NOTES
TO CONDENSED FINANCIAL STATEMENTS
(Unaudited)
Note
1. Organization and Significant Accounting Policies
Organization
and Business Operations
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, Inc., a Nevada Corporation.
Effective
March 2, 2018, the Company effected a 1 for 2 reverse stock split of its issued and outstanding Common Stock (the “Reverse
Stock Split”). 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 Split.
Basis
of Presentation
The
condensed financial statements included herein have been prepared by us without audit pursuant to the rules and regulations of
the Securities and Exchange Commission (“SEC”) and should be read in conjunction with our audited financial statements
for the year ended December 31, 2018. Certain information and footnote disclosures normally included in financial statements prepared
in accordance with accounting principles generally accepted in the United States of America (“GAAP”) have been condensed
or omitted as permitted by the SEC, although we believe the disclosures that are made are adequate to make the information presented
herein not misleading.
The
accompanying condensed financial statements reflect, in our opinion, all normal recurring adjustments necessary to present fairly
our financial position at March 31, 2019 and the results of our operations and cash flows for the periods presented. We derived
the December 31, 2018 condensed balance sheet data from audited financial statements; however, we did not include all disclosures
required by GAAP.
Interim
results are subject to seasonal variations, and the results of operations for the three months ended March 31, 2019 are not necessarily
indicative of the results to be expected for the full year.
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 as of the date of the financial statements and the
reported amounts of revenues and expenses during the reporting period. Actual results could differ significantly from those estimates.
Significant accounting estimates in these financial statements include valuation assumptions for share-based payments, allowance
for doubtful accounts and notes receivable, inventory reserves, accrual for warranty reserves, the carrying value of long-lived
assets and intangible assets, income tax valuation allowances, the carrying value of cost basis investments, and the allocation
of the transaction price to the performance obligations in our contracts with customers.
Reclassifications
Certain
reclassifications have been made to the 2018 financial statements to conform to the 2019 financial statement presentation. These
reclassifications had no effect on net earnings or cash flows as previously reported.
Revenue
Recognition
The
Company adopted Accounting Standards Codification 606, Revenue from Contract with Customer (Topic 606) (“ASC 606”)
on January 1, 2018 and the Company elected to use the modified retrospective transition which requires application of ASC 606
to uncompleted contracts at the date of adoption. The adoption of ASC 606 did not have a material impact on the financial statements.
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. Significant judgment is necessary when making these determinations.
The
Company’s primary sources of revenue are derived from simulator and accessories sales, training and installation, the sale
of customizable software and the sale of extended service-type warranties. Sales discounts are presented in the financial statements
as reductions in determining net revenues. Credit sales are recorded as current assets (accounts receivable). Prepaid deposits
received at the time of sale and extended warranties purchased are recorded as current and long-term liabilities (deferred revenue)
until earned. The following briefly summarizes the nature of our performance obligations and method of revenue recognition:
Performance Obligation
|
|
Method of Recognition
|
|
|
|
Simulator and accessories
|
|
Upon transfer of control
|
|
|
|
Installation and training
|
|
Upon completion or over the period of services being rendered
|
|
|
|
Extended service-type warranty
|
|
Deferred and recognized over the life of the extended warranty
|
|
|
|
Customized software
|
|
Upon transfer of control
|
|
|
|
Sales-based royalty exchanged for license of intellectual property
|
|
Recognized as the performance obligation is satisfied over time – which is as the sales occur.
|
The
Company recognizes revenue upon transfer of control or upon completion of the services for the simulator and accessories; for
the installation and training and customized software performance obligations as the customer has the right and ability to direct
the use of these products and services and the customer obtains substantially all of the remaining benefit from these products
and services at that time. For the sales-based royalty exchanged for license of intellectual property, the Company recognized
revenue as the sales occur over time.
The
Company recognizes revenue on a straight-line basis over the period of services being rendered for the extended service-type warranties
as these warranties represent a performance obligation to “stand ready to perform” over the duration of the warranties.
As such, the warranty service is performed continuously over the warranty period.
Each
contract states the transaction price. The contracts do not include variable consideration, significant financing components or
noncash consideration. The Company has elected to exclude sales and similar taxes from the measurement of the transaction price.
The contract’s transaction price is allocated to the performance obligations based upon their stand-alone selling prices.
Discounts to the stand-alone selling prices, if any, are allocated proportionately to each performance obligation.
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 recognized and the following table illustrates the
disaggregation disclosure by customer’s location and performance obligation.
|
|
Three
Months Ended
|
|
|
|
March
31, 2019
|
|
|
March
31, 2018
|
|
|
|
Domestic
|
|
|
International
|
|
|
Total
|
|
|
Domestic
|
|
|
International
|
|
|
Total
|
|
Simulators
and accessories
|
|
$
|
1,932,659
|
|
|
$
|
318,438
|
|
|
$
|
2,251,097
|
|
|
$
|
936,692
|
|
|
$
|
1,552,733
|
|
|
$
|
2,489,425
|
|
Extended
service-type warranties
|
|
|
480,524
|
|
|
|
29,950
|
|
|
|
510,474
|
|
|
|
424,123
|
|
|
|
62,386
|
|
|
|
486,509
|
|
Customized
software
|
|
|
178,770
|
|
|
|
-
|
|
|
|
178,770
|
|
|
|
137,273
|
|
|
|
11,940
|
|
|
|
149,213
|
|
Installation
and training
|
|
|
71,360
|
|
|
|
-
|
|
|
|
71,360
|
|
|
|
67,457
|
|
|
|
50,220
|
|
|
|
117,677
|
|
Licensing
and royalties
|
|
|
39,637
|
|
|
|
-
|
|
|
|
39,637
|
|
|
|
45,968
|
|
|
|
-
|
|
|
|
45,968
|
|
Total
Revenue
|
|
$
|
2,702,950
|
|
|
$
|
348,388
|
|
|
$
|
3,051,338
|
|
|
$
|
1,611,513
|
|
|
$
|
1,677,279
|
|
|
$
|
3,288,792
|
|
Customer
Deposits
Customer
deposits are recorded as a current liability under deferred revenue on the accompanying balance sheets and totaled $312,354 and
$186,450 as of March 31, 2019 and December 31, 2018, respectively. Changes in deferred revenue amounts related to customer deposits
will fluctuate from year to year based upon the mix of customers for the year and the Company’s backlog of open contracts.
Customer deposits are considered a deferred liability until completion of the customer’s contract performance obligations.
When revenue is recognized, the deposit is applied to the customer’s receivable balance.
Warranty
The
Company warranties its products from manufacturing defects on a limited basis for a period of one year after purchase, and also
sells separately priced extended service-type warranties for periods of up to four years after the expiration of the standard
one-year warranty. During the term of the initial one-year warranty, if the device fails to operate properly from defects in materials
and workmanship, the Company will fix or replace the defective product. Deferred revenue for separately priced extended warranties
one year or less totaled $1,645,632 and $1,604,637 as of March 31, 2019 and December 31, 2018, respectively. Deferred revenue
for separately priced extended warranties longer than one year totaled $963,019 and $962,356 as of March 31, 2019 and December
31, 2018, respectively. The accrual for the one-year manufacturer’s warranty liability totaled $200,505 as of March 31,
2019 and December 31, 2018. During the three months ended March 31, 2019 and 2018, the Company recognized revenue of $510,474
and $486,509, respectively, related to the extended service-type warranties that was amortized from the deferred revenue balance.
Changes in deferred revenue amounts related to extended service-type warranties will fluctuate from year to year based upon the
average remaining life of the warranties at the beginning of the period and new extended service-type warranties sold during the
period.
Customer
Retainage
Customer
retainage is recorded as a current liability under deferred revenue on the accompanying balance sheet and totaled $133,220 as
of March 31, 2019 and December 31, 2018. Changes in deferred revenue amounts related to customer retainage will fluctuate from
year to year based upon the customer’s contract completion date allowing the Company to invoice and recover the retainage.
Licensing
and Royalties with Related Party
As
discussed further in Note 8. Collaboration Agreement with Related Party, the Company licenses intellectual property to Modern
Round, LLC (“MR”), a wholly-owned subsidiary of That’s Eatertainment Corp. (“TEC”), a related party,
in exchange for sales-based royalties. Revenues from this agreement are recognized in accordance with the terms of the contract
as the sales occur. The Company receives additional immaterial sales-based royalties from strategic partners.
Adoption
of New Accounting Standards
In
February 2016, the FASB issued ASU 2016-02, “Leases (Topic 842) and subsequent amendments to the initial guidance: ASU 2018-10,
ASU 2018-11, ASU 2018-20 and ASU 2019-01 (collectively, Topic 842). ASU 2016-02 requires an entity to recognize a right-of-use
asset (“ROU”) and lease liability for all leases and provide enhanced disclosures. Recognition, measurement, and presentation
of expenses depends on classification as a finance lease or an operating lease. On January 1, 2019, the Company adopted Topic
842 using the modified retrospective approach. Results for reporting periods after January 1, 2019 are presented under Topic 842,
while prior periods have not been adjusted. The Company elected the package of practical expedients permitted under the transition
guidance within the new standard, which among other things, allowed the Company to carry forward the historical lease classification.
Refer to Note 6 - Leases.
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 of ASU No. 2017-11 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 Accounting Standards Codification (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. Early adoption is permitted. ASU No.
2017-11 did not have a material impact on the Company’s 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. ASU No. 2018-07 did not have a material impact on the Company’s financial statements.
Fair
Value Measurements
ASC
Topic 820,
Fair Value Measurements
, defines fair value as the price that would be received in the sale of an asset or paid
to transfer a liability in an orderly transaction between market participants at the measurement date. Topic 820 also specifies
a fair value hierarchy that requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs
when measuring fair value. The standard describes three levels of inputs that may be used to measure fair value as follows:
Level
1: Quoted prices in active markets for identical assets or liabilities;
Level
2: Observable inputs other than Level 1 prices, such as quoted prices for similar assets or liabilities; quoted prices in markets
that are not active; or other inputs that are observable or can be corroborated by observable market data for substantially the
full term of the assets or liabilities; and
Level
3: Valuation is generated from model-based techniques that use significant assumptions not observable in the market. These unobservable
assumptions reflect our own estimate of assumptions that market participants would use in pricing the asset or liability.
Fair
Value of Financial Instruments
The
Company’s financial instruments consist of cash and cash equivalents, certificates of deposit, accounts receivable, notes
and interest receivables, accounts payable, and accrued liabilities. The fair value of financial instruments, except for long-term
notes receivable, approximates their carrying values, using level 3 inputs, at March 31, 2019 and December 31, 2018 due to their
short maturities. The fair value of the long-term notes receivable approximates its carrying value, using level 3 inputs, at March
31, 2019 and December 31, 2018 based on borrowing rates currently available for loans with similar terms and maturities.
Cash
and Cash Equivalents
The
Company considers all highly liquid investments with a maturity of 90 days or less at the time of purchase to be cash equivalents.
Certificates
of Deposit and Mutual Funds
The
Company invests its excess cash in certificates of deposit and money market mutual funds issued by financial institutions with
high credit ratings. The certificates of deposit generally have average maturities of approximately six months and are subject
to penalties for early withdrawal. The money market mutual funds are open ended and can be withdrawn at any time without penalty.
Accounts
and Notes Receivable and Allowance for Doubtful Accounts
The
Company recognizes an allowance for losses on accounts receivable based on an analysis of historical bad debt experience, current
receivables aging, and expected future write-offs, as well as an assessment of specific identifiable customer accounts considered
at risk or uncollectible. Accounts receivable do not bear interest and are charged off after all reasonable collection efforts
have been taken. As of March 31, 2019 and December 31, 2018, the Company maintained an allowance for doubtful accounts of $24,511
and $23,044, respectively.
Notes
receivable are carried at their estimated collectible amounts. Interest income on notes receivable is recognized using the effective
interest method. Notes receivable are periodically evaluated for collectability based on the credit history and the current financial
condition of the counter party, and the known and inherent risks in the notes. Notes receivable are placed on nonaccrual status
when they become 90 days past due and the customer has not made a payment in over 60 days. Upon suspension of the accrual of interest,
interest income is subsequently recognized to the extent cash payments are received. Accrual of interest is resumed when notes
are removed from non-accrual status. Notes receivable are charged against the allowance for credit losses when they are deemed
to be uncollectible. As of March 31, 2019 and December 31, 2018, the allowance for uncollectible notes receivable was $266,813.
Inventory
Inventory
is stated at the lower of cost or net realizable value with cost being determined on the average cost method. Work in progress
and finished goods inventory includes an allocation for capitalized labor and overhead. The Company routinely evaluates the carrying
value of inventory for slow moving and potentially obsolete inventory and, when appropriate, will record an adjustment to reduce
inventory to its estimated net realizable value. As of March 31, 2019 and December 31, 2018, inventory reserves were $105,031.
Investments
in Other Companies
Minority
investments in other companies are accounted for under the cost method of accounting because the Company does not have the ability
to exercise significant influence over the other companies’ operations. Under the cost method of accounting, investments
in private companies are carried at cost and are only adjusted for other-than-temporary declines in fair value and distribution
of earnings. For investments in public companies that have readily determinable fair values, the Company classifies its investments
as available-for-sale, and accordingly records these investments at their fair values with unrealized gains and losses included
as a separate component of stockholders’ equity and in total comprehensive income (loss). Upon sale or liquidation, realized
gains and losses are included in the statements of operations.
The
adoption of ASU 2016-01 requires investments in other companies that do not have readily determinable fair value be accounted
for 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 adoption of ASU 2016-01 did not have a material impact on the financial statements.
Upon adoption, the Company has elected to utilize the cost minus impairment approach because the investment in TEC does not have
a readily determinable fair value as of the reporting date. See Note 8. Collaboration Agreement with Related Party.
Management
regularly evaluates the recoverability of its investment based on the investee company’s performance and financial position.
During the three months ended March 31, 2019 and 2018, the Company did not recognize any impairment loss. Management regularly
assesses the classification of its investments.
Property
and Equipment
Property
and equipment are carried at cost, net of depreciation. Gains or losses related to retirements or disposition of fixed assets
are recognized in operations in the period incurred. Costs of normal repairs and maintenance are charged to expense as incurred,
while betterments or renewals are capitalized. Depreciation commences at the time the assets are placed in service. Depreciation
is provided using the straight-line method over the estimated economic lives of the assets or for leasehold improvements, over
the shorter of the estimated useful life or the remaining lease term, which are summarized as follows:
Computer equipment
|
|
|
3-5 years
|
|
Furniture and office equipment
|
|
|
5-7 years
|
|
Machinery and equipment
|
|
|
5-7 years
|
|
Leasehold improvements
|
|
|
7 years
|
|
Intangible
assets
Intangible
assets at March 31, 2019 are comprised of various patents. We compute amortization expense on the intangible assets using the
straight-line method over the estimate remaining useful lives of 18 years.
Cost
of Products Sold
Cost
of products sold represents manufacturing costs, consisting of materials, labor and overhead related to finished goods and components.
Cost of products sold does not include depreciation of fixed assets. Shipping costs incurred related to product delivery are included
in cost of products sold.
Advertising
Costs
Costs
associated with advertising are expensed as incurred. Advertising expense was $119,403 and $139,381 for the three months ended
March 31, 2019 and 2018, respectively. These costs include domestic and international tradeshows, website, and sales promotional
materials.
Research
and Development Costs
Research
and development costs are expensed as incurred. Research and development costs primarily include expenses, including labor, directly
related to research and development support. Research and development costs were $355,641 and $367,544 for the three months ended
March 31, 2019 and 2018, respectively.
Legal
Costs
Legal
costs relating to loss contingencies are expensed as incurred. See Note 10.
Concentration
of Credit Risk and Major Customers and Suppliers
Financial
instruments that potentially subject the Company to concentrations of credit risk consist of cash and cash equivalents, certificates
of deposit, accounts receivable and notes receivable.
The
Company’s cash, cash equivalents and certificates of deposit are maintained with financial institutions with high credit
standings and are FDIC insured deposits. The FDIC insures deposits according to the ownership category in which the funds are
insured and how the accounts are titled. The standard deposit insurance coverage limit is $250,000 per depositor, per FDIC-insured
bank, per ownership category. The Company had uninsured cash and cash equivalents of $1,138,137 and $2,014,987 as of March 31,
2019 and December 31, 2018, respectively.
Sales
are typically made on credit and the Company generally does not require collateral. Management performs ongoing credit evaluations
of its customers’ financial condition and maintains an allowance for estimated losses. Historically, the Company has experienced
minimal charges relative to doubtful accounts.
The
Company’s notes receivable are due from two counter parties and are unsecured. Management performs ongoing evaluations of
the collectability of its notes receivable and maintains an allowance for estimated losses.
Historically,
the Company primarily sells its products to United States federal and state agencies. For the three months ended March 31, 2019,
one federal agency comprised 12% of total net sales. By comparison, for the three months ended March 31, 2018, one federal agency
comprised 15%, and one commercial customer comprised 41% of total net sales, respectively.
As
of March 31, 2019, one federal agency comprised 40% and one state agency comprised 14% of total accounts receivables. By comparison,
as of December 31, 2018, one federal agency comprised 26% and one state agency comprised 20% of total accounts receivables.
Income
Taxes
Deferred
tax assets and liabilities are recorded based on the difference between the financial statement and the tax basis of assets and
liabilities using enacted tax rates in effect for the year in which the differences are expected to reverse. The Company calculates
a provision for income taxes using the asset and liability method, under which deferred tax assets and liabilities are recognized
by identifying the temporary differences arising from the different treatment of items for tax and accounting purposes. In determining
the future tax consequences of events that have been recognized in the financial statements or tax returns, judgment and interpretation
of statutes are required.
In
assessing realizable deferred tax assets, management assesses the likelihood that deferred tax assets will be recovered from future
taxable income, and to the extent that recovery is not likely or there is insufficient operating history, a valuation allowance
is established. The Company adjusts the valuation allowance in the period management determines it is more likely than not that
net deferred tax assets will or will not be realized. After review of the deferred tax asset and valuation allowance in accordance
with ASC 740, management determined that it is more likely than not that the Company will fully realize all of its deferred tax
asset and no valuation allowance was needed as of March 31, 2019 and December 31, 2018.
As
of March 31, 2019 and December 31, 2018, the Company did not recognize any assets or liabilities relative to uncertain tax positions.
Interest or penalties, if any, will be recognized in income tax expense. Since there are no significant unrecognized tax benefits
as a result of tax positions taken, there are no accrued penalties or interest. Tax positions are positions taken in a previously
filed tax return or positions expected to be taken in a future tax return that are reflected in measuring current or deferred
income tax assets and liabilities reported in the financial statements.
The
Company reflects tax benefits, only if it is more likely than not that the Company will be able to sustain the tax return position,
based on its technical merits. If a tax benefit meets this criterion, it is measured and recognized based on the largest amount
of benefit that is cumulatively greater than 50% likely to be realized. Management does not believe that there are any uncertain
tax positions at March 31, 2019 and December 31, 2018.
The
Company is potentially subject to tax audits for its United States federal and Arizona, California, Florida, Georgia, Hawaii,
Illinois, Massachusetts, Maryland, Michigan, North Dakota, New Hampshire, New Jersey, New York, Ohio, Idaho, South Carolina, Tennessee,
Texas, Virginia, Washington, and West Virginia state income and excise tax returns for tax years between 2014 and 2019; however,
earlier years may be subject to audit under certain circumstances. Tax audits by their very nature are often complex and can require
several years to complete.
Impairment
of Long-Lived Assets and Intangible Assets
Long
lived assets, such as equipment, and intangible assets are reviewed for impairment whenever events or changes in circumstances
indicate that the carrying amount of an asset may not be recoverable. Recoverability of assets to be held and used is measured
by a comparison of the carrying amount of an asset to estimated undiscounted future cash flows expected to be generated by the
asset. If the carrying amount of an asset exceeds its estimated future cash flows, an impairment charge is recognized by the amount
by which the carrying amount of the asset exceeds the fair value of the asset. Fair value is determined based on discounted cash
flows or appraised values, depending on the nature of the asset. At March 31, 2019 and December 31, 2018, the Company concluded
that there has been no indication of impairment to the carrying value of its long-lived assets. As such, no impairment has been
recorded.
Stock
Based Compensation
The
Company measures the cost of awards of equity instruments based on the grant date fair value of the awards. The Company calculates
the fair value of stock-based awards using the Black-Scholes-Merton option pricing valuation model, which incorporates various
assumptions including volatility, expected term and risk-free interest rates. There were no grants of stock-based awards during
the three months ended March 31, 2019 and 2018.
The
expected term of the options is the estimated period of time until exercise and was determined using the SEC’s safe harbor
rules, using an average of vesting and contractual terms, as we did not have sufficient historical experience of similar awards.
The risk-free interest rate is based on the implied yield available on United States Treasury zero-coupon issues with an equivalent
remaining term. The Company has not paid dividends in the past and does not plan to pay any dividends in the near future. The
estimated fair value of stock-based compensation awards and other options is amortized to expense on a straight-line basis over
the relevant vesting period. As share-based compensation expense recognized is based on awards ultimately expected to vest, it
is reduced for estimated forfeitures. The Company has elected to recognize forfeitures as they occur rather than estimating them
at the time of grant.
New
Accounting Pronouncements
In
June 2016, the FASB issued ASU No. 2016-13, Financial Instruments – Credit Losses (Topic 326), which provides guidance on
measuring credit losses on financial instruments. The amended guidance replaces current incurred loss impairment methodology of
recognizing credit losses when a loss is probable with a methodology that reflects expected credit losses and requires a broader
range of reasonable and supportable information to assess credit loss estimates. ASU 2016-13 is effective for us on January 1,
2020, with early adoption permitted on January 1, 2019. The Company is assessing what effect the provisions of 2016-13 will have
on the financial statements.
In
November 2018, the FASB issued ASU No. 2018-18, Collaborative Arrangements (Topic 808): Clarifying the Interaction between Topic
808 and Topic 606, which clarifies that certain transactions between participants in a collaborative arrangement should be accounted
for under ASC 606 when the counterparty is a customer. In addition, Topic 808 precludes an entity from presenting consideration
from a transaction in a collaborative arrangement as revenue from contracts with customers if the counterparty is not a customer
for that transaction. This guidance will be effective for the Company beginning January 1, 2020. The Company is currently evaluating
the impact of the adoption of 2018-18 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. This unsecured promissory note is due in full on or before February 2020. The
note bears interest at the rate of ten percent (10%) per annum and requires installment payments of $20,000 principal and interest.
Payments are due monthly and include late fees. The principal and accrued interest due as of March 31, 2019 and December 31, 2018
was $369,286 and $374,034, respectively. At March 31, 2019 and December 31, 2018, the Company recorded an allowance against the
note receivable balance in the amount of $266,813. The current portion of the remaining note receivable, net of allowance, collectible
in one year or less was $40,598. The remaining portion of the note, classified as long-term was $61,875.
The
Company accepted an unsecured convertible promissory note (the “Convertible Note”) from TEC, a related party, 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 the Convertible Note. The note has a conversion right, at the sole discretion
of the Company, to convert the outstanding balance of principal and accrued interest at any time for shares of common stock of
TEC. Prior to the due date, the Company may elect to convert the Convertible Note for shares of common stock in TEC at a twenty-five
percent (25%) discount to the price of shares sold to the public in a public offering in connection with a go-public transaction.
The issuance of common stock upon conversion shall be made without charge to the Company. No fractional shares shall be issued
upon conversion and in lieu of fractional shares, TEC will pay the Company the amount of any obligation that is not converted.
Any unpaid balance of principal 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 principal and accrued interest due as of March 31,
2019 and December 31, 2018 was $301,876 and $298,224, respectively. No reserve for collectability has been recorded as of March
31, 2019 and December 31, 2018. See Note 8.
Note
3. Inventory
Inventory
consisted of the following as of:
|
|
March 31, 2019
|
|
|
December 31, 2018
|
|
Raw materials and work in process
|
|
$
|
1,813,702
|
|
|
$
|
1,717,033
|
|
Reserve
|
|
|
(105,031
|
)
|
|
|
(105,031
|
)
|
|
|
|
|
|
|
|
|
|
Total inventory, net
|
|
$
|
1,708,671
|
|
|
$
|
1,612,002
|
|
During
2018, the Company evaluated the useful life of its spare parts inventory. As a result of this evaluation, the Company classified
$348,461 and $292,298 of spare parts as Other Assets, long-term on the Balance Sheet at March 31, 2019 and December 31, 2018,
respectively.
Note
4. Property and Equipment
Property
and equipment consisted of the following as of:
|
|
March 31, 2019
|
|
|
December 31, 2018
|
|
Computer equipment
|
|
$
|
1,070,372
|
|
|
$
|
1,054,004
|
|
Furniture and office equipment
|
|
|
212,347
|
|
|
|
207,921
|
|
Machinery and equipment
|
|
|
1,091,228
|
|
|
|
1,021,188
|
|
Leasehold improvements
|
|
|
324,313
|
|
|
|
324,313
|
|
|
|
|
|
|
|
|
|
|
Total property and equipment
|
|
|
2,698,260
|
|
|
|
2,607,426
|
|
Less: Accumulated depreciation
|
|
|
(1,997,964
|
)
|
|
|
(1,929,181
|
)
|
|
|
|
|
|
|
|
|
|
Property and equipment, net
|
|
$
|
700,296
|
|
|
$
|
678,245
|
|
Depreciation
expense was $70,312 and $68,619 for the three months ended March 31, 2019 and 2018, respectively.
Note
5. Intangible Asset
Intangible
asset consisted of the following as of:
|
|
March 31, 2019
|
|
|
December 31, 2018
|
|
Patents
|
|
$
|
160,000
|
|
|
$
|
-
|
|
|
|
|
|
|
|
|
|
|
Total intangible asset
|
|
|
160,000
|
|
|
|
-
|
|
Less: Accumulated amortization
|
|
|
(1,481
|
)
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
Intangible asset, net
|
|
$
|
158,519
|
|
|
$
|
-
|
|
Amortization
expense was $1,481 and $0 for the three months ended March 31, 2019 and 2018, respectively.
Note
6. Leases
We
lease approximately 37,729 rentable square feet of office and warehouse space from an unaffiliated third party for our corporate
office, manufacturing, assembly, warehouse and shipping facility located at 7970 South Kyrene Road, Tempe, Arizona 85284. In addition,
we lease approximately 4,529 rentable square feet of office and industrial space from an unaffiliated third party for our machine
shop at 2169 East 5th St., Tempe, Arizona 85284 through March 2019. In April 2019 the Company relocated the machine shop from
the Fifth St. location to 7910 South Kyrene Road, within the same business complex as our main office. The Company executed a
lease amendment to add an additional 5,131 rentable square feet for the machine shop and extended its existing office lease through
April 2024. The Company’s lease agreements do not contain any residual value guarantees, restrictive covenants or variable
lease payments. The Company has not entered into any financing leases.
In
addition to base rent, the Company’s lease generally provides for additional payments for other charges, such as rental
tax. The lease includes fixed rent escalations. The Company’s lease does not include an option to renew.
The
Company determines if an arrangement is a lease at inception. Operating leases are recorded in operating lease right of use assets,
net, operating lease liability – short term, and operating lease liability – long-term on its condensed balance sheet.
Operating
lease assets represent the Company’s right to use an underlying asset for the lease term and lease liabilities represent
its obligation to make lease payments arising from the lease. Operating lease assets and liabilities are recognized at the commencement
date based on the present value of lease payments over the lease term. As the Company’s leases do not provide an implicit
rate, the Company uses its incremental borrowing rate based on the information available at commencement date in determining the
present value of lease payments. The incremental borrowing rate used at adoption was 4.5%. Significant judgement is required when
determining the Company’s incremental borrowing rate. The Company uses the implicit rate when readily determinable. Lease
expense for lease payments are recognized on a straight-line basis over the lease term.
Effective
January 1, 2019, the Company obtained a right-of-use asset in exchange for a new operating lease liability in the amount of $1,721,380
and derecognized $46,523 deferred rent for an adjusted operating lease right-of-use asset in the net amount of $1,674,857.
The
balance sheet classification of lease assets and liabilities was as follows:
Balance Sheet Classification
|
|
March 31, 2019
|
|
Assets
|
|
|
|
|
Operating lease right-of-use assets, beginning balance
|
|
$
|
1,674,857
|
|
Current period amortization
|
|
|
(69,990
|
)
|
Total operating lease right-of-use asset
|
|
$
|
1,604,867
|
|
Liabilities
|
|
|
|
|
Current
|
|
|
|
|
Operating lease liability, short term
|
|
$
|
262,575
|
|
Non-current
|
|
|
|
|
Operating lease liability, long term
|
|
|
1,400,987
|
|
Total lease liabilities
|
|
$
|
1,663,562
|
|
Future
minimum lease payments as of March 31, 2019 under non-cancelable operating leases are as follows:
2019
|
|
$
|
244,858
|
|
2020
|
|
|
357,452
|
|
2021
|
|
|
398,955
|
|
2022
|
|
|
411,849
|
|
2023
|
|
|
359,703
|
|
Thereafter
|
|
|
98,364
|
|
Total lease payments
|
|
|
1,871,181
|
|
Less: imputed interest
|
|
|
(207,619
|
)
|
Operating lease liability
|
|
$
|
1,663,562
|
|
The
Company had a deferred rent liability of $0 and $46,523 as of March 31, 2019 and December 31, 2018, respectively, relative to
the increasing future minimum lease payments. Rent expense for the three months ended March 31, 2019 and 2018 was $89,139
and $87,345, respectively.
Note
7. Accrued Expenses
Accrued
compensation and related costs consisted of the following as of:
|
|
March
31, 2019
|
|
|
December
31, 2018
|
|
|
|
|
|
|
|
|
Salaries and wages payable
|
|
$
|
357,651
|
|
|
$
|
147,677
|
|
401(k) contributions payable
|
|
|
15,635
|
|
|
|
8,232
|
|
Accrued paid time off
|
|
|
248,891
|
|
|
|
265,962
|
|
Profit sharing payable
|
|
|
106,006
|
|
|
|
191,820
|
|
|
|
|
|
|
|
|
|
|
Total accrued compensation and related costs
|
|
$
|
728,183
|
|
|
$
|
613,691
|
|
Accrued
expenses and other current liabilities consisted of the following as of:
|
|
March
31, 2019
|
|
|
December
31, 2018
|
|
|
|
|
|
|
|
|
Manufacturer’s warranties
|
|
$
|
200,505
|
|
|
$
|
200,505
|
|
Warranties-other
|
|
|
189,983
|
|
|
|
189,983
|
|
Loss contingencies
|
|
|
76,250
|
|
|
|
40,000
|
|
Taxes payable
|
|
|
199,259
|
|
|
|
202,118
|
|
|
|
|
|
|
|
|
|
|
Total accrued expenses and other current
liabilities
|
|
$
|
665,997
|
|
|
$
|
632,606
|
|
Note
8. Collaboration Agreement with Related Party
On
January 16, 2015, the Company entered into a Co-Venture Agreement (the “Co-Venture Agreement”) with Modern Round,
LLC (“MR”), a wholly-owned subsidiary of TEC, a related party. The Co-Venture Agreement grants TEC an exclusive non-transferrable
license to use the Company’s technology and certain equipment solely for use at locations to operate the concept, as defined
in the Co-Venture Agreement. 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. Under the terms of the original agreement, 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.
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 the Company 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.
In
April 2018, Modern Round effected a 1 for 12,000 reverse stock split, followed by a 2,000 for 1 forward stock split completed
in November 2018. As a result, the Company holds, as of March 31, 2019 and December 31, 2018, 560,000 shares of TEC common stock
representing approximately 5.9% of the issued and outstanding common shares of TEC. The Company recorded its investment at cost
minus impairment as of March 31, 2019 and December 31, 2018, at $1,120,000.
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 payment; (iii) clarify the exclusivity provisions of the Agreement; and
(iv) amend the minimum royalty calculations to only TEC branded facilities. For the three months ended March 31, 2019 and 2018,
respectively, the Company recognized license fee income (royalties) from TEC of $39,637 and $43,788.
In
addition, at March 31, 2019, the Company holds a warrant to purchase 25,577 shares of TEC common stock, adjusted for the 1 for
12,000 reverse stock split and the 2,000 for 1 forward stock split, at an exercise price of $2.4436 per share, as adjusted. This
warrant became exercisable on the date of grant of April 14, 2015 and expires on the tenth anniversary of the date of grant, if
not earlier pursuant to the terms of the option.
Note
9. Related Party Transactions
Mr.
Saltz, who is a member of our Board of Directors, is also Chairman of the Board of Directors of TEC, as well as, a majority stockholder
of TEC. The Company has entered into a Co-venture Agreement with TEC as disclosed in Note 8. In addition, the Company owns 560,000
shares of TEC common stock representing approximately 5.9% of the issued and outstanding shares of TEC common stock. The Company
recognized $39,637 and $43,788 for license fees (royalties) for the three months ended March 31, 2019 and 2018, respectively,
pursuant to the terms of the Co-Venture Agreement. As of March 31, 2019 and December 31, 2018, TEC had accounts receivable balances
outstanding of $14,190 and $16,743, respectively.
Mr.
Richardson, who is a member of our Board of Directors, is also acting CEO of Natural Point, Inc., a vendor of the Company. For
the three months ended March 31, 2019 and 2018, the Company purchased specialized equipment from Natural Point in the amount of
$38,352 and $52,328, respectively. As of March 31, 2019, the Company had accounts payable balance outstanding with Natural Point
of $2,467, and as of December 31, 2018, the Company had a prepaid balance outstanding with Natural Point of $1,020.
Note
10. Commitments and Contingencies
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. In June 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 $76,250 and $40,000 as of March 31, 2019 and December 31,
2018, respectively (also see Note 12 Subsequent Events).
Employment
Agreements
On
April 2, 2012, the Company entered into three-year Employment Agreements with its Chief Executive Officer and Chief Operating
Officer that call for base annual salaries of $195,000 and $175,000, respectively, subject to cost of living adjustments, and
contain automatic one-year extension provisions. These contracts have been renewed annually and have been adjusted based on the
same percentage increase approved for Company-wide cost-of-living adjustments.
Profit
Sharing
VirTra
provides a discretionary profit-sharing program that pays out a percentage of company profits each year as a cash bonus to active
and eligible employees. The cash payment is typically split into two equal payments and distributed pro-rata to employees in April
and October of the following year after the completion of the annual financial audit. For the three months ended March 31, 2019
and 2018, the amount charged to operations was $0 due to net loss in the respective periods.
Note
11. Stockholders’ Equity
Authorized
Capital
Common
Stock.
Authorized
Shares
. The Company is authorized to issue 60,000,000 shares of Common Stock, par value $0.0001 per share (the “Common
Stock”), of which (a) 50,000,000 shares shall be Common Stock, par value $0.0001, (b) 2,500,000 shares shall be Class A
Common Stock, par value $0.0001 per share (the “Class A Common Stock”), and (c) 7,500,000 shares shall be Class B
Common Stock, par value $0.0001 per share (the “Class B Common Stock”). No Class A or Class B Common Stock has been
issued.
Rights
and Preferences
. Voting Rights. Except as otherwise required by the Nevada Revised Statues or as provided by or pursuant to
the provisions of the Articles of Incorporation:
(i)
Each holder of Common Stock shall be entitled to one (1) vote for each share of Common Stock held of record by such holder. The
holders of shares of Common Stock shall not have cumulative voting rights.
(ii)
Each holder of Class A Common Stock shall be entitled to ten (10) votes for each share of Class A Common Stock held of record
by such holder. The holders of shares of Class A Common Stock shall not have cumulative voting rights.
(iii)
The holders of Common Stock and Class A Common Stock shall vote together as a single class on all matters on which stockholders
are generally entitled to vote.
(iv)
The holders of Class B Common Stock shall not be entitled to vote on any matter, except that the holders of Class B Common Stock
shall be entitled to vote separately as a class with respect to amendments to the Articles of Incorporation that increase or decrease
the aggregate number of authorized shares of such class, increase or decrease the par value of the shares of such class, or alter
or change the powers, preferences, or special rights of the shares of such class so as to affect them adversely.
Preferred
Stock
Authorized
Shares
. The Company is authorized to issue 2,500,000 shares of preferred stock, par value $0.0001 per share (the “Preferred
Stock”).
Rights
and Preferences
. The Board of Directors is authorized at any time, and from time to time, to provide for the issuance of shares
of Preferred Stock in one or more series, and to determine the designations, preferences, limitations and relative or other rights
of the Preferred Stock or any series thereof.
Stock
Repurchase
On
October 25, 2016 the Company’s Board of Directors authorized the repurchase of up to $1,000,000 of its common stock under
the U.S. Securities and Exchange Commission (“SEC”) rule 10b-18. Purchases made pursuant to this authorization will
be made in the open market, in privately negotiated transactions, or pursuant to any trading plan that may be adopted in accordance
with the Rule 10b-18. The timing, manner, price and amount of any repurchases will be determined by the Company in its discretion
and will be subject to economic and market conditions, stock price, applicable legal requirements and other factors. On January
9, 2019, VirTra’s Board of Directors authorized an additional $1 million be allocated for the repurchase of VirTra’s
stock under the existing 10b-18 plan.
Treasury
Stock
During
the three months ended March 31, 2019, the Company purchased 68,239 additional treasury shares at an average cost of $3.82 per
share. As of December 31, 2018, the Company held 10,707 treasury shares at an average cost of $3.48 per share. As of March 31,
2019, all 78,946 treasury shares outstanding had been cancelled and returned to shares authorized.
Non-qualified
Stock Options
The
Company has periodically issued non-qualified stock options to key employees, officers and directors under a stock option compensation
plan approved by the Board of Directors in 2009. Terms of option grants are at the discretion of the Board of Directors and are
generally seven years. Upon the exercise of these options, the Company expects to issue new authorized shares of its common stock.
The following table summarizes all non-qualified stock options as of:
|
|
March
31, 2019
|
|
|
March
31, 2018
|
|
|
|
Number
of
|
|
|
Weighted
|
|
|
Number
of
|
|
|
Weighted
|
|
|
|
Stock
Options
|
|
|
Exercise
Price
|
|
|
Stock
Options
|
|
|
Exercise
Price
|
|
Options
outstanding, beginning of year
|
|
|
279,167
|
|
|
$
|
2.34
|
|
|
|
531,667
|
|
|
$
|
1.80
|
|
Granted
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Redeemed
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Exercised
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Expired
/ terminated
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Options
outstanding, end of quarter
|
|
|
279,167
|
|
|
$
|
2.34
|
|
|
|
531,667
|
|
|
$
|
1.80
|
|
Options
exercisable, end of quarter
|
|
|
279,167
|
|
|
$
|
2.34
|
|
|
|
521,667
|
|
|
$
|
1.82
|
|
The
Company did not have any non-vested stock options outstanding as of March 31, 2019. There were 10,000 non-vested stock options
as of March 31, 2018 that vested in October 2018. The weighted average contractual term for options outstanding and exercisable
at March 31, 2019 and 2018 was 7 years.
2017
Equity Incentive Plan
On
August 23, 2017, our board approved, subject to stockholder approval at the annual meeting of stockholders on October 6, 2017,
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
automatically increased on January 1, 2018, and will increase 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.
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.
As
of March 31, 2019 and December 31, 2018, there were no options issued under this plan.
Note
12. Subsequent Events
In
April, 2019, the Company entered into settlement discussions with a former customer pertaining to ongoing legal proceedings (see
Note 10 General or Threatened Litigation). On April 30, 2019 the Company’s settlement offer of $76,250 was verbally accepted
and a formal settlement agreement is in process. The agreement does not constitute an admission of any unlawful conduct or wrongdoing.
The Company had established a probable and estimated loss contingency of $40,000 as of December 31, 2018. The Company accrued
the full amount of the settlement liability as of March 31, 2019.
In
April, 2019, the Company purchased 14,450 shares of treasury stock at an average cost of $3.97 per share.