VirTra(VTSI) - 2023 Q4 - Annual Report

PART I Business Overview VirTra provides judgmental use of force and firearms training simulators, expanding market share through core growth, product broadening, and strategic partnerships - VirTra is a global provider of judgmental use of force and firearms training simulators for law enforcement, military, and commercial markets, leveraging patented technologies for realistic scenarios[19] - Key growth strategies involve building the core business, increasing total addressable market, broadening product offerings (including new VR), and pursuing partnerships and acquisitions[21][23][27][28] - Product offerings include V-300™, V-180™, V-100™ Simulators, V-ST PRO™, V-VICTA™, STEP™, V-Author™ Software, Simulated Recoil Kits, and the patented Threat-Fire™ device[23][27] - VirTra holds seven issued U.S. patents expiring between 2025 and 2037, along with key trademarks, protecting its intellectual property through trade secrets and copyrights[29][31][32][33][34] Research and Product Development Expenses | Year Ended December 31, | Amount ($) | | :---------------------- | :--------- | | 2023 | 2,794,314 | | 2022 | 2,606,840 | - As of March 22, 2024, VirTra employed 112 full-time employees, operating from its Chandler, Arizona office and an Orlando, Florida facility opened in 2022 to support East Coast and military business[38] - The company is subject to U.S. and international regulatory matters, including export laws (U.S. Export Administration Regulations, ITAR) and trade sanctions, with potential non-compliance penalties[39][40][41] Risk Factors VirTra faces risks from government contract reliance, intense competition, export control compliance, supply chain disruptions, intellectual property claims, and public company compliance costs - Substantially all 2023 revenues were from government contracts, making the company vulnerable to changes in government spending or contract terms[46][49] - The company operates in highly competitive markets with well-resourced competitors, facing risks from lower-priced or more innovative products, particularly in VR training tools[50][51][59][60] - Failure to obtain necessary licenses or comply with U.S. export control rules (e.g., ITAR) could materially adversely affect business, operations, and financial condition[55][56][57] - Future success depends on identifying, marketing, and selling new products that meet evolving customer preferences, with new products potentially not generating sufficient revenue to cover costs[52] - Disruptions to manufacturing, warehousing, distribution, or supplier capabilities from unforeseen events (e.g., natural disasters, cybersecurity breaches) could negatively impact revenue and operating results[61] - Third-party intellectual property infringement assertions could lead to significant costs, product usage cessation, or costly licensing agreements[63][64][65][66][67] - The loss of key executive officers, particularly Robert Ferris (Executive Chairman) and John Givens II (CEO), could materially harm the business due to their expertise and relationships[69] - As a public company, VirTra incurs significantly increased legal, accounting, and compliance costs, requiring substantial management time for initiatives like Sarbanes-Oxley Act Section 404[75][77] - The Common Stock price is likely to be highly volatile due to operating result fluctuations, limited public float, market conditions, and the absence of dividends[80][81][89] Unresolved Staff Comments The company has no unresolved staff comments from the SEC - Not applicable[90] Cybersecurity VirTra is enhancing cybersecurity with a new Director of Technology, pursuing CMMC certification by FY2025, and implementing a NIST-aligned program with Board oversight - VirTra is increasing information system investment, hiring a Director of Technology in 2024, and pursuing CMMC certification by fiscal year 2025[91] - The Management Leadership Team, with Board oversight, plans to implement a comprehensive cybersecurity program aligned with NIST frameworks[92] - The Director of Technology reports to the CFO, overseeing information security programs, strategy, and compliance, with Board and Audit Committee oversight of enterprise cybersecurity risks[93][94] - While no recent material cybersecurity incidents occurred, the company acknowledges potential risks like reputational harm, revenue loss, and legal actions from future incidents[95] Properties VirTra consolidated operations into a 76,650 sq ft Chandler, Arizona facility and leased a 9,350 sq ft Orlando, Florida facility for military and East Coast support - VirTra purchased a 76,650 square foot industrial building in Chandler, Arizona, for $10.8 million in August 2021, consolidating all operations by 2023[97][206] - The new Chandler facility is expected to support growth, enhance efficiency, and provide dedicated training and demo space, enabling remote demonstrations[97] - In June 2022, the company leased a 9,350 square foot facility in Orlando, Florida, to expand military business and East Coast customer service[98] Legal Proceedings There are no material pending legal proceedings against VirTra, other than routine litigation incidental to its business - There are no material pending legal proceedings, other than ordinary routine litigation incidental to the business[98] Mine Safety Disclosures Mine Safety Disclosures are not applicable to VirTra's business operations - Not applicable[99] PART II Market for Registrant's Common Equity, Related Stockholder Matters, and Issuer Purchases of Equity Securities VirTra's Common Stock trades on NASDAQ under "VTSI," with 11,109,730 shares outstanding held by approximately 39 record holders as of March 29, 2024 - VirTra's Common Stock is traded on The NASDAQ Capital Market under the symbol "VTSI"[102] Common Stock Outstanding and Holders | As of Date | Shares Outstanding | Holders of Record | | :------------- | :----------------- | :---------------- | | March 29, 2024 | 11,109,730 | Approximately 39 | - No Class A, Class B, or Preferred Stock shares were issued and outstanding as of March 29, 2024[102] Reserved This item is reserved and contains no information Management's Discussion and Analysis of Financial Condition and Results of Operations VirTra achieved significant 2023 financial growth with 34% revenue increase to $38.0 million and 330% net income surge to $8.4 million, driven by simulator sales and improved gross margin Key Financial Highlights (Year Ended December 31) | Metric | 2023 ($) | 2022 ($) | Change ($) | % Change | | :---------------------- | :----------- | :----------- | :----------- | :------- | | Revenues | 38,043,360 | 28,302,244 | 9,741,116 | 34% | | Cost of Sales | 11,378,264 | 12,047,366 | (669,102) | (6)% | | Gross Profit | 26,665,096 | 16,254,878 | 10,410,218 | 64% | | Gross Profit Margin | 70% | 57% | 13% pts | | | Net Operating Expense | 17,029,508 | 13,661,173 | 3,368,335 | 25% | | Income from Operations | 9,635,588 | 2,593,705 | 7,041,883 | 271% | | Other Income (Expense) | 586,082 | (66,165) | 652,247 | Positive | | Income Tax Expense | 1,818,812 | 571,642 | 1,247,170 | 218% | | Net Income | 8,402,858 | 1,955,898 | 6,446,960 | 330% | | Basic EPS | 0.77 | 0.18 | 0.59 | 328% | | Diluted EPS | 0.77 | 0.18 | 0.59 | 328% | Adjusted EBITDA (Year Ended December 31) | Metric | 2023 ($) | 2022 ($) | Change ($) | % Change | | :-------------- | :----------- | :----------- | :----------- | :------- | | Net Income | 8,402,858 | 1,955,898 | 6,446,960 | 330% | | EBITDA | 11,129,775 | 3,605,430 | 7,524,345 | 209% | | Adjusted EBITDA | 11,625,902 | 4,017,765 | 7,608,137 | 189% | Liquidity and Capital Resources (As of December 31) | Metric | 2023 ($) | 2022 ($) | Change ($) | % Change | | :---------------------- | :----------- | :----------- | :----------- | :------- | | Cash and Cash Equivalents | 18,849,842 | 13,483,597 | 5,366,245 | 39.8% | | Working Capital | 33,240,516 | 24,339,089 | 8,901,427 | 36.6% | Cash Flows (Year Ended December 31) | Activity | 2023 ($) | 2022 ($) | Change ($) | | :------------------------ | :----------- | :----------- | :----------- | | Operating Activities | 6,682,616 | (2,693,351) | 9,375,967 | | Investing Activities | (1,128,187) | (3,341,198) | 2,213,011 | | Financing Activities | (188,184) | (190,419) | 2,235 | - The increase in cash from operating activities was driven by changes in terms and conditions, enabling more upfront and quicker cash collection, decreasing unbilled revenue, and increasing deferred revenue[116] Backlog as of December 31, 2023 | Category | Amount ($ millions) | | :------- | :------------------ | | Capital | 10.5 | | Service | 6.3 | | STEP | 2.6 | | Total| 19.4 | - Management estimates that the majority of new bookings received in Q4 2023 will convert to revenue in 2024[119] - Management believes current capital resources are adequate for over 12 months of operations but remains open to raising additional funds for expansion and market opportunities[120] Revenue Disaggregation by Customer Location (Year Ended December 31) | Customer Type | 2023 Revenue ($) | 2023 % of Total | 2022 Revenue ($) | 2022 % of Total | | :------------ | :--------------- | :-------------- | :--------------- | :-------------- | | Governmental | 31,047,588 | 82% | 22,371,959 | 79% | | Commercial | 1,237,836 | 3% | 1,770,682 | 6% | | International | 5,757,936 | 15% | 4,159,603 | 15% | | Total | 38,043,360 | 100% | 28,302,244 | 100% | STEP Revenue (Year Ended December 31) | Year | STEP Revenue ($) | % of Total Net Sales | | :--- | :--------------- | :------------------- | | 2023 | 3,525,873 | 9% | | 2022 | 2,912,451 | 10% | Quantitative and Qualitative Disclosures About Market Risk The company has no material quantitative or qualitative disclosures about market risk - Not applicable[142] Financial Statements and Supplementary Data This section presents VirTra's audited financial statements for 2023 and 2022, including the Report of Independent Registered Public Accounting Firm, Balance Sheets, Statements of Operations, and Cash Flows, with detailed notes on accounting policies and financial items - The financial statements for 2023 and 2022 were audited by Haynie & Company, which issued an unqualified opinion[146][150] Balance Sheet Summary (As of December 31) | Metric | 2023 ($) | 2022 ($) | | :---------------------- | :----------- | :----------- | | Total Current Assets | 48,995,288 | 34,095,853 | | Total Long-Term Assets | 20,638,754 | 19,718,638 | | Total Assets | 69,634,042 | 53,814,491 | | Total Current Liabilities | 15,754,772 | 9,756,764 | | Total Long-Term Liabilities | 11,257,403 | 10,376,108 | | Total Liabilities | 27,012,175 | 20,132,872 | | Total Stockholders' Equity | 42,621,867 | 33,681,619 | Statements of Operations Summary (Year Ended December 31) | Metric | 2023 ($) | 2022 ($) | | :---------------------- | :----------- | :----------- | | Total Revenue | 38,043,360 | 28,302,244 | | Gross Profit | 26,665,096 | 16,254,878 | | Net Operating Expense | 17,029,508 | 13,661,173 | | Income from Operations | 9,635,588 | 2,593,705 | | Net Income | 8,402,858 | 1,955,898 | Statements of Cash Flows Summary (Year Ended December 31) | Activity | 2023 ($) | 2022 ($) | | :------------------------ | :----------- | :----------- | | Net cash from operating activities | 6,682,616 | (2,693,351) | | Net cash used in investing activities | (1,128,187) | (3,341,198) | | Net cash used in financing activities | (188,184) | (190,419) | | Net increase (decrease) in cash | 5,366,245 | (6,224,968) | | Cash, end of period | 18,849,842 | 13,483,597 | - Revenue recognition follows ASC 606, identifying performance obligations and allocating transaction prices, with primary sources including simulator sales, STEP programs, training, and extended warranties[166][167][169] Inventory Valuation (As of December 31) | Category | 2023 ($) | 2022 ($) | | :------------------------ | :----------- | :----------- | | Raw materials and work in process | 12,834,368 | 9,894,759 | | Reserve | (429,488) | (302,431) | | Total Inventory | 12,404,880 | 9,592,328 | Property and Equipment, Net (As of December 31) | Category | 2023 ($) | 2022 ($) | | :------------------------ | :----------- | :----------- | | Total property and equipment | 20,375,888 | 19,247,700 | | Less: Accumulated depreciation | (4,888,876) | (3,980,567) | | Property and equipment, net | 15,487,012 | 15,267,133 | Intangible Assets, Net (As of December 31) | Category | 2023 ($) | 2022 ($) | | :------------------------ | :----------- | :----------- | | Total intangible assets | 695,207 | 695,207 | | Less accumulated amortization | (127,667) | (107,430) | | Intangible assets, net | 567,540 | 587,777 | Accrued Compensation and Related Costs (As of December 31) | Category | 2023 ($) | 2022 ($) | | :------------------------ | :----------- | :----------- | | Salaries and wages payable | 457,565 | 502,940 | | Employee benefits payable | 54,811 | 31,618 | | Accrued paid time off (PTO) | 361,418 | 590,491 | | Profit sharing payable | 1,347,622 | 369,841 | | Total | 2,221,416 | 1,494,890 | Note Payable Summary (As of December 31) | Category | 2023 ($) | 2022 ($) | | :------------------------ | :----------- | :----------- | | Note payable, short-term | 226,355 | 232,537 | | Note payable, long-term | 7,813,021 | 8,050,116 | Income Tax Provision (Year Ended December 31) | Category | 2023 ($) | 2022 ($) | | :------------------------ | :----------- | :----------- | | Current | 4,924,686 | 1,136,170 | | Deferred | (3,105,874) | (564,528) | | Total Provision | 1,818,812 | 571,642 | Changes in and Disagreements with Accountants on Accounting and Financial Disclosures There have been no changes in or disagreements with accountants on accounting and financial disclosures - None[261] Controls and Procedures As of December 31, 2023, VirTra's disclosure controls and internal control over financial reporting were ineffective due to material weaknesses, with remediation efforts ongoing - As of December 31, 2023, VirTra's disclosure controls and procedures were not effective due to identified material weaknesses in internal control over financial reporting[261] - Management concluded that internal control over financial reporting was not effective as of December 31, 2023, based on the 2013 COSO framework[262] - Identified material weaknesses include a lack of multiple management review levels on complex issues and inadequate system and manual controls[263] - The company anticipates continuing to report material weaknesses until staff expansion and accounting system/procedure enhancements are completed[263] - Subsequent to December 31, 2023, the company implemented more formal review and documentation of workflow processes and increased ERP training[267] Other Information This item reports that there is no other information required to be disclosed - None[268] Disclosure Regarding Foreign Jurisdictions that Prevent Inspection This item reports that there are no disclosures regarding foreign jurisdictions that prevent inspection - None[269] PART III Directors, Executive Officers and Corporate Governance VirTra's five-member Board includes Executive Chairman Robert D. Ferris and CEO John F. Givens II, overseeing corporate risk through audit, compensation, and governance committees Board of Directors and Executive Officers | Name | Age | Position/Title | | :---------------- | :-- | :----------------------------- | | Robert D. Ferris | 51 | Executive Chairman of the Board| | John F. Givens II | 59 | Chief Executive Officer and Director | | Alanna Boudreau | 44 | Chief Financial Officer | | Jeffrey D. Brown | 59 | Director | | Gregg C.E. Johnson| 58 | Director | | Jim McDonnell | 64 | Director | - Robert D. Ferris transitioned to Executive Chairman in August 2023, and John F. Givens II was appointed CEO, having served as Co-CEO since April 2022[272][273] - Jeffrey D. Brown, Gregg C.E. Johnson, and Jim McDonnell are independent directors, but the Board lacks a majority of independent directors as per NASDAQ standards[281] - The Board of Directors oversees corporate risk, with the audit committee managing financial risks and the compensation committee overseeing compensation-related risks[283] - The Board has established an audit committee (chaired by Mr. Brown, an audit committee financial expert), a compensation committee, and a nominating and corporate governance committee (chaired by Mr. Johnson)[284][285][286][289] - The company has adopted a written Code of Ethics and a Whistleblower Protection Policy, applicable to all directors, officers, and employees, available on its website[290] Executive Compensation 2023 executive compensation included significant stock awards for CEO John F. Givens II ($617,332) and Executive Chairman Robert D. Ferris ($47,850), alongside a $1.26 million profit-sharing program 2023 Director Compensation | Name | Fees Earned or Paid in Cash ($) | Stock Awards ($) | | :---------------- | :------------------------------ | :--------------- | | Jeffrey D. Brown | 24,000 | - | | Gregg C.E. Johnson| 24,000 | - | | James McDonnell | 24,000 | 50,000 | 2023 Summary Executive Compensation | Name and Principal Position | Fiscal Year Ended | Salary ($) | Bonus ($) | Stock Awards ($) | Option Awards ($) | Total ($) | | :-------------------------- | :---------------- | :--------- | :-------- | :--------------- | :---------------- | :-------- | | Robert D. Ferris, Executive Chairman | 12/31/2023 | 349,860 | 12,334 | 47,850 | - | 410,044 | | John F. Givens II, Chief Executive Officer | 12/31/2023 | 349,860 | 6,943 | 617,332 | - | 974,135 | | Alanna Boudreau, Chief Financial Officer | 12/31/2023 | 185,385 | 307 | 36,800 | - | 222,492 | - Robert D. Ferris and John F. Givens II served as Co-CEOs until August 15, 2023, when Mr. Ferris became Executive Chairman and Mr. Givens became CEO[296] - The company has a discretionary profit-sharing program for eligible employees, with $1,260,431 expensed in 2023 and $300,000 in 2022[313] - The 2017 Equity Incentive Plan is designed to attract, retain, and motivate employees, officers, consultants, and directors through various equity awards[314] Securities Authorized for Issuance Under Equity Compensation Plans (As of December 31, 2023) | Plan Category | Number of securities to be issued upon exercise of outstanding options, warrants and rights (a) | Weighted average exercise price of outstanding options, warrants and rights (b) ($) | Number of securities remaining available for future issuance under equity compensation plans (c) | | :-------------------------------- | :------------------------------------------------------------------------------------------ | :---------------------------------------------------------------------------------- | :--------------------------------------------------------------------------------------------- | | Plans approved by our stockholders: VirTra, Inc. 2017 Equity Incentive Plan | - | - | 1,259,819 | | Plans not approved by stockholders: Stock Option Plan | 234,167 | 2.47 | - | Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters As of March 29, 2024, Robert D. Ferris beneficially owned 3.1% and John F. Givens II 2.1% of VirTra's Common Stock, with the executive group owning 5.7% Beneficial Ownership of Common Stock (As of March 29, 2024) | Name of Beneficial Owner | Amount and Nature of Beneficial Ownership | Percent of Class | | :---------------------------------------- | :---------------------------------------- | :--------------- | | Robert D. Ferris | 344,029 | 3.1% | | John F. Givens II | 236,341 | 2.1% | | Jeffrey D. Brown | 49,193 | * | | Alanna Boudreau | 7,291 | * | | Gregg C.E. Johnson | 2,100 | * | | Jim McDonnell | - | - | | All named executive officers and directors as a group (six persons) | 638,954 | 5.7% | - Beneficial ownership percentages are based on 11,109,730 shares of Common Stock outstanding as of March 29, 2024[326] Certain Relationships and Related Transactions, and Director Independence In 2023 and 2022, VirTra redeemed stock options from related parties, including the Executive Chairman, incurring additional compensation expense, and issued common stock upon option exercises Stock Option Redemptions from Related Parties | Year Ended December 31, | Options Redeemed | Additional Compensation Expense ($) | | :---------------------- | :--------------- | :-------------------------------- | | 2023 | 15,000 | 29,251 | | 2022 | 27,500 | 74,368 | Stock Option Exercises by Related Parties | Year Ended December 31, | Options Exercised | Exercise Price ($) | | :---------------------- | :---------------- | :----------------- | | 2023 | 15,000 | 54,900 | | 2022 | 17,500 | 40,845 | - Restricted stock units were awarded to executive officers in 2023 and 2022, as detailed in Item 11[330] Principal Accountant Fees and Services Haynie & Company, VirTra's independent auditor, billed $111,204 for 2023 audit fees, with all services pre-approved by the audit committee to ensure independence Principal Accountant Fees (Fiscal Years Ended December 31) | Fee Category | 2023 ($) | 2022 ($) | | :---------------- | :--------- | :--------- | | Audit Fees | 111,204 | 141,664 | | Audit-Related Fees| - | - | | Tax Fees | - | 55,500 | | All Other Fees | - | - | | Total | 111,204| 197,164| - All audit and permissible non-audit services provided by Haynie & Company were pre-approved by the audit committee[338] - The audit committee determined that the services provided were compatible with the provision of independent audit services[340] PART IV Exhibit and Financial Statement Schedules This section lists the financial statements, supplementary data, and comprehensive exhibits filed with the Form 10-K, including governance and financial documents - The consolidated financial statements and Report of Independent Registered Public Accounting Firm are included, starting on page F-2[342] - All required financial statement schedules are either not applicable or their disclosures are contained within the financial statements[343] - A detailed list of exhibits is provided, including Articles of Incorporation, Bylaws, Employment Agreements, and various SEC certifications[345][348] Form 10-K Summary This item indicates that no Form 10-K summary is provided - None[348] Signatures The Form 10-K report is signed by the CEO, CFO, Executive Chairman, and other Directors, with the CEO and CFO authorized as attorneys-in-fact for amendments - The report is signed by John F. Givens II (CEO) and Alanna Boudreau (CFO) on April 1, 2024[352] - Signatories, including Robert D. Ferris (Executive Chairman), appoint John F. Givens II and Alanna Boudreau as attorneys-in-fact for report amendments[353][354]