Stock Option
Compensation plan approved by the Board of Directors in 2009. The plan remains in effect for ten (10) years from the Effective
Date or unless terminated earlier by the Company. Terms of the option grants are at the discretion of the Board of Directors but
historically have been seven years.
During
the three and six months ended June 30, 2018 and 2017, respectively, the Company issued the following stock options for shares
of the Company’s common stock.
|
|
Three
Months Ended June 30,
|
|
|
Six
Months Ended June 30,
|
|
|
|
2018
|
|
|
2017
|
|
|
2018
|
|
|
2017
|
|
Number
of stock options granted
|
|
|
-
|
|
|
|
13,750
|
|
|
|
-
|
|
|
|
27,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
average purchase price
|
|
$
|
-
|
|
|
$
|
4.30
|
|
|
$
|
-
|
|
|
$
|
4.75
|
|
During
the three and six months ended June 30, 2018 and 2017, respectively, the Company redeemed the following stock options that had
previously been awarded:
|
|
Three
Months Ended June 30,
|
|
|
Six
Months Ended June 30,
|
|
|
|
2018
|
|
|
2017
|
|
|
2018
|
|
|
2017
|
|
Number
of stock options redeemed
|
|
|
22,500
|
|
|
|
12,500
|
|
|
|
22,500
|
|
|
|
25,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Redemption
value
|
|
$
|
76,900
|
|
|
$
|
36,750
|
|
|
$
|
76,900
|
|
|
$
|
85,250
|
|
Amount
previously expensed (2011 and 2010)
|
|
|
(32,000
|
)
|
|
|
(17,500
|
)
|
|
|
(32,000
|
)
|
|
|
(35,000
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Additional
compensation expense
|
|
$
|
44,900
|
|
|
$
|
19,250
|
|
|
$
|
44,900
|
|
|
$
|
50,250
|
|
During
the three and six months ended June 30, 2018, 7,500 stock options were exercise and common stock purchased at an exercise price
of $1.40 per share. No stock options were exercised during the three or six months ended June 30, 2017.
2017
Equity Incentive Plan
On
August 23, 2017 and October 6, 2017, respectively, the board of directors and shareholders approved the 2017 Equity Incentive
Plan (the “Equity Plan”). The Equity Plan is intended to make available incentives that will assist us to attract,
retain and motivate employees, including officers, consultants and directors. We may provide these incentives through the grant
of stock options, stock appreciation rights, restricted stock, restricted stock units, performance shares and units and other
cash-based or stock-based awards.
A
total of 1,187,500 shares of our common stock was initially authorized and reserved for issuance under the Equity Plan. This reserve
will automatically increase on January 1, 2018 and each subsequent anniversary through 2027, by an amount equal to the smaller
of (a) 3% of the number of shares of common stock issued and outstanding on the immediately preceding December 31, or (b) an amount
determined by the board. On January 1, 2018, the amount authorized and reserved increased to 1,424,630 shares.
Awards
may be granted under the Equity Plan to our employees, including officers, directors or consultants or those of any present or
future parent or subsidiary corporation or other affiliated entity. All awards will be evidenced by a written agreement between
us and the holder of the award and may include any of the following: stock options, stock appreciation rights, restricted stock,
restricted stock units, performance shares and performance units and cash-based awards and other stock-based awards. To date,
there have been no awards under this plan.
The
assumptions used for the periods ended June 30, 2018 and 2017, and the resulting estimates of weighted-average fair value per
share of options granted during those periods, are as follows:
|
|
Three
Months Ended June 30,
|
|
|
Six
Months Ended June 30,
|
|
|
|
2018
|
|
|
2017
|
|
|
2018
|
|
|
2017
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Volatility
|
|
|
-
|
|
|
|
98%
to 100%
|
|
|
|
-
|
|
|
|
98%
to 101%
|
|
Risk-free
interest rate
|
|
|
-
|
|
|
|
2%
|
|
|
|
-
|
|
|
|
2%
|
|
Expected
term
|
|
|
-
|
|
|
|
7
years
|
|
|
|
-
|
|
|
|
7
years
|
|
The following table summarizes all compensation
plan stock options as of June 30:
|
|
June
30, 2018
|
|
|
June
30, 2017
|
|
|
|
Number
of
Stock
|
|
|
Weighted
Exercise
|
|
|
Number
of
Stock
|
|
|
Weighted
Exercise
|
|
|
|
Options
|
|
|
Price
|
|
|
Options
|
|
|
Price
|
|
Options
outstanding, beginning of year
|
|
|
531,667
|
|
|
$
|
1.80
|
|
|
|
557,917
|
|
|
$
|
1.60
|
|
Granted
|
|
|
-
|
|
|
|
-
|
|
|
|
27,500
|
|
|
|
4.75
|
|
Redeemed
|
|
|
(22,500
|
)
|
|
|
1.70
|
|
|
|
(25,000
|
)
|
|
|
1.38
|
|
Exercised
|
|
|
(7,500
|
)
|
|
|
1.40
|
|
|
|
-
|
|
|
|
-
|
|
Expired
/ terminated
|
|
|
(5,000
|
)
|
|
|
1.40
|
|
|
|
-
|
|
|
|
-
|
|
Options
outstanding, end of period
|
|
|
496,667
|
|
|
$
|
1.82
|
|
|
|
560,417
|
|
|
$
|
1.76
|
|
Options
exercisable, end of period
|
|
|
493,489
|
|
|
$
|
1.82
|
|
|
|
540,417
|
|
|
$
|
1.81
|
|
Stock
compensation expense was $4,860 and $48,812 for the three months ended June 30, 2018 and 2017, respectively. Stock compensation
expense was $4,860 and $117,975 for the six months ended June 30, 2018 and 2017, respectively. There are 3,178 non-vested stock
options as of June 30, 2018 that will be fully vested by October 2018.
Note
10. SUBSEQUENT EVENTS
Other
On July 23, 2018, the Company entered into
the second amendment to the Co-Venture Agreement with TEC to (i) confirm the minimum royalty deficiency benefit due for the royalty
period ended May 31, 2018; (ii) establish payment terms for the minimum royalty deficiency benefit due, to include both
cash and promissory note; (iii) clarify the exclusivity provisions of the Agreement; and (iv) amend the minimum royalty calculations
to only TEC branded facilities.
On August 7, 2018, the Company executed
a lease addendum for the 2169 E Fifth Street location to extend the lease term for two (2) additional months with all other lease
terms remaining the same.