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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-Q

 

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the quarterly period ended September 30, 2021

 

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the transition period from _____________ to ______________

 

Commission file number: 001-38420

 

VIRTRA, INC.

(Exact name of registrant as specified in its charter)

 

Nevada   93-1207631
(State or other jurisdiction of   (I.R.S. Employer
incorporation or organization)   Identification No.)

 

7970 S. Kyrene Rd. Tempe, AZ   85284
(Address of principal executive offices)   (Zip Code)

 

Registrant’s telephone number, including area code: (480) 968-1488

 

N/A

(Former name, former address and former fiscal year, if changed since last report)

 

Securities registered pursuant to Section 12(b) of the Act:

 

Title of each class   Trading Symbol(s)   Name of each exchange on which registered
N/A   N/A   N/A

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐

 

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☒ No ☐

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

 

Large accelerated filer Accelerated filer
Non-accelerated filer Smaller reporting company
Emerging growth company    

 

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes ☐ No

 

As of November 12, 2021, the registrant had 10,807,130 shares of common stock outstanding.

 

 

 

 

 

 

VIRTRA, INC.

FORM 10-Q

 

TABLE OF CONTENTS

 

     

PAGE

NO.

PART I FINANCIAL INFORMATION  
       
  Item 1. Financial Statements (Unaudited) F-1
    Balance Sheets as of September 30, 2021 and December 31, 2020 F-1
    Statements of Operations for the Three and Nine months ended September 30, 2021 and 2020 F-2
    Statements of Changes in Stockholders’ Equity for the Three and Nine months Ended September 30, 2021 and 2020 F-3
    Statements of Cash Flows for the Nine months Ended September 30, 2021 and 2020 F-4
    Notes to the Unaudited Financial Statements F-5
       
  Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations 3
       
  Item 3. Quantitative and Qualitative Disclosures About Market Risk 8
       
  Item 4. Controls and Procedures 8
       
PART II OTHER INFORMATION  
       
  Item 1. Legal Proceedings 9
       
  Item 1A. Risk Factors 9
       
  Item 2. Unregistered Sales of Equity Securities and Use of Proceeds 9
       
  Item 3. Defaults Upon Senior Securities 9
       
  Item 4. Mine Safety Disclosures 9
       
  Item 5. Other Information 9
       
  Item 6. Exhibits 10
       
  SIGNATURES  11

 

2

 

 

PART I: FINANCIAL INFORMATION

 

ITEM 1. FINANCIAL STATEMENTS

 

VIRTRA, INC.

BALANCE SHEETS

 

  

September 30,

2021

  

December 31,

2020

 
   (Unaudited)     
ASSETS          
           
Current assets:          
Cash and cash equivalents  $21,545,843   $6,841,984 
Accounts receivable, net   4,890,424    1,378,270 
Inventory, net   5,933,586    3,515,997 
Unbilled revenue   4,346,282    5,408,598 
Prepaid expenses and other current assets   624,767    382,445 
           
Total current assets   37,340,902    17,527,294 
           
Long-term assets:          
Property and equipment, net   12,438,061    1,381,744 
Operating lease right-of-use asset, net   863,227    1,094,527 
Intangible assets, net   882,604    271,048 
Security deposits, long-term   19,712    86,500 
Other assets, long-term   533,264    500,114 
Deferred tax asset, net   1,482,107    1,892,000 
           
Total long-term assets   16,218,975    5,225,933 
           
Total assets  $53,559,877   $22,753,227 
           
LIABILITIES AND STOCKHOLDERS’ EQUITY          
           
Current liabilities:          
Accounts payable  $1,087,736   $345,573 
Accrued compensation and related costs   1,287,063    843,101 
Accrued expenses and other current liabilities   493,643    772,884 
Note payable, current   233,047    266,037 
Operating lease liability, short-term   341,124    321,727 
Deferred revenue, short-term   8,058,613    4,708,575 
           
Total current liabilities   11,501,226    7,257,897 
           
Long-term liabilities:          
Deferred revenue, long-term   1,958,110    1,920,346 
Note payable, long-term   8,336,991    1,063,243 
Operating lease liability, long-term   594,499    853,155 
Other long term liabilities   5,435    - 
           
Total long-term liabilities   10,895,035    3,836,744 
           
Total liabilities   22,396,261    11,094,641 
           
Commitments and contingencies (See Note 9)          
           
Stockholders’ equity:          
Preferred stock $0.0001 par value; 2,500,000 authorized; no shares issued or outstanding   -    - 
Common stock $0.0001 par value; 50,000,000 shares authorized; 10,807,130 shares issued and outstanding as of September 30, 2021 and 7,775,030 shares issued and outstanding as of December 31, 2020   1,081    778 
Class A common stock $0.0001 par value; 2,500,000 shares authorized; no shares issued or outstanding   -    - 
Class B common stock $0.0001 par value; 7,500,000 shares authorized; no shares issued or outstanding   -    - 
Additional paid-in capital   30,870,893    13,893,660 
Retained earnings (Accumulated deficit)   291,642    (2,235,852)
           
Total stockholders’ equity   31,163,616    11,658,586 
           
Total liabilities and stockholders’ equity  $53,559,877   $22,753,227 

 

See accompanying notes to unaudited financial statements.

 

F-1

 

 

VIRTRA, INC.

STATEMENTS OF OPERATIONS

(Unaudited)

 

                     
   Three Months Ended   Nine Months Ended 
  

September 30,

2021

  

September 30,

2020

  

September 30,

2021

  

September 30,

2020

 
                 
Revenues:                    
Net sales  $6,093,263   $6,395,356   $15,790,364   $12,472,106 
That’s Eatertainment royalties/licensing fees, former related party   -    16,005    -    45,247 
Other royalties/licensing fees   -    2,360    -    4,310 
Total revenue   6,093,263    6,413,721    15,790,364    12,521,663 
                     
Cost of sales   3,217,911    2,446,455    7,211,807    5,381,403 
                     
Gross profit   2,875,352    3,967,266    8,578,557    7,140,260 
                     
Operating expenses:                    
General and administrative   1,958,038    2,250,348    5,670,883    6,050,798 
Research and development   651,734    497,645    1,257,271    1,204,011 
                     
Net operating expense   2,609,772    2,747,993    6,928,154    7,254,809 
                     
Income (loss) from operations   265,580    1,219,273    1,650,403    (114,549)
                     
Other income (expense):                    
Other income   (11,981)   7,067    38,777    45,359 
Gain on forgiveness of note payable   1,320,714    -    1,320,714    - 
Other (expense) income   21,948    (3,315)   (13,094)   (12,929)
                     
Net other income (expense)   1,330,681    3,752    1,346,397    32,430 
                     
Income (Loss) before provision for income taxes   1,596,261    1,223,025    2,996,800    (82,119)
                     
Provision (Benefit) for income taxes   253,289    354,941    469,306    40,467 
                     
Net income (loss)  $1,342,972   $868,084   $2,527,494   $(122,586)
                     
Net income (loss) per common share:                    
Basic  $0.12   $0.11   $0.26   $(0.02)
Diluted  $0.12   $0.11   $0.25   $(0.02)
                     
Weighted average shares outstanding:                    
Basic   10,792,520    7,760,799    9,745,091    7,753,034 
Diluted   11,031,922    7,842,475    10,111,458    7,753,034 

 

See accompanying notes to unaudited financial statements.

 

F-2

 

 

VIRTRA, INC.

STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY

(Unaudited)

 

                                 
   For the Three Months Ended September 30, 2021 
   Preferred Stock   Common Stock  

Additional

Paid-In
   Treasury  

Accumulated

Earnings
     
   Shares   Amount   Shares   Amount   Capital   Stock   (deficit)   Total 
                                 
Balance at June 30, 2021   -   $-    10,780,030   $1,078   $30,694,430   $-   $(1,051,330)  $29,644,178 
Stock options exercised   -    -    2,500    -    5,250    -    -    5,250 
Stock issued for services   -    -    24,600    3   $171,213   $-    -    171,216 
Net income   -    -    -    -    -    -    1,342,972    1,342,972 
Balance at September 30, 2021   -   $-    10,807,130   $1,081   $30,870,893   $-   $291,642   $31,163,616 

 

   For the Nine Months Ended September 30, 2021 
   Preferred Stock   Common Stock  

Additional

Paid-In

   Treasury  

Accumulated

Earnings
     
   Shares   Amount   Shares   Amount   Capital   Stock   (deficit)   Total 
                                 
Balance at December 31, 2020   -   $-    7,775,030   $778   $13,893,660   $-   $(2,235,852)  $11,658,586 
Stock options exercised   -    -    7,500    -    11,320    -    -    11,320 
Stock issued for cash in offering, net   -    -    3,000,000    300    16,794,700    -    -    16,795,000 
Stock issued for services   -    -    24,600    3    171,213    -    -    171,216 
Net income   -    -    -    -    -    -    2,527,494    2,527,494 
Balance at September 30, 2021   -   $-    10,807,130   $1,081   $30,870,893   $-   $291,642   $31,163,616 

 

   For the Three Months Ended September 30, 2020 
   Preferred Stock   Common Stock  

Additional

Paid-In
   Treasury   Accumulated     
   Shares   Amount   Shares   Amount   Capital   Stock   Deficit   Total 
                                 
Balance at June 30, 2020   -   $-    7,760,030   $777   $13,902,047   $-   $(4,704,925)  $9,197,899 
Stock options exercised   -    -    7,500    1    6,749    -    -    6,750 
Stock options repurchased   -    -    -    -    (20,821)   -    -    (20,821)
Net income   -    -    -    -    -    -    868,084    868,084 
Balance at September 30, 2020   -   $-    7,767,530   $778   $13,887,975   $-   $(3,836,841)  $10,051,912 

 

   For the Nine Months Ended September 30, 2020 
   Preferred Stock   Common Stock  

Additional

Paid-In

   Treasury   Accumulated     
   Shares   Amount   Shares   Amount   Capital   Stock   Deficit   Total 
                                 
Balance at December 31, 2019   -   $-    7,745,030   $775   $13,894,680   $-   $(3,714,255)  $10,181,200 
Stock options exercised   -    -    22,500    3    19,962    -    -    19,965 
Stock options repurchased   -    -    -    -    (26,667)   -    -    (26,667)
Net loss   -    -    -    -    -    -    (122,586)   (122,586)
Balance at September 30, 2020   -   $-    7,767,530   $778   $13,887,975   $-   $(3,836,841)  $10,051,912 

 

See accompanying notes to unaudited financial statements.

 

F-3

 

 

VIRTRA, INC.

STATEMENTS OF CASH FLOWS

(Unaudited)

 

           
   Nine Months Ended September 30, 
   2021   2020 
         
Cash flows from operating activities:          
Net income (loss)  $2,527,494   $(122,586)
Adjustments to reconcile net income (loss) to net cash (used in) provided by operating activities:          
Depreciation and amortization   367,253    274,866 
Right of use amortization   231,300    220,997 
Reserve for note receivable   -    16,738 
Deferred taxes   409,893    80,000 
Impairment of investment in That’s Eatertainment, former related party   -    406,000 
Gain on forgiveness of note payable   (1,329,280)   - 
Employee stock compensation   171,216    - 
Changes in operating assets and liabilities:          
Accounts receivable, net   (3,512,154)   (215,159)
That’s Eatertainment note receivable, net, related party   -    (10,916)
Interest receivable   -    7,340 
Inventory, net   (2,417,589)   (1,492,350)
Unbilled revenue   1,062,316    (109,500)
Prepaid expenses and other current assets   (242,322)   (107,637)
Other assets   (33,150)   18,246 
Security deposits, long-term   66,788    - 
Accounts payable and other accrued expenses   912,318    635,765 
Payments on operating lease liability   (239,259)   (221,028)
Deferred revenue   3,387,802    452,324 
           
Net cash provided by (used in) operating activities   1,362,626    (166,900)
           
Cash flows from investing activities:          
           
Redemption of certificates of deposit   -    1,915,000 
Purchase of intangible assets   (627,765)   (55,580)
Purchase of property and equipment   (11,407,278)   (329,386)
           
Net cash provided by (used in) investing activities   (12,035,043)   1,530,034 
           
Cash flows from financing activities:          
Repurchase of stock options   -    (26,667)
Principal payments of debt   (20,195)   - 
Net proceeds from long term debt   8,590,151    - 
Stock issued for cash in offering, net   16,795,000    - 
Stock options exercised   11,320    19,965 
Note payable-PPP Loan   -    1,325,961 
Net cash provided by (used in) financing activities   25,376,276    1,319,259 
           
Net increase (decrease) in cash and restricted cash   14,703,859    2,682,393 
Cash and restricted cash, beginning of period   6,841,984    1,415,091 
Cash and restricted cash, end of period  $21,545,843   $4,097,484 
           
Supplemental disclosure of cash flow information:          
Cash (refunded) paid:          
Taxes refunded  $78,096   $(39,533)
Interest paid   20,783    5,247 

 

See accompanying notes to unaudited financial statements.

 

F-4

 

 

VIRTRA, INC.

NOTES TO FINANCIAL STATEMENTS

(Unaudited)

 

Note 1. Organization and Significant Accounting Policies

 

Organization and Business Operations

 

VirTra, Inc. (the “Company,” “VirTra,” “we,” “us” or “our”), located in Tempe, Arizona, is a global provider of judgmental use of force training simulators, firearms training simulators and driving simulators for the law enforcement, military, educational and commercial markets. The Company’s patented technologies, software, and scenarios provide intense training for de-escalation, judgmental use-of-force, marksmanship and related training that mimics real-world situations. VirTra’s mission is to save and improve lives worldwide through practical and highly-effective virtual reality and simulator technology. The Company sells its 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.

 

During March 2020, a global pandemic was declared by the World Health Organization related to the rapidly growing outbreak of a novel strain of coronavirus (COVID-19). The pandemic has significantly impacted the economic conditions in the U.S., accelerating during half of March and April as federal, state and local governments react to the public health crisis, creating significant uncertainties in the U.S. economy. On March 30, 2020, the Governor for the State of Arizona issued a stay-at-home order which expired on May 15, 2020, upon which Arizona entered Phase I of reopening. The Company carefully reviewed all rules and regulations of the government orders and determined it met the requirements of an essential business to remain open. The Company had the majority of its staff begin working remotely in mid-March, with only essential personnel continue working at the manufacturing and production facilities and currently remains in Arizona’s Phase I of reopening. This situation is rapidly changing and additional impacts to the business may arise that we are not aware of currently. While the disruption is currently expected to be temporary, there is uncertainty around the duration. The ultimate impact of the pandemic on the Company’s results of operations, financial position, liquidity or capital resources cannot be reasonably estimated at this time. To date, the COVID-19 restrictions have resulted in reduced customer shipments and customer system installations. These recent developments are expected to result in lower recognized revenue and possibly lower gross margin when they occur. To date, there have been no order cancellations; rather, there have only been delays in when orders ship or installations occur and all delayed orders remain in backlog. Any future impact cannot be reasonably estimated at this time. The Company is no longer investing in Certificates of Deposits as a precautionary measure to increase its liquid cash position and preserve financial flexibility considering uncertainty in the U.S. and global markets resulting from COVID-19. Additionally, the Company’s stock repurchase program was suspended as a result of interim rulings for public-company recipients of a PPP loan under the CARES Act. The stock repurchase suspension remained in effect for the duration of the outstanding PPP loan. See Note 7 for information about the PPP Loan.

 

Basis of Presentation

 

The unaudited 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, 2020 included in the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2020 filed with the SEC on March 29, 2021. 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 unaudited financial statements reflect, in our opinion, all normal recurring adjustments necessary to present fairly our financial position at September 30, 2021 and the results of our operations and cash flows for the periods presented. We derived the December 31, 2020 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 nine months ended September 30, 2021 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.

 

F-5

 

 

Revenue Recognition

 

The Company adopted the Financial Accounting Standards Board’s (the “FASB”) Accounting Standards Codification (“ASC”) 606, Revenue from Contracts with Customer (Topic 606) (“ASC 606”) on January 1, 2018 and the Company elected to use the modified retrospective transition method 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. The Company’s policy is to typically invoice upon completion of installation and/or training until such time the performance obligations that have been satisfied are included in unbilled. Sales discounts are presented in the financial statements as reductions in determining net revenues. Credit sales are recorded as current assets (accounts receivable and unbilled revenue). 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 and content   Upon transfer of control or over the period services are performed depending on the terms of the contract
     
Customized content scenario   As performance obligation is transferred over time (input method using time and materials expanded)
     
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. Revenue from certain customized content contracts may be recognized over the period the services are performed based on the terms of the contract. 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.

 

F-6

 

 

Disaggregation of Revenue

Schedule Of Disaggregation Of Revenues

   Three Months Ended 
   September 30, 2021   September 30, 2020 
   Commercial   Government   International   Total   Commercial   Government   International   Total 
Simulators and accessories  $1,370,466   $2,645,312   $723,471   $4,739,249   $212,030   $4,635,562   $-   $4,847,592 
Extended service-type warranties   31,910    656,870    25,180    713,960    18,037    611,087    11,894    641,018 
Customized software and content   -    290,829    52,273    343,102    -    738,291    -    738,291 
Installation and training   42,952    190,098    59,500    292,550    1,351    167,104    -    168,455 
Licensing and royalties   4,402    -    -    4,402    18,365    -    -    18,365 
                                         
Total Revenue  $1,449,730   $3,783,109   $860,424   $6,093,263   $249,783   $6,152,044   $11,894   $6,413,721 

 

For the three months ended September 30, 2021, governmental customers comprised $3,783,109, or 62%, of total net revenue, commercial customers comprised $1,449,730 or 24%, of total net revenue, and international customers comprised $860,424, or 14%, of total net revenue. By comparison, for the three months ended September 30, 2020, governmental customers comprised $6,152,044, or 96%, of total net revenue, commercial customers comprised $249,783, or 4%, of total net revenue, and international customers comprised $11,894, or less than 1% of total net revenue. For the three months ended September 30, 2021, and 2020, the Company recorded $490,059 and $233,981, respectively, in STEP revenue, or 8.0% and 3.6%, respectively, of total net revenue.

 

   Nine Months Ended 
   September 30, 2021   September 30, 2020 
   Commercial   Government   International   Total   Commercial   Government   International   Total 
Simulators and accessories  $2,183,769   $7,828,503   $1,907,588   $11,919,860   $477,874   $7,969,907   $291,939   $8,739,720 
Extended service-type warranties   79,531    2,001,423    74,196    2,155,150    51,700    1,769,908    116,042    1,937,650 
Customized software and content   -    905,204    125,716    1,030,920    18,566    1,388,121    -    1,406,687 
Installation and training   93,501    496,251    85,850    675,602    11,059    372,026    4,964    388,049 
Licensing and royalities   8,832    -    -    8,832    49,557    -    -    49,557 
                                         
Total Revenue  $2,365,633   $11,231,381   $2,193,350   $15,790,364   $608,756   $11,499,962   $412,945   $12,521,663 

 

For the nine months ended September 30, 2021, governmental customers comprised $11,231,381, or 71% of total net revenue, commercial customers comprised $2,365,633, or 15% of total net revenue, and international customers comprised $2,193,350, or 14% of total net revenue. By comparison, for the nine months ended September 30, 2020, governmental customers comprised $11,499,962, or 92% of total net revenue, commercial customers comprised $608,756, or 5% of total net revenue, and international customers comprised $412,945, or 3% of total net revenue. For the nine months ended September 30, 2021, and 2020, the Company recorded $1,349,677 and $558,462, respectively, in STEP revenue, or 8.5% and 4.4%, respectively of total net revenue.

 

Customer Deposits

 

Customer deposits consist of prepaid deposits received for equipment purchase orders and for Subscription Training Equipment Partnership (“STEP”) operating agreements that expire annually. Customer deposits are considered a deferred liability until the completion of the customer’s contract performance obligation. When revenue is recognized, the deposit is applied to customer’s receivable balance. Customer deposits are recorded as a current liability under deferred revenue on the accompanying balance sheet and totaled $6,440,194 and $2,517,175 at September 30, 2021 and December 31, 2020, respectively. Changes in deferred revenue amounts related to customer deposits will fluctuate from year to year based upon the mix of customers required to prepay deposits under the Company’s credit policy.

 

Warranty

 

The Company warranties its products from manufacturing defects on a limited basis for a period of one year after purchase, but 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 $1,618,419 and $2,191,400 as of September 30, 2021 and December 31, 2020, respectively. Deferred revenue for separately priced extended warranties longer than one year totaled $1,958,110 and $1,920,346 as of September 30, 2021 and December 31, 2020, respectively. The accrual for the one-year manufacturer’s warranty liability totaled $304,000 and $352,000 as of September 30, 2021 and December 31, 2020, respectively. During the three months ended September 30, 2021 and 2020, the Company recognized revenue of $713,960 and $641,018, respectively, related to the extended service-type warranties that was amortized from the deferred revenue balance at the beginning of each period. During the nine months ended September 30, 2021 and 2020, the Company recognized revenue of $2,155,150 and $1,937,650, respectively. 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.

 

STEP Revenue

 

The Company’s STEP operations consist principally of renting its simulator products under operating agreements expiring in one year. At the commencement of a STEP agreement, any rental payments received are deferred and no income is recognized. Subsequently, payments are amortized and recognized as revenue on a straight-line basis over the term of the agreement. The agreements are generally for a period of 12 months and can be renewed for additional 12-month periods. Agreements may be terminated by either party upon written notice of termination at least sixty days prior to the end of the 12-month period. The payments are generally fixed for the first year of the agreement, with increases in payments in subsequent years to be mutually agreed upon. The agreements do not include variable lease payments or free rent periods. In addition, the agreements do not provide for the underlying assets to be purchased at its fair market values at interim periods or at maturity. Each STEP agreement comes with full customer support and stand-ready advance replacement parts to maintain each system for the duration of the lease. The amounts that the Company expects to derive from the STEP equipment following the end of the agreement term is dependent upon the number of agreement terms renewed. The agreements do not include a residual value guarantee.

 

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 $21,043,538 and $6,338,896 as of September 30, 2021, and December 31, 2020, respectively.

 

F-7

 

 

Most sales are to governments that 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.

 

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 September 30, 2021, one commercial agency comprised 20% of total net sales. By comparison, for the three months ended September 30, 2020, one federal agency comprised 22% of total net sales and another federal agency comprised 20% of total net sales. For the nine months ended September 30, 2021, no single customer had a significant percentage of total revenue. By comparison, for the nine months ended September 30, 2020, one federal agency comprised 19% and another federal agency comprised 14% of total net revenue.

 

As of September 30, 2021, no single customer had a significant percentage of total accounts receivable. By comparison, as of December 31, 2020, one federal agency comprised 8.5% and one state agency comprised 31% of total accounts receivable.

 

Note 2. Inventory

 

Inventory consisted of the following as of:

 

   September 30, 2021   December 31, 2020 
         
Raw materials and work in process  $6,616,616   $3,636,649 
Reserve   (683,030)   (120,652)
           
Total inventory  $5,933,586   $3,515,997 

 

The Company regularly evaluates the useful life of its spare parts inventory and as a result, the Company classified $479,771 and $500,114 of spare parts as Other Assets, long-term on the Balance Sheet at September 30, 2021 and December 31, 2020, respectively.

 

Note 3. Property and Equipment

 

Property and equipment consisted of the following as of:

 

   September 30, 2021   December 31, 2020 
         
Land  $1,778,987   $- 
Building & Building Improvements   8,606,224    - 
Computer equipment   1,162,369    1,115,326 
Furniture and office equipment   256,425    223,925 
Machinery and equipment   1,743,487    1,096,898 
STEP equipment   1,502,694    1,206,757 
Leasehold improvements   334,933    334,934 
           
Total property and equipment   15,385,119    3,977,840 
Less: Accumulated depreciation and amortization   (2,947,058)   (2,596,096)
           
Property and equipment, net  $12,438,061   $1,381,744 

 

Depreciation expense, including STEP depreciation, was $350,963 and $268,200 for the nine months ended September 30, 2021, and 2020, respectively. Depreciation expense, including STEP depreciation, was $154,252 and $93,037 for the three months ended September 30, 2021, and 2020, respectively.

 

On August 25, 2021, the Company completed the purchase of real property located in Chandler, Arizona (the “Property”) for $10,800,000, paid with cash and proceeds from a mortgage loan from Arizona Bank & Trust in the amount of $8,600,000 (Note 7). The Property consists of approximately 4.3 acres and an industrial building of approximately 76,650 square feet. The Company intends to move all of its’ operations and headquarters to the Property during 2022. Approximately 15,000 square feet of the building is dedicated to two pre-existing tenants with multi-year rent agreements.

 

Under the provision of ASC 805, the Company determined this acquisition was an asset acquisition. This determination was based on substantially all of the fair value of the gross assets acquired was concentrated in the similarly identifiable assets of the Property. The fair value was allocated to the land, building, and acquired leases based upon their relative fair values at the date of acquisition in accordance with ASC 805-50-30-3.

 

The fair value of the in-place leases is the estimated cost to replace the leases (including loss of rent, estimated commissions and legal fees paid in similar leases). The capitalized in-place leases are amortized over the remaining term of the leases as amortization expense. The fair value of the above or below market lease is the present value of the difference between the contractual amount to be paid pursuant to the in-place lease and the estimated current market lease rate expected over the remaining non-cancelable life of the lease. The capitalized above or below market lease values are amortized as a decrease or increase to the rental income over the remaining term of the lease.

 

Upon closing, the Company assumed interest in two in-place leases. The first tenant took occupancy in November 2006 and is paying the annual Triple Net rate of $11.34 per square foot. The rate increased to $11.68 per square foot on November 1, 2021, increasing to $12.03 on November 1, 2022, and expiring on October 31, 2023. The second tenant took occupancy in November 2016 and is paying the annual rate of $9.00 per square foot. The lease expires October 31, 2024. This tenant has the option to extend the lease for 5 years thru October 31, 2029 with 5% increases to the rental rate for the first 3 years.

 

The following table presents purchase price allocation for the assets acquired:

 

   September 30, 2021 
     
Land  $1,778,987 
Building and building improvements  $8,566,492 
Acquired Lease Intangible Assets  $454,521 
      
Total Purchase Price  $10,800,000 

 

F-8

 

 

Note 4. Intangible Asset

 

Intangible asset consisted of the following as of:

 

   September 30, 2021   December 31, 2020 
         
Patents  $160,000   $160,000 
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