VirTra(VTSI) - 2019 Q4 - Annual Report

PART I Business Overview VirTra provides judgmental use of force, firearms training, and driving simulators to global law enforcement and military markets - The company focuses on providing judgmental use of force, firearms training, and driving simulators for law enforcement, military, educational, and commercial markets[19] - Its mission is to save and improve lives worldwide through practical and effective virtual reality and simulator technology[19] - Key growth strategies include consolidating core business, expanding the total addressable market, broadening product lines, and seeking partnerships and acquisitions[23][24] - Competitive advantages lie in high-quality software solutions, patented accessories, and extensive virtual shooting scenario content[30] - As of December 31, 2019, the company had 88 full-time employees[47] - As of December 31, 2019, the company had sales contracts and warranty service obligations in the United States and 33 other countries[49] R&D Expenses | Year | R&D Expenses (USD) | | :--- | :--- | | 2019 | 1,346,000 | | 2018 | 1,358,000 | Our Corporate History - The company originated as Ferris Productions, Inc in 1993, merged with GameCom, Inc in 2001 to become VirTra Systems, Inc, and converted to a Nevada corporation, VirTra, Inc, on October 1, 2016[13][14] - On March 2, 2018, the company conducted a 1-for-2 reverse stock split[16] Business Overview - VirTra, Inc is a global provider of judgmental use of force, firearms training, and driving simulators for law enforcement, military, educational, and commercial markets[19] - The company's patented technology, software, and scenarios provide high-intensity training that simulates real-world situations, aiming to save and improve lives globally[19] Business Strategy - The company's primary customer groups include law enforcement, military, educational, and civilian markets[23] - Key growth strategies include consolidating core business, expanding the total addressable market, broadening product lines, and seeking partnerships and acquisitions[24] Product Offerings - Key simulator products include the V-300™ (300-degree wraparound screen), V-180™ (180-degree screen), and V-100™/V-100™ MIL (single-screen systems), offering decision-making simulations and tactical firearms training[25][27] - Other products and services include the VirTra Driving Simulator, V-VICTA™ (Virtual Interactive Coursework Training Academy), STEP™ (Subscription Training Equipment Partnership program), V-Author™ software, simulated recoil kits, Threat-Fire™ return fire system, and TASER©, OC spray, and low-light training devices[21][27] Modern Round, a Related Party - The company has a joint venture agreement with Modern Round, Inc (a subsidiary of That's Eatertainment Corp (TEC)), licensing its technology for use in virtual shooting entertainment venues in exchange for a percentage of sales[26][28] - VirTra board member Mitchell Saltz is the Chairman and majority shareholder of TEC[26][28] - The company holds 560,000 shares of TEC common stock, representing approximately 4.8% of outstanding shares, and recognized investment impairment losses of $280,000 in 2019 and $254,900 in 2018[37] TEC Licensing Fee Revenue | Year | Licensing Fee Revenue (USD) | | :--- | :--- | | 2019 | 130,625 | | 2018 | 549,568 | Operations and Suppliers - The company manufactures some products in-house while relying on various suppliers for key components, with production facilities located in Tempe, Arizona[29][46][47] Competition and Competitive Landscape - The company competes in a highly competitive market against firms such as Arotech, Inc, Cubic, Inc, Laser Shot, Inc, Meggitt Training Systems, and Ti Training Corp[29] - The company believes its products and services are superior to competitors due to high-quality software, patented accessories, and extensive virtual training scenario content[30] Intellectual Property - The company protects its intellectual property through patents, trademarks, copyrights, proprietary technology, trade secrets, and confidentiality agreements[39][40][44] - The company holds three issued U.S. patents (expiring between 2025 and 2037) and has two pending patent applications[41] - The company owns registered trademarks including "VirTra," "VirTra Systems," and "Threat-Fire"[42] Research and Development R&D Expenses | Year | R&D Expenses (USD) | | :--- | :--- | | 2019 | 1,346,000 | | 2018 | 1,358,000 | Sources and Availability of Raw Materials/Manufacturing and Assembly - The company sources key product components from local suppliers and believes alternative sources are available[46] - Manufacturing, assembly, warehousing, and shipping facilities are located in Tempe, Arizona[47] Employees - As of December 31, 2019, the company had 88 full-time employees and maintains good working relationships with no labor disputes[47] Property - The company leases approximately 37,729 square feet of office and warehouse space and approximately 5,131 square feet for a machine shop in Tempe, Arizona, with both leases expiring in April 2024[48] Operations - The company's operational headquarters is in Tempe, Arizona, with no international offices or employees, but it has sales contracts and warranty services in the U.S. and 33 countries[49] Regulatory Matters - The company's business is subject to regulation by U.S. and international government agencies, including the U.S. military and the Department of Homeland Security[51] - The company is also subject to export laws and regulations, such as the U.S. Export Administration Regulations and the International Traffic in Arms Regulations (ITAR), with non-compliance potentially leading to civil or criminal penalties[52][53] Government Contracts - The U.S. government and other governments may terminate contracts for convenience or default, with default potentially making the company liable for re-procurement costs and damages[54] Environmental - The company complies with federal, state, local, and non-U.S. environmental protection laws and regulations, with related compliance and management costs being part of daily operations[55] Risk Factors The company faces risks from government contract dependency, COVID-19 impacts, competition, innovation, and intellectual property protection - Heavy reliance on government contracts makes revenue susceptible to budget cuts or contract terminations, which could materially and adversely affect business, sales, and cash flow[58][60] - The COVID-19 pandemic could adversely affect operations, supply chain, sales, and marketing, and a potential economic downturn could impact product demand[61][63] - Intense market competition from rivals offering lower-priced or more innovative products could lead to a significant decline in sales[64][65] - Failure to effectively protect intellectual property (patents, trademarks, copyrights, trade secrets) could harm the brand and competitive position, and the company may face third-party infringement claims[82][83][84] - The company has material weaknesses in internal controls, which could result in inaccurate financial reporting, loss of investor confidence, and potential regulatory investigations[96][97] - The company's stock price may be highly volatile due to factors such as fluctuating operating results, market sentiment, competitor announcements, limited financing ability, and loss of key personnel[100][101] Risks Related to Our Business - A significant portion of revenue comes from government contracts, making the business vulnerable to budget cuts, policy changes, or contract terminations[58][59][60] - Public health events like COVID-19 could disrupt the supply chain, manufacturing, sales, and marketing activities, and lead to an economic downturn affecting product demand[61][63][76] - The market is highly competitive, and rivals may introduce lower-priced or more innovative products, causing a decline in sales and operating performance[64][65][74] - Product components may pose safety risks, leading to potential liability claims, and existing insurance may not be sufficient to cover all claims[77] - Failure to effectively protect intellectual property could harm the brand and competitive ability, and the company may face third-party infringement lawsuits, resulting in high costs and resource diversion[78][79][82] - The company relies on its executive team, and the loss of key personnel could adversely affect its business strategy and financial performance[86] - Failure to implement and maintain effective internal control over financial reporting could lead to a loss of investor confidence in the accuracy of financial reports and affect the stock price[87][88] Risks Relating to Our Stock - Nasdaq may delist the company's common stock, limiting shareholders' ability to trade and potentially resulting in limited market quotations and reduced liquidity[98] - The price of the company's common stock may be highly volatile due to factors such as fluctuating operating results, market sentiment, competitor announcements, limited financing ability, and loss of key personnel[100][101] - The company may need to raise additional capital, and failure to obtain it could lead to business failure or adversely affect operating results and stock price[103] - Issuing additional common stock to pay for services or repay debt will dilute existing shareholders' ownership and voting rights and may negatively impact the stock price[104] - Provisions in the company's articles of incorporation and bylaws could delay or prevent an acquisition that may not be in the best interests of shareholders[108] - The company has never paid dividends on its common stock and has no plans to do so in the future, meaning investor returns will primarily come from stock price appreciation[109] Unresolved Staff Comments The company has no unresolved comments from the staff of the Securities and Exchange Commission - Not applicable[110] Properties The company leases its primary office, manufacturing, and warehouse facilities in Tempe, Arizona, totaling approximately 42,860 square feet - The company leases approximately 37,729 square feet of office and warehouse space for its corporate headquarters, manufacturing, assembly, warehousing, and shipping facilities[111] - The company also leases approximately 5,131 square feet of office and industrial space as a machine shop within the same commercial complex[111] - Both properties are under the same lease agreement, which expires in April 2024[111] Legal Proceedings The company settled a breach of contract and warranty claim from a former customer for $76,250 in May 2019 - In May 2019, the company reached a $76,250 settlement regarding breach of contract and warranty claims from a former customer[112] - As of December 31, 2018, the company had established a $40,000 contingency reserve for this matter, and the settlement was fully accrued and paid by December 31, 2019[112] Mine Safety Disclosures The company has no mine safety disclosures to report - Not applicable[113] PART II Market for Registrant's Common Equity, Related Stockholder Matters, and Issuer Purchases of Equity Securities VirTra's common stock trades on the Nasdaq Capital Market under "VTSI," with 7,745,030 shares outstanding held by 169 stockholders as of March 2020 - The company's common stock is traded on the Nasdaq Capital Market under the symbol "VTSI"[115] - As of March 23, 2020, there were 7,745,030 shares of common stock outstanding, held by approximately 169 registered stockholders[6][115] - On January 9, 2019, the Board of Directors authorized an additional $1 million for stock repurchases under the existing 10b-18 plan[119] - No stock repurchases were made between October 1, 2019, and December 31, 2019[118] Selected Financial Data The company has not provided selected financial data - Not applicable[120] Management's Discussion and Analysis of Financial Condition and Results of Operations This section discusses VirTra's financial condition and operating results for fiscal years 2019 and 2018, highlighting key performance metrics and trends - The COVID-19 pandemic may adversely affect the company's operations, supply chain, sales, and marketing, and a potential economic downturn could impact product demand and operating results[130][132] - As of December 31, 2019, the company's backlog was $9.6 million, and total revenue plus backlog was $28.3 million, a year-over-year increase of 13.7%[146] - Management believes existing capital resources are sufficient to support operations and current business strategy for over 12 months and is open to future financing to support growth[148] Key Financial Data (2019 vs 2018) | Metric | 2019 (USD) | 2018 (USD) | Change (USD) | Change (%) | | :----------------------- | :------------- | :------------- | :----------- | :------- | | Total Revenue | 18,711,923 | 18,080,126 | 631,797 | 3.5% | | Cost of Sales | 8,998,232 | 7,030,286 | 1,967,946 | 28.0% | | Gross Profit | 9,713,691 | 11,049,840 | (1,336,149) | -12.1% | | Net Operating Expenses | 9,451,373 | 10,049,939 | (598,566) | -6.0% | | Operating Income | 262,318 | 999,901 | (737,583) | -73.8% | | Income Tax Expense | 446,725 | 309,998 | 136,727 | 44.1% | | Net (Loss) Income | (75,277) | 818,092 | (893,369) | -109.2% | Adjusted EBITDA (2019 vs 2018) | Metric | 2019 (USD) | 2018 (USD) | Change (USD) | Change (%) | | :----------------------------------- | :------------- | :------------- | :----------- | :------- | | Net (Loss) Income | (75,277) | 818,092 | (893,369) | -109.2% | | Provision for Income Taxes | 446,725 | 309,998 | 136,727 | 44.1% | | Depreciation and Amortization | 307,952 | 291,855 | 16,097 | 5.5% | | EBITDA | 679,400 | 1,419,945 | (740,545) | -52.2% | | Impairment loss on related party That's Eatertainment | 280,000 | 254,933 | 25,067 | 9.8% | | Non-cash stock option compensation | - | 7,124 | (7,124) | -100.0% | | Provision for notes receivable | 108,174 | 266,813 | (158,639) | -59.5% | | Adjusted EBITDA | 1,067,574 | 1,948,815 | (881,241) | -45.2% | Liquidity and Capital Resources (2019 vs 2018) | Metric | Dec 31, 2019 (USD) | Dec 31, 2018 (USD) | | :------------------- | :-------------------- | :-------------------- | | Cash and Cash Equivalents | 1,415,091 | 2,500,381 | | Certificates of Deposit | 1,915,000 | 3,490,000 | | Working Capital | 7,173,280 | 6,769,068 | Results of operations for the years ended December 31, 2019 and December 31, 2018 - Gross margin decreased from 61.1% in 2018 to 51.9% in 2019, primarily due to changes in the type and volume of simulator systems, accessories, and services sold[135] Comparison of Operating Results | Metric | 2019 (USD) | 2018 (USD) | Change (USD) | Change (%) | | :----------------------- | :------------- | :------------- | :----------- | :------- | | Total Revenue | 18,711,923 | 18,080,126 | 631,797 | 3.5% | | Cost of Sales | 8,998,232 | 7,030,286 | 1,967,946 | 28.0% | | Gross Profit | 9,713,691 | 11,049,840 | (1,336,149) | -12.1% | | Net Operating Expenses | 9,451,373 | 10,049,939 | (598,566) | -6.0% | | Operating Income | 262,318 | 999,901 | (737,583) | -73.8% | | Income Tax Expense | 446,725 | 309,998 | 136,727 | 44.1% | | Net (Loss) Income | (75,277) | 818,092 | (893,369) | -109.2% | Adjusted Earnings Before Interest, Taxes, Depreciation and Amortization (AEBITDA) - Adjusted EBITDA is a non-GAAP measure that excludes certain non-operating costs and revenues, such as non-cash stock option expense, impairment charges, and bad debt expense[141] Adjusted EBITDA Reconciliation | Metric | 2019 (USD) | 2018 (USD) | Change (USD) | Change (%) | | :----------------------------------- | :------------- | :------------- | :----------- | :------- | | Net (Loss) Income | (75,277) | 818,092 | (893,369) | -109.2% | | Provision for Income Taxes | 446,725 | 309,998 | 136,727 | 44.1% | | Depreciation and Amortization | 307,952 | 291,855 | 16,097 | 5.5% | | EBITDA | 679,400 | 1,419,945 | (740,545) | -52.2% | | Impairment loss on related party That's Eatertainment | 280,000 | 254,933 | 25,067 | 9.8% | | Non-cash stock option compensation | - | 7,124 | (7,124) | -100.0% | | Provision for notes receivable | 108,174 | 266,813 | (158,639) | -59.5% | | Adjusted EBITDA | 1,067,574 | 1,948,815 | (881,241) | -45.2% | Liquidity and Capital Resources Liquidity Metrics | Metric | Dec 31, 2019 (USD) | Dec 31, 2018 (USD) | | :------------------- | :-------------------- | :-------------------- | | Cash and Cash Equivalents | 1,415,091 | 2,500,381 | | Certificates of Deposit | 1,915,000 | 3,490,000 | | Working Capital | 7,173,280 | 6,769,068 | Cash Flow Activities | Activity Type | 2019 (USD) | 2018 (USD) | | :----------------- | :------------- | :------------- | | Net Cash from Operating Activities | (1,432,351) | 1,828,075 | | Net Cash from Investing Activities | 699,165 | (3,782,827) | | Net Cash from Financing Activities | (352,104) | (625,312) | Backlog - As of December 31, 2019, the company's backlog was $9.6 million[146] - New orders totaled $4.2 million in the fourth quarter of 2019[146] - Total revenue and backlog for 2019 amounted to $28.3 million, a 13.7% increase from 2018[146] Cash Requirements - Management believes existing capital resources are sufficient to support operations and the current business strategy for more than 12 months[148] - The company is open to raising additional capital through capital markets for acquisitions, capacity expansion, product services, and sales and marketing[148] Critical Accounting Policies - Critical accounting policies involve estimates and judgments regarding share-based payments, bad debt allowance, inventory reserves, warranty provisions, long-lived assets, income tax valuation allowance, cost-method investments, and allocation of transaction prices in customer contracts[151] - The company recognizes revenue under ASC 606 by identifying contracts, performance obligations, allocating transaction prices, and recognizing revenue when performance obligations are satisfied[158][160] - The company uses the Black-Scholes-Merton option-pricing model to calculate the fair value of equity incentives, which is amortized over the relevant vesting period[162][163] - The company estimates warranty costs based on historical claim experience and records a liability at the time of product sale[168] Off-Balance Sheet Arrangements - As of December 31, 2019, the company had no off-balance sheet arrangements that had a material effect on its financial condition, results of operations, or liquidity[170] Quantitative and Qualitative Disclosures About Market Risk The company has no quantitative and qualitative disclosures about market risk - Not applicable[171] Financial Statements and Supplementary Data This section contains VirTra's audited financial statements for the years ended December 31, 2019 and 2018, with an unqualified opinion from its auditor - MaloneBailey, LLP issued an unqualified opinion on the company's financial statements for the years ended December 31, 2019 and 2018[176] - The financial statements are prepared in accordance with U.S. Generally Accepted Accounting Principles (GAAP)[197] - The company adopted ASC 842, Leases, on January 1, 2019, using the modified retrospective method, with no material impact on the financial statements[213] - The company adopted ASU 2018-07, Compensation—Stock Compensation, on January 1, 2019, with no material impact on the financial statements[215] INDEX TO HISTORICAL FINANCIAL STATEMENTS - The index lists the audited financial statements for the years ended December 31, 2019 and 2018, including the report of the independent registered public accounting firm, balance sheets, statements of operations, statements of changes in stockholders' equity, statements of cash flows, and notes to financial statements[174] REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM - MaloneBailey, LLP issued an unqualified opinion on the financial statements of VirTra, Inc for the years ended December 31, 2019 and 2018[176] - The audit was conducted in accordance with PCAOB standards but did not include an opinion on the effectiveness of internal controls[178] BALANCE SHEETS Balance Sheet Summary | Metric | Dec 31, 2019 (USD) | Dec 31, 2018 (USD) | | :----------------------- | :-------------------- | :-------------------- | | Assets | | | | Total Current Assets | 11,528,734 | 10,380,871 | | Total Long-Term Assets | 5,931,059 | 4,837,142 | | Total Assets | 17,459,793 | 15,218,013 | | Liabilities and Stockholders' Equity | | | | Total Current Liabilities | 4,355,454 | 3,611,803 | | Total Long-Term Liabilities | 2,923,139 | 1,008,879 | | Total Liabilities | 7,278,593 | 4,620,682 | | Total Stockholders' Equity | 10,181,200 | 10,597,331 | | Total Liabilities and Stockholders' Equity | 17,459,793 | 15,218,013 | STATEMENTS OF OPERATIONS Statement of Operations Summary | Metric | 2019 (USD) | 2018 (USD) | | :----------------------- | :------------- | :------------- | | Total Revenue | 18,711,923 | 18,080,126 | | Cost of Sales | 8,998,232 | 7,030,286 | | Gross Profit | 9,713,691 | 11,049,840 | | Net Operating Expenses | 9,451,373 | 10,049,939 | | Operating Income | 262,318 | 999,901 | | Income Tax Expense | 446,725 | 309,998 | | Net (Loss) Income | (75,277) | 818,092 | | Basic Net (Loss) Income Per Share | (0.01) | 0.10 | | Diluted Net (Loss) Income Per Share | (0.01) | 0.10 | STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY - Total stockholders' equity was $10,181,200 as of December 31, 2019, a decrease from $10,597,331 in 2018, primarily due to the net loss in 2019 and treasury stock purchases[189] - The company reported a net loss of $75,277 in 2019, compared to a net income of $818,092 in 2018[189] - Treasury stock repurchases amounted to $318,204 in 2019 and $381,937 in 2018[189] STATEMENTS OF CASH FLOWS - Cash used in operating activities was $1,432,351 in 2019, primarily due to an increase in accounts receivable and unbilled revenue, partially offset by deferred revenue[143][192] - Cash provided by investing activities was $699,165 in 2019, mainly from the redemption of certificates of deposit, partially offset by purchases of property and intangible assets[144][192] - Cash used in financing activities was $352,104 in 2019, primarily for the repurchase of stock options and treasury stock[145][192] Statement of Cash Flows Summary | Activity Type | 2019 (USD) | 2018 (USD) | | :----------------- | :------------- | :------------- | | Net Cash from Operating Activities | (1,432,351) | 1,828,075 | | Net Cash from Investing Activities | 699,165 | (3,782,827) | | Net Cash from Financing Activities | (352,104) | (625,312) | | Net Decrease in Cash | (1,085,290) | (2,580,064) | | Cash at End of Period | 1,415,091 | 2,500,381 | Notes to Financial Statements Note 1. Organization and Significant Accounting Policies - The company adopted ASC 606, Revenue from Contracts with Customers, on January 1, 2018, using the modified retrospective transition method, with no material impact on the financial statements[200] - In 2019, government customers accounted for 82% of total net sales, commercial customers for 5%, and international customers for 13%[207] - The company adopted ASU 2016-02, Leases (Topic 842), on January 1, 2019, using the modified retrospective method, recognizing right-of-use assets and lease liabilities[213] - The company's cash, cash equivalents, and certificates of deposit are held at high-credit-quality financial institutions, with $1,069,887 in cash and cash equivalents uninsured by the FDIC as of December 31, 2019[233] - As of December 31, 2019, the company had net deferred tax assets of $1,792,000 and believes all deferred tax assets will be realized, with no valuation allowance recorded[279] Revenue by Customer Location and Performance Obligation (2019 vs 2018) | Revenue Source | 2019 (USD) | 2018 (USD) | | :----------------------- | :------------- | :------------- | | Simulators and Accessories | 13,592,600 | 14,583,171 | | Extended Service-Type Warranties | 2,371,433 | 1,896,077 | | Custom Software and Content Scenarios | 1,629,550 | 496,068 | | Installation and Training | 965,158 | 547,597 | | Licenses and Royalties | 153,182 | 557,213 | | Total Revenue | 18,711,923 | 18,080,126 | Note 2. Notes Receivable - In 2019, the company converted a customer's past-due trade receivable of $400,906 into an unsecured promissory note; the remaining $102,473 was recognized as bad debt expense after the customer's dissolution[250] - The company accepted a $292,138 unsecured convertible promissory note from related party TEC with a 5% annual interest rate, convertible into TEC common stock at the company's discretion; the maturity date was extended to August 1, 2020[251] - As of December 31, 2019, the principal and accrued interest on the convertible note was $296,811, with a $5,701 allowance for collectability recorded[251] Note 3. Inventory - The company classifies $351,236 (2019) and $292,298 (2018) of spare replacement parts as long-term other assets[253] Inventory Composition | Inventory Category | Dec 31, 2019 (USD) | Dec 31, 2018 (USD) | | :------------------- | :-------------------- | :-------------------- | | Raw Materials and Work-in-Process | 2,070,066 | 1,717,033 | | Reserve | (120,652) | (105,031) | | Total Inventory | 1,949,414 | 1,612,002 | Note 4. Property and Equipment - Depreciation expense, including STEP equipment depreciation, was $299,804 in 2019 and $291,855 in 2018[254] Net Property and Equipment | Category | Dec 31, 2019 (USD) | Dec 31, 2018 (USD) | | :------------------- | :-------------------- | :-------------------- | | Computer Equipment | 1,115,326 | 1,054,004 | | Furniture and Office Equipment | 223,925 | 207,921 | | Machinery and Equipment | 1,096,898 | 1,021,188 | | Leasehold Improvements | 334,934 | 324,313 | | STEP Equipment | 481,946 | - | | Total Property and Equipment | 3,253,029 | 2,607,426 | | Less: Accumulated Depreciation | (2,224,831) | (1,929,181) | | Net Property and Equipment | 1,028,198 | 678,245 | Note 5. Intangible Asset - Amortization expense was $8,148 in 2019, with a weighted-average remaining amortization period of 17 years[255] Net Intangible Assets | Category | Dec 31, 2019 (USD) | Dec 31, 2018 (USD) | | :------------------- | :-------------------- | :-------------------- | | Patents | 160,000 | - | | Capitalized Media Content | 66,078 | - | | Total Intangible Assets | 226,078 | - | | Less: Accumulated Amortization | (8,148) | - | | Net Intangible Assets | 217,930 | - | Note 6. Leases - The company leases office and warehouse space, as well as a machine shop, in Tempe, Arizona, with both leases expiring in April 2024[256] - The company adopted ASC 842, Leases, on January 1, 2019, recognizing right-of-use assets and lease liabilities[259] Lease Assets and Liabilities (Dec 31, 2019) | Category | Amount (USD) | | :----------------------- | :---------- | | Operating Lease Right-of-Use Assets | 1,390,873 | | Short-Term Operating Lease Liabilities | 297,244 | | Long-Term Operating Lease Liabilities | 1,174,882 | | Total Lease Liabilities | 1,472,126 | Future Minimum Lease Payments (Dec 31, 2019) | Year | Amount (USD) | | :--- | :---------- | | 2020 | 357,452 | | 2021 | 368,060 | | 2022 | 379,097 | | 2023 | 390,562 | | 2024 | 131,152 | | Total Lease Payments | 1,626,323 | | Less: Imputed Interest | (154,197) | | Operating Lease Liabilities | 1,472,126 | Note 7. Accrued Expenses Accrued Compensation and Related Costs (2019 vs 2018) | Category | Dec 31, 2019 (USD) | Dec 31, 2018 (USD) | | :------------------- | :-------------------- | :-------------------- | | Wages and Salaries Payable | 192,161 | 147,677 | | Medical Contributions Payable | 1,633 | - | | 401(k) Contributions Payable | 9,626 | 8,232 | | Accrued Paid Time Off | 287,846 | 265,962 | | Profit Sharing Payable | 120,221 | 191,820 | | Total Accrued Compensation and Related Costs | 611,487 | 613,691 | Accrued Expenses and Other Current Liabilities (2019 vs 2018) | Category | Dec 31, 2019 (USD) | Dec 31, 2018 (USD) | | :------------------- | :-------------------- | :-------------------- | | Manufacturer's Warranty | 257,000 | 200,505 | | Other Warranties | 74,176 | 189,983 | | Contingent Loss | - | 40,000 | | Taxes Payable | 2,382 | 202,118 | | Other Payables | 1,193 | - | | Total Accrued Expenses and Other Current Liabilities | 334,751 | 632,606 | Note 8. Collaboration Agreement with Related Party - The company has a joint venture agreement with related party Modern Round, LLC (a subsidiary of TEC), licensing its technology in exchange for a percentage of sales[264] - VirTra board member Mitchell Saltz is the Chairman and majority shareholder of TEC[264] - In July 2019, the company and TEC signed the First Amendment to the Convertible Promissory Note, extending the maturity date to August 1, 2020, for which TEC paid $16,000[267] - The company holds 560,000 shares of TEC common stock (approx 4.8%) and recognized impairment losses of $280,000 in 2019 and $254,900 in 2018[268] Note 9. Related Party Transactions - In 2019 and 2018, the company redeemed 34,225 and 220,523 expiring stock options, respectively, from related parties (including the CEO, COO, and directors), resulting in additional compensation expense[270][364] - In 2019 and 2018, related parties exercised 5,000 and 10,700 stock options, respectively, resulting in the issuance of common stock to the CEO and a director[271][365] - Licensing fee revenue from TEC was $130,625 in 2019 and $549,568 in 2018[272] - The company purchased professional equipment from Natural Point, Inc, where director James Richardson serves as CEO, with purchases totaling $167,302 in 2019 and $122,758 in 2018[273][366] Note 10. Commitments and Contingencies - The company reached a $76,250 settlement in May 2019 for a breach of contract and warranty claim from a former customer, which has been fully paid[274] - The company filed a lawsuit over a trade note receivable and was awarded a $396,575 judgment in September 2019; however, due to the customer's dissolution, the remaining $102,473 was recognized as bad debt expense as of December 31, 2019[275] - The company has employment agreements with its CEO and COO, stipulating base annual salaries and automatic renewal clauses[277] - The company has a discretionary profit-sharing plan, with $93,160 accrued in 2019 and $166,506 in 2018[278] Note 11. Income Taxes - The company estimates it has approximately $1.3 million in federal net operating loss carryforwards as of December 31, 2019, available to offset future taxable income, which will expire through 2039[280] - The increase in income tax expense in 2019 was primarily due to adjustments to deferred tax assets and temporary differences related to deferred revenue, reserves, depreciation, amortization, and net operating loss carryforwards[281] Deferred Tax Assets (2019 vs 2018) | Category | Dec 31, 2019 (USD) | Dec 31, 2018 (USD) | | :----------------------- | :-------------------- | :-------------------- | | Net Operating Loss Carryforwards | 762,000 | 586,000 | | Tax Credits | 286,000 | - | | Deferred Revenue | 58,000 | 989,000 | | Non-Qualified Stock Option Expense | 136,000 | 147,000 | | Investment in Related Party That's Eatertainment | 51,000 | 39,000 | | Reserves, Accruals, and Other | 231,000 | 160,000 | | Accumulated Depreciation and Amortization | 268,000 | 479,000 | | Total Deferred Tax Assets | 1,792,000 | 2,400,000 | | Less: Valuation Allowance | - | - | | Net Deferred Tax Assets | 1,792,000 | 2,400,000 | Income Tax Expense (2019 vs 2018) | Category | 2019 (USD) | 2018 (USD) | | :------------------- | :------------- | :------------- | | Current | (162,000) | - | | Deferred | 608,000 | 310,000 | | Change in Valuation Allowance | - | - | | Income Tax Expense | 446,000 | 310,000 | Note 12. Stockholders' Equity - The company is authorized to issue 60,000,000 shares of common stock (including 50,000,000 common, 2,500,000 Class A common, and 7,500,000 Class B common) and 2,500,000 shares of preferred stock[282][287] - Common stock carries one vote per share, Class A common stock carries ten votes per share, and Class B common stock is non-voting (except in specific circumstances)[283][285][286] - The Board of Directors authorized a repurchase of up to $1 million of common stock on October 25, 2016, and an additional $1 million on January 9, 2019[288] - As of December 31, 2019, all treasury shares had been retired and returned to authorized shares[289] - The 2017 Equity Incentive Plan initially authorized and reserved 1,187,500 shares of common stock, with an automatic annual increase beginning January 1, 2019[294] Treasury Stock Repurchases | Year | Total Shares Repurchased | Average Price Per Share (USD) | | :--- | :----------- | :------------------ | | 2019 | 82,689 | 3.85 | | 2018 | 98,063 | 3.89 | Non-Qualified Stock Options Overview (2019 vs 2018) | Metric | Dec 31, 2019 | Dec 31, 2018 | | :------------------- | :------------- | :------------- | | Outstanding Options at Beginning of Period | 279,167 | 531,667 | | Outstanding Options at End of Period | 234,167 | 279,167 | | Exercisable Options at End of Period | 234,167 | 279,167 | | Weighted-Average Exercise Price of Outstanding Options | $2.47 | $2.34 | | Weighted-Average Exercise Price of Exercisable Options | $2.47 | $2.34 | Note 13. Subsequent Events - In March 2020, the company's Board of Directors approved the filing of a Form S-3 registration statement with the SEC following the completion of the 2019 annual audit[297] Changes in and Disagreements With Accountants on Accounting and Financial Disclosures The company reports no changes in or disagreements with its accountants on accounting and financial disclosures - None[299] Controls and Procedures VirTra's disclosure controls and internal control over financial reporting were deemed ineffective as of December 31, 2019 - As of December 31, 2019, the company's disclosure controls and procedures were deemed ineffective due to material weaknesses in internal control over financial reporting[300] - As of December 31, 2019, the company's internal control over financial reporting was deemed ineffective, primarily due to a lack of multi-layered management review for complex business, accounting, and financial reporting issues, as well as insufficient system and manual controls[301][302] - There were no material changes in internal control over financial reporting during the year ended December 31, 2019[305] Other Information The company has no other information to report - None[307] PART III Directors, Executive Officers and Corporate Governance This section details VirTra's board and executive composition, committee structures, and corporate governance policies - The Board of Directors consists of five members, with Robert D. Ferris serving as CEO, President, and Chairman[310][311] - Mitchell A. Saltz, Jeffrey D. Brown, and James Richardson are determined to be independent directors, constituting a majority of the board[322] - Jeffrey D. Brown serves as the chair of the Audit Committee and qualifies as an "audit committee financial expert" under SEC rules[326] - The company has adopted a written Code of Ethics and Business Conduct and a Whistleblower Protection Policy applicable to all directors, officers, and employees[332] - In 2019, non-employee directors (Messrs Saltz, Brown, and Richardson) each received $24,000 in cash retainers[334] Board of Directors and Executive Officers - Robert D. Ferris has served as President since founding Ferris Productions, Inc in 1993 and as CEO and Chairman of the Board since 2008[311] - Matthew D. Burlend has served as COO and a director since 2008 and as Vice President since October 9, 2017[312] - Judy A. Henry has served as CFO since August 24, 2017, and as Secretary and Treasurer since October 9, 2017[313] Directors and Executive Officers | Name | Age | Position/Title | | :---------------- | :--- | :----------------------------------- | | Robert D. Ferris | 48 | Chief Executive Officer, President & Chairman of the Board | | Matthew D. Burlend | 45 | Chief Operating Officer, Vice President & Director | | Judy A. Henry | 58 | Chief Financial Officer, Secretary & Treasurer | | Mitchell A. Saltz | 66 | Director | | Jeffrey D. Brown | 56 | Director | | James Richardson | 43 | Director | Director Independence - The Board has determined that Mitchell A. Saltz, Jeffrey D. Brown, and James Richardson are independent directors under Nasdaq listing standards[322] - Robert D. Ferris and Matthew D. Burlend are not independent directors[322] Board Leadership Structure and Board's Role in Risk Oversight - Robert D. Ferris serves as Chairman of the Board, responsible for presiding over board meetings and setting the agenda[323] - The Board is responsible for overseeing company risks, primarily categorized as financial risk and product commercialization risk, which are reviewed regularly by the Audit Committee and the Board[324] Board Committees Audit Committee - The Audit Committee consists of Mitchell A. Saltz, Jeffrey D. Brown, and James Richardson, with Jeffrey D. Brown serving as chair and qualifying as an "audit committee financial expert"[326] - The Audit Committee is responsible for overseeing the accounting and financial reporting processes, the selection and retention of the independent auditor, the effectiveness of internal controls over financial reporting, and the review and approval of related party transactions[327] Compensation Committee - The Compensation Committee consists of Mitchell A. Saltz, Jeffrey D. Brown, and James Richardson, with Mitchell A. Saltz serving as chair[329] - The Compensation Committee is responsible for reviewing and approving the compensation of the CEO and other executive officers, incentive compensation arrangements, and director compensation[330] Nominating and Corporate Governance Committee - The Nominating and Corporate Governance Committee consists of Mitchell A. Saltz, Jeffrey D. Brown, and James Richardson, with James Richardson serving as chair[331] - The committee is responsible for identifying director qualifications, selecting director nominees, reviewing the structure and composition of board committees, and overseeing compliance with the Code of Ethics and Business Conduct[331] Code of Ethics and Business Conduct and Whistleblower Protection Policy - The company has adopted a written Code of Ethics and Business Conduct and a Whistleblower Protection Policy applicable to all directors, officers, and employees to ensure lawful and ethical business conduct and protect whistleblowers[332] Director Compensation - Non-employee directors (Messrs Saltz, Brown, and Richardson) receive quarterly and annual cash retainers in lieu of previous stock option awards and other compensation[335] 2019 Director Compensation | Name | Cash Compensation (USD) | Stock Awards (USD) | Option Awards (USD) | Other Compensation (USD) | Total (USD) | | :---------------- | :-------------- | :-------------- | :-------------- | :-------------- | :---------- | | Mitchell A. Saltz | 24,000 | - | - | - | 24,000 | | Jeffrey D. Brown | 24,000 | - | - | - | 24,000 | | James Richardson | 24,000 | - | - | - | 24,000 | Executive Compensation This section details the compensation of VirTra's executive officers for 2019 and 2018, including salaries, bonuses, and equity awards - The employment agreements for CEO Robert D. Ferris and COO Matthew D. Burlend stipulate base annual salaries ($241,545 and $216,771 for 2019, respectively) and performance-based annual cash bonuses[338] - The company maintains a discretionary profit-sharing plan, accruing $93,160 in 2019 and $166,506 in 2018[344] - The 2017 Equity Incentive Plan initially authorized 1,187,500 shares of common stock, with an automatic annual increase, to attract, retain, and motivate employees, consultants, and directors[347] 2019 Summary Compensation Table | Name and Principal Position | Fiscal Year Ended | Salary (USD) | Bonus (USD) | Stock Awards (USD) | Option Awards (USD) | Other Comp (USD) | Total (USD) | | :----------------------- | :----------- | :---------- | :---------- | :---------- | :---------- | :---------- | :---------- | | Robert D. Ferris, CEO | 2019/12/31 | 241,545 | 31,750 | - | 6,050 | - | 279,345 | | Robert D. Ferris, CEO | 2018/12/31 | 234,282 | 106,064 | - | 30,750 | - | 371,096 | | Matthew D. Burlend, COO | 2019/12/31 | 216,771 | 40,602 | - | - | - | 257,373 | | Matthew D. Burlend, COO | 2018/12/31 | 210,253 | 81,312 | - | - | - | 291,565 | | Judy A. Henry, CFO | 2019/12/31 | 170,001 | 4,160 | - | - | - | 174,161 | | Judy A. Henry, CFO | 2018/12/31 | 133,510 | 3,748 | - | - | - | 137,258 | 2019 Summary Compensation Table 2019 Executive Officer Compensation | Name and Principal Position | Fiscal Year Ended | Salary (USD) | Bonus (USD) | Stock Awards (USD) | Option Awards (USD) | Other Comp (USD) | Total (USD) | | :----------------------- | :----------- | :---------- | :---------- | :---------- | :---------- | :---------- | :---------- | | Robert D. Ferris, CEO | 2019/12/31 | 241,545 | 31,750 | - | 6,050 | - | 279,345 | | Matthew D. Burlend, COO | 2019/12/31 | 216,771 | 40,602 | - | - | - | 257,373 | | Judy A. Henry, CFO | 2019/12/31 | 170,001 | 4,160 | - | - | - | 174,161 | Executive Employment Agreements - The employment agreements for CEO Robert D. Ferris and COO Matthew D. Burlend stipulate base annual salaries ($241,545 and $216,771 for 2019, respectively) and performance-based annual cash bonuses[338] - The agreements include automatic one-year renewal clauses and provisions for severance payments and accelerated vesting of stock options under certain termination scenarios[338][340] - In 2019, the CEO and COO each redeemed 25,000 expiring stock options, resulting in an additional compensation expense of $38,353[341] Employee Benefit and Equity Incentive Plans - The company has a non-qualified stock option plan with 234,167 options outstanding and exercisable as of December 31, 2019, at a weighted-average exercise price of $2.47[342] - The company maintains a discretionary profit-sharing plan, accruing $93,160 in 2019 and $166,506 in 2018[344] - The 2017 Equity Incentive Plan is designed to attract, retain, and motivate employees, consultants, and directors through awards such as stock options and restricted stock[346][353] - The plan initially authorized 1,187,500 shares of common stock, with an automatic annual increase beginning January 1, 2019, equal to 3% of the outstanding common shares on December 31 of the preceding year or an amount determined by the Board[347] Outstanding Equity Awards at 2019 Fiscal Year-End Robert D. Ferris Outstanding Options (Dec 31, 2019) | Grant Date | Number of Exercisable Options () | Exercise Price (USD) | Expiration Date | | :--------- | :----------------- | :------------ | :--------- | | 2013/4/1 | 5,000 | 0.84 | 2020/4/1 | | 2013/7/1 | 5,000 | 0.92 | 2020/7/1 | | 2013/10/1 | 5,000 | 0.90 | 2020/10/1 | | ... | ... | ... | ... | | 2017/7/1 | 5,000 | 3.76 | 2024/7/1 | | Total | 90,000 | | | Matthew D. Burlend Outstanding Options (Dec 31, 2019) | Grant Date | Number of Exercisable Options () | Exercise Price (USD) | Expiration Date | | :--------- | :----------------- | :------------ | :--------- | | 2013/4/1 | 3,750 | 0.84 | 2020/4/1 | | 2013/7/1 | 3,750 | 0.92 | 2020/7/1 | | 2013/10/1 | 3,750 | 0.90 | 2020/10/1 | | ... | ... | ... | ... | | 2017/7/1 | 3,750 | 3.76 | 2024/7/1 | | Total | 67,500 | | | Securities Authorized for Issuance under Equity Compensation Plans Securities Authorized for Issuance under Equity Compensation Plans (Dec 31, 2019) | 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 (c) | | :--------------------------------- | :------------------------------------------ | :------------------------------------------ | :------------------------------------------ | | Plans approved by 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 This section discloses the common stock ownership of directors, executive officers, and certain beneficial owners as of March 23, 2020 - As of March 23, 2020, there were 7,745,030 shares of common stock outstanding[359] - Robert D. Ferris's beneficial ownership includes 352,219 issued common shares and 90,000 purchasable options[361] Beneficial Ownership of Directors and Executive Officers (March 23, 2020) | Name | Number of Shares Beneficially Owned | Percent of Class | | :----------------------- | :------------- | :----------- | | Robert D. Ferris | 442,219 | 5.6% | | Jeffrey D. Brown | 47,453 | * | | Mitchell A. Saltz | 29,167 | * | | James Richardson | - | - | | Matthew D. Burlend | 67,500 | * | | Judy A. Henry | 3,460 | * | | All executive officers and directors as a group (six persons) | 589,799 | 7.4% | Certain Relationships and Related Transactions, and Director Independence This section discloses transactions with related parties, including a joint venture with That's Eatertainment Corp and equipment purchases - The company has a joint venture agreement with Modern Round (a subsidiary of TEC) to license VirTra technology for a percentage of sales; VirTra director Mitchell Saltz is the Chairman and majority shareholder of TEC[362] - The company holds 560,000 shares of TEC common stock and recognized impairment losses of $280,000 in 2019 and $254,900 in 2018[362] - In 2019 and 2018, the company redeemed 34,225 and 220,523 stock options, respectively, from related parties, resulting in additional compensation expense[364] - In 2019 and 2018, related parties exercised 5,000 and 10,700 stock options, respectively[365] - The company purchased professional equipment from Natural Point, Inc, where director James Richardson serves as CEO, with purchases totaling $167,302 in 2019 and $122,758 in 2018[366] TEC Licensing Fee Revenue | Year | Licensing Fee Revenue (USD) | | :--- | :--- | | 2019 | 130,625 | | 2018 | 549,568 | Principal Accounting Fees and Services This section discloses the audit and tax fees paid to the independent registered public accounting firm MaloneBailey LLP for 2019 and 2018 - All audit and permissible non-audit services were pre-approved by the Audit Committee, which considered these services compatible with maintaining the auditor's independence[373][374] MaloneBailey LLP Fees (2019 vs 2018) | Category | 2019 (USD) | 2018 (USD) | | :----------------- | :------------- | :------------- | | Audit Fees | 68,016 | 29,500 | | Audit-Related Fees | - | - | | Tax Fees | 5,000 | 5,000 | | All Other Fees | - | - | | Total | 73,016 | 34,500 | PART IV Exhibits, Financial Statement Schedules This section lists the exhibits included in the Form 10-K report, such as corporate charters, employment agreements, and certifications - The audited financial statements and the report of the independent registered public accounting firm are included[376] - All schedules required by applicable accounting regulations have been omitted as they are not required or the information is disclosed in the financial statements[377] - Exhibits include key documents such as the company's articles of incorporation, lease agreements, employment agreements, joint venture agreement, and the 2017 Equity Incentive Plan[380] Form 10-K Summary The company has not provided a Form 10-K summary - None[382] Signatures The report was duly signed on March 23, 2020, by the registrant's authorized officers and directors - The report was signed on March 23, 2020[387][389] - Signatories include Robert D. Ferris (CEO, President, Chairman & Director), Judy A. Henry (CFO, Secretary & Treasurer), Matthew D. Burlend (Director, COO & Vice President), Mitchell A. Saltz (Director), Jeffrey D. Brown (Director), and James Richardson (Director)[390]