NOTES
TO CONDENSED 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.
Basis
of Presentation
The
condensed financial statements included herein have been prepared by us without audit pursuant to the rules and regulations of
the Securities and Exchange Commission (“SEC”) and should be read in conjunction with our audited financial statements
for the year ended December 31, 2019 included in the Company’s Annual Report on Form 10-K for the fiscal year ended December
31, 2019 filed with the SEC on March 23, 2020. Certain information and footnote disclosures normally included in financial statements
prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”) have
been condensed or omitted as permitted by the SEC, although we believe the disclosures that are made are adequate to make the
information presented herein not misleading.
The
accompanying condensed financial statements reflect, in our opinion, all normal recurring adjustments necessary to present fairly
our financial position at March 31, 2020 and the results of our operations and cash flows for the periods presented. We derived
the December 31, 2019 condensed balance sheet data from audited financial statements; however, we did not include all disclosures
required by GAAP.
Interim
results are subject to seasonal variations, and the results of operations for the three months ended March 31, 2020 are not necessarily
indicative of the results to be expected for the full year.
Use
of Estimates
The
preparation of financial statements in conformity with GAAP requires management to make estimates that affect the reported amounts
of assets and liabilities and disclosure of contingent assets and liabilities as of the date of the financial statements and the
reported amounts of revenues and expenses during the reporting period. Actual results could differ significantly from those estimates.
Significant accounting estimates in these financial statements include valuation assumptions for share-based payments, allowance
for doubtful accounts and notes receivable, inventory reserves, accrual for warranty reserves, the carrying value of long-lived
assets and intangible assets, income tax valuation allowances, the carrying value of cost basis investments, and the allocation
of the transaction price to the performance obligations in our contracts with customers.
Reclassifications
Certain
reclassifications have been made to the 2019 financial statements to conform to the 2020 financial statement presentation. These
reclassifications had no effect on net earnings or cash flows as previously reported.
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. 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.
|
|
For
the Three Months Ended March 31,
|
|
|
|
2020
|
|
|
2019
|
|
|
|
Commercial
|
|
|
Government
|
|
|
International
|
|
|
Total
|
|
|
Commercial
|
|
|
Government
|
|
|
International
|
|
|
Total
|
|
Simulators and accessories
|
|
$
|
14,048
|
|
|
$
|
1,976,188
|
|
|
$
|
278,820
|
|
|
$
|
2,269,056
|
|
|
$
|
318,438
|
|
|
$
|
1,908,695
|
|
|
$
|
31,974
|
|
|
$
|
2,259,107
|
|
Extended service-type warranties
|
|
|
18,441
|
|
|
|
568,079
|
|
|
$
|
62,600
|
|
|
|
649,120
|
|
|
|
29,950
|
|
|
|
477,157
|
|
|
|
3,366
|
|
|
|
510,473
|
|
Customized software and customized content scenarios
|
|
|
18,940
|
|
|
|
231,998
|
|
|
$
|
-
|
|
|
|
250,938
|
|
|
|
-
|
|
|
|
168,621
|
|
|
|
-
|
|
|
|
168,621
|
|
Installation and training
|
|
|
2,771
|
|
|
|
142,428
|
|
|
$
|
5,700
|
|
|
|
150,899
|
|
|
|
-
|
|
|
|
62,341
|
|
|
|
11,159
|
|
|
|
73,500
|
|
Licensing and royalties
|
|
|
18,150
|
|
|
|
-
|
|
|
|
-
|
|
|
|
18,150
|
|
|
|
39,637
|
|
|
|
-
|
|
|
|
-
|
|
|
|
39,637
|
|
Total Revenue
|
|
$
|
72,350
|
|
|
$
|
2,918,693
|
|
|
$
|
347,120
|
|
|
$
|
3,338,163
|
|
|
$
|
388,025
|
|
|
$
|
2,616,814
|
|
|
$
|
46,499
|
|
|
$
|
3,051,338
|
|
For
the three months ended March 31, 2020, governmental customers comprised $2,918,693, or 87% of total net sales, commercial customers
comprised $72,350, or 2% of total net sales, and international customers comprised $347,120, or 10% of total net sales. By comparison,
for the three months ended March 31, 2019, governmental customers comprised $2,616,814, or 86% of total net sales, commercial
customer comprised $388,025, or 13% of total net sales, and international customers comprised $46,499, or 2% of total net sales.
Customer
Deposits
Customer
deposits are recorded as a current liability under deferred revenue on the accompanying balance sheets and totaled $1,270,747
and $651,073 as of March 31, 2020 and December 31, 2019, 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. Customer deposits are considered a deferred liability until completion of the customer’s contract performance
obligations. When revenue is recognized, the deposit is applied to the customer’s receivable balance.
Warranty
The
Company warranties its products from manufacturing defects on a limited basis for a period of one year after purchase, 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 $1,675,019 and $1,829,052 as of March 31, 2020 and December 31, 2019, respectively. Deferred revenue
for separately priced extended warranties longer than one year totaled $1,863,921 and $1,748,257 as of March 31, 2020 and December
31, 2019, respectively. The accrual for the one-year manufacturer’s warranty liability totaled $360,176 and $331,176 as
of March 31, 2020 and December 31, 2019, respectively. During the three months ended March 31, 2020 and 2019, the Company recognized
revenue of $649,120 and $510,473, respectively, related to the extended service-type warranties that was amortized from the deferred
revenue balance at the beginning of each period. Changes in deferred revenue amounts related to extended service-type warranties
will fluctuate from year to year based upon the average remaining life of the warranties at the beginning of the period and new
extended service-type warranties sold during the period.
Customer
Retainage
Customer
retainage is recorded as a current liability under deferred revenue on the accompanying balance sheets and totaled $10,720 as
of March 31, 2020 and December 31, 2019. Changes in deferred revenue amounts related to customer retainage will fluctuate from
year to year based upon the customer’s contract completion date allowing the Company to invoice and be paid the retainage.
Licensing
and Royalties with Related Party
As
discussed further in Note 8. Collaboration Agreement with Related Party, the Company licenses intellectual property to Modern
Round, LLC (“MR”), a wholly-owned subsidiary of That’s Eatertainment Corp. (“TEC”), a related party,
in exchange for sales-based royalties. Revenues from this agreement are recognized in accordance with the terms of the contract
as the sales occur. The Company receives additional immaterial sales-based royalties from strategic partners.
STEP
Revenue
The
Company’s Subscription Training Equipment Partnership (STEPTM) 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 lease 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 amount 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.
Adoption
of New Accounting Standards
In
June 2016, the FASB issued ASU No. 2016-13, Financial Instruments – Credit Losses (Topic 326), which together with subsequent
amendments provides guidance on measuring credit losses on financial instruments. The amended guidance replaces current incurred
loss impairment methodology of recognizing credit losses when a loss is probable with a methodology that reflects expected credit
losses and requires a broader range of reasonable and supportable information to assess credit loss estimates. ASU 2016-13 and
related amendments are effective for us on January 1, 2020, the adoption of 2016-13 did not have a material impact on the Company’s
financial statements.
In
November 2018, the FASB issued ASU No. 2018-18, Collaborative Arrangements (Topic 808): Clarifying the Interaction between Topic
808 and Topic 606, which clarifies that certain transactions between participants in a collaborative arrangement should be accounted
for under ASC 606 when the counterparty is a customer. In addition, Topic 808 precludes an entity from presenting consideration
from a transaction in a collaborative arrangement as revenue from contracts with customers if the counterparty is not a customer
for that transaction. This guidance will be effective for the Company beginning January 1, 2020, the adoption did not have a material
impact on the Company’s financial statements.
Fair
Value Measurements
ASC
Topic 820, Fair Value Measurements, defines fair value as the price that would be received in the sale of an asset or paid
to transfer a liability in an orderly transaction between market participants at the measurement date. Topic 820 also specifies
a fair value hierarchy that requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs
when measuring fair value. The standard describes three levels of inputs that may be used to measure fair value as follows:
Level
1: Quoted prices in active markets for identical assets or liabilities;
Level
2: Observable inputs other than Level 1 prices, such as quoted prices for similar assets or liabilities; quoted prices in markets
that are not active; or other inputs that are observable or can be corroborated by observable market data for substantially the
full term of the assets or liabilities; and
Level
3: Valuation is generated from model-based techniques that use significant assumptions not observable in the market. These unobservable
assumptions reflect our own estimate of assumptions that market participants would use in pricing the asset or liability.
Fair
Value of Financial Instruments
The
Company’s financial instruments consist of cash and cash equivalents, certificates of deposit, accounts receivable, notes
and interest receivables, accounts payable, and accrued liabilities. The fair value of financial instruments, except for long-term
notes receivable, approximates their carrying values, using level 3 inputs, at March 31, 2020 and December 31, 2019 due to their
short maturities. The fair value of the note receivable approximates its carrying value, using level 3 inputs, at March 31, 2020
and December 31, 2019.
Cash
and Cash Equivalents
The
Company considers all highly liquid investments with a maturity of 90 days or less at the time of purchase to be cash equivalents.
Certificates
of Deposit and Mutual Funds
The
Company invests its excess cash in certificates of deposit and money market mutual funds issued by financial institutions with
high credit ratings. The certificates of deposit generally have average maturities of approximately six months and are subject
to penalties for early withdrawal. The money market mutual funds are open ended and can be withdrawn at any time without penalty.
Accounts
and Notes Receivable and Allowance for Doubtful Accounts
The
Company recognizes an allowance for losses on accounts receivable based on an analysis of historical bad debt experience, current
receivables aging, and expected future write-offs, as well as an assessment of specific identifiable customer accounts considered
at risk or uncollectible. Accounts receivable do not bear interest and are charged off after all reasonable collection efforts
have been taken. The Company maintained an allowance for doubtful accounts of $33,354 and $34,177 at March 31, 2020 and December
31, 2019, respectively.
Notes
receivable are carried at their estimated collectible amounts. Interest income on notes receivable is recognized using the effective
interest method. Notes receivable are periodically evaluated for collectability based on the credit history and the current financial
condition of the counter party, and the known and inherent risks in the notes. Notes receivable are placed on nonaccrual status
when they become 90 days past due and the customer has not made a payment in over 60 days. Upon suspension of the accrual of interest,
interest income is subsequently recognized to the extent cash payments are received. Accrual of interest is resumed when notes
are removed from non-accrual status. Notes receivable are charged against the allowance for credit losses when they are deemed
to be uncollectible. The allowance for uncollectible notes receivable was $9,340 and $5,701 at March 31, 2020 and December 31,
2019, respectively.
Inventory
Inventory
is stated at the lower of cost or net realizable value with cost being determined on the average cost method. Work in progress
and finished goods inventory includes an allocation for capitalized labor and overhead. The Company routinely evaluates the carrying
value of inventory for slow moving and potentially obsolete inventory and, when appropriate, will record an adjustment to reduce
inventory to its estimated net realizable value. As of March 31, 2020 and December 31, 2019, inventory reserves were $120,652.
Leases
The
Company categorized leases with contractual terms longer than twelve months as either operating or finance leases. Finance leases
are generally those leases that allow the Company to substantially utilize or pay for the entire asset over its estimated life.
All other leases are categorized as operating leases. As of March 31, 2020, the Company had no finance leases. Certain lease contracts
include obligations to pay for other services, such as maintenance. The Company elected to account for these other services as
a component of the lease (i.e. the Company elected the practical expedient not to separate lease and non-lease components). Lease
liabilities are recognized as the present value of the fixed lease payments using a discount rate based on the Company’s
current borrowing rate at the lease commencement date, adjusted for various factors including level of collateralization and term
(the “incremental borrowing rate”), unless the rate implicit in the lease is readily determinable. The current portion
of lease liabilities is included in “Current liabilities” and the noncurrent portion included in “Long-term
liabilities.” Lease assets are recognized based on the initial present value of the fixed lease payments, plus any direct
costs from executing the lease or lease prepayments reclassified. Lease assets are presented as “Operating lease right-of-use
asset” as a long-term asset. Leasehold improvements are capitalized at cost and amortized over the lesser of their expected
useful life or the lease term. Costs associated with operating lease assets are recognized on a straight-line basis within operating
expenses over the term of the lease.
Investments
in Other Companies
The
Company accounts for investments in other companies that do not have readily determinable fair value at cost minus impairment,
if any, plus or minus changes resulting from observable price changes in orderly transactions for the identical or a similar investment
of the same issuer. The Company has elected to utilize the cost minus impairment approach because the investment in TEC does not
have a readily determinable fair value as of the reporting date. See Note 8. Collaboration Agreement with Related Party.
Management
regularly evaluates the recoverability of its investment based on the investee company’s performance and financial position.
During the three months ended March 31, 2020 and 2019, the Company did not recognize any impairment loss. Management regularly
assesses the classification of its investments.
Property
and Equipment
Property
and equipment are carried at cost, net of depreciation. Gains or losses related to retirements or disposition of fixed assets
are recognized in operations in the period incurred. Costs of normal repairs and maintenance are charged to expense as incurred,
while betterments or renewals are capitalized. Depreciation commences at the time the assets are placed in service or for STEP
equipment under rental agreements, when the equipment is made available for use by the customer. Depreciation is provided using
the straight-line method over the estimated economic lives of the assets or for leasehold improvements, over the shorter of the
estimated useful life or the remaining lease term. For STEP equipment under rental agreements, depreciation is provided using
the straight-line method over the shorter of the useful life or 5-year maximum term of the agreement. Estimated useful lives are
summarized as follows:
Computer
equipment
|
|
|
3-5 years
|
|
Furniture and office
equipment
|
|
|
5-7 years
|
|
Machinery and equipment
|
|
|
5-7 years
|
|
STEP equipment
|
|
|
5 years
|
|
Leasehold improvements
|
|
|
7 years
|
|
Intangible
Assets
Intangible
assets at March 31, 2020 and December 31, 2019 are comprised of various patents and capitalized media content costs. We compute
amortization expense on the intangible assets using the straight-line method over the estimate remaining useful lives.
Cost
of Products Sold
Cost
of products sold represents manufacturing costs, consisting of materials, labor and overhead related to finished goods and components.
Cost of products sold includes depreciation of STEP contract fixed assets. Shipping costs incurred related to product delivery
are included in cost of products sold.
Advertising
Costs
Costs
associated with advertising are expensed as incurred. Advertising expense was $138,236 and $119,403 for the three months ended
March 31, 2020 and 2019, respectively. These costs include domestic and international tradeshows, website, and sales promotional
materials.
Research
and Development Costs
Research
and development costs are expensed as incurred. Research and development costs primarily include expenses, including labor, directly
related to research and development support. Research and development costs were $329,755 and $355,641 for the three months ended
March 31, 2020 and 2019, respectively.
Legal
Costs
Legal
costs relating to loss contingencies are expensed as incurred. See Note 10. Commitments and Contingencies.
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 $2,615,647 and $1,069,887 as of March 31,
2020 and December 31, 2019, respectively.
Sales
are typically made on credit and the Company generally does not require collateral. Management performs ongoing credit evaluations
of its customers’ financial condition and maintains an allowance for estimated losses. Historically, the Company has experienced
minimal charges relative to doubtful accounts.
Sales
are typically made on credit and the Company generally does not require collateral. Management performs ongoing credit evaluations
of its customers’ financial condition and maintains an allowance for estimated losses. Historically, the Company has experienced
minimal charges relative to doubtful accounts.
Management
performs ongoing evaluations of the collectability of its notes receivable and maintains an allowance for estimated losses. The
Company’s remaining note receivable is due from one related party and is unsecured but the note can be converted to equity
at the Company’s discretions (See Note 2. Notes Receivable and Note 8. Collaboration Agreement with Related Party.)
Historically,
the Company primarily sells its products to United States federal and state agencies. For the three months ended March 31, 2020,
one federal agency comprised 17% and one state agency comprised 15% of total net sales. By comparison, for the three months ended
March 31, 2019, one federal agency comprised 12% of total net sales.
As
of March 31, 2020, one federal agency comprised 13%, one state agency comprised 34% and two international customers comprised
12% and 14% of total accounts receivable. By comparison, as of December 31, 2019, one federal agency comprised 30% and one international
customer comprised of 20% of total accounts receivable.
Income
Taxes
Deferred
tax assets and liabilities are recorded based on the difference between the financial statement and the tax basis of assets and
liabilities using enacted tax rates in effect for the year in which the differences are expected to reverse. The Company calculates
a provision for income taxes using the asset and liability method, under which deferred tax assets and liabilities are recognized
by identifying the temporary differences arising from the different treatment of items for tax and accounting purposes. In determining
the future tax consequences of events that have been recognized in the financial statements or tax returns, judgment and interpretation
of statutes are required.
In
assessing realizable deferred tax assets, management assesses the likelihood that deferred tax assets will be recovered from future
taxable income, and to the extent that recovery is not likely or there is insufficient operating history, a valuation allowance
is established. The Company adjusts the valuation allowance in the period management determines it is more likely than not that
net deferred tax assets will or will not be realized. After review of the deferred tax asset and valuation allowance in accordance
with ASC 740, management determined that it is more likely than not that the Company will fully realize all of its deferred tax
asset and no valuation allowance was recorded as of March 31, 2020 and December 31, 2019.
The
Company did not recognize any assets or liabilities relative to uncertain tax positions at March 31, 2020 and December 31, 2019.
Interest or penalties, if any, will be recognized in income tax expense. Since there are no significant unrecognized tax benefits
as a result of tax positions taken, there are no accrued penalties or interest. Tax positions are positions taken in a previously
filed tax return or positions expected to be taken in a future tax return that are reflected in measuring current or deferred
income tax assets and liabilities reported in the financial statements.
The
Company reflects tax benefits, only if it is more likely than not that the Company will be able to sustain the tax return position,
based on its technical merits. If a tax benefit meets this criterion, it is measured and recognized based on the largest amount
of benefit that is cumulatively greater than 50% likely to be realized. Management does not believe that there are any uncertain
tax positions at March 31, 2020 and December 31, 2019.
The
Company is potentially subject to tax audits for its United States federal and various state income and excise tax returns for
tax years between 2015 and 2020; however, earlier years may be subject to audit under certain circumstances. Tax audits by their
very nature are often complex and can require several years to complete.
Impairment
of Long-Lived Assets and Intangible Assets
Long-lived
assets, such as equipment, and intangible assets are reviewed for impairment whenever events or changes in circumstances indicate
that the carrying amount of an asset may not be recoverable. Recoverability of assets to be held and used is measured by a comparison
of the carrying amount of an asset to estimated undiscounted future cash flows expected to be generated by the asset. If the carrying
amount of an asset exceeds its estimated future cash flows, an impairment charge is recognized by the amount by which the carrying
amount of the asset exceeds the fair value of the asset. Fair value is determined based on discounted cash flows or appraised
values, depending on the nature of the asset. At March 31, 2020 and December 31, 2019, the Company concluded that there has been
no indication of impairment to the carrying value of its long-lived assets. As such, no impairment has been recorded.
Stock
Based Compensation
The
Company measures the cost of awards of equity instruments based on the grant date fair value of the awards. The Company calculates
the fair value of stock-based awards using the Black-Scholes-Merton option pricing valuation model, which incorporates various
assumptions including volatility, expected term and risk-free interest rates. There were no grants of stock-based awards during
the three months ended March 31, 2020 and 2019.
The
expected term of the options is the estimated period of time until exercise and was determined using an average of vesting and
contractual terms, as we did not have sufficient historical experience of similar awards. The risk-free interest rate is based
on the implied yield available on United States Treasury zero-coupon issues with an equivalent remaining term. The Company has
not paid dividends in the past and does not plan to pay any dividends in the near future. The estimated fair value of stock-based
compensation awards and other options is amortized to expense on a straight-line basis over the relevant vesting period. The Company
has elected to recognize forfeitures as they occur rather than estimating them at the time of grant.
New
Accounting Pronouncements
In
December 2019, the FASB issued ASU No. 2019-12, Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes (“ASU
2019-12”). ASU 2019-12 simplifies the accounting for income taxes by removing certain exceptions to the general principles
in Topic 740. ASU 2019-12 also simplifies aspects of accounting for franchise taxes and clarifies the accounting for transactions
that result in a step-up in the tax basis of goodwill. ASU 2019-12 is effective for annual and interim financial statement periods
beginning after December 15, 2020, with early adoption permitted. The Company is currently evaluating the impact of the adoption
of ASU 2019-12 on its financial statements.
Note
2. Notes Receivable, Related Party
The
Company accepted an unsecured convertible promissory note (the “Convertible Note”) from TEC, a related party (see
Note 8), in the amount of $292,138 for a portion of their minimum royalty payment due as of May 31, 2018. The note bears interest
at the rate of 5% per annum and contains a provision requiring remittance of not less than 20% of the net proceeds of any private
or public offering of its securities in reduction of the Convertible Note. The note has a conversion right, at the sole discretion
of the Company, to convert the outstanding balance of principal and accrued interest at any time for shares of common stock of
TEC. Prior to the due date, the Company may elect to convert the Convertible Note for shares of common stock in TEC at a 25% discount
to the price of shares sold to the public in a public offering in connection with a go-public transaction. The issuance of common
stock upon conversion shall be made without charge to the Company. No fractional shares shall be issued upon conversion and in
lieu of fractional shares, TEC will pay the Company the amount of any obligation that is not converted. Any unpaid balance of
principal and accrued interest becomes due and collectible on the earlier of (i) August 1, 2019 (maturity date), or (ii) if declared
due and payable in the event of Default. In July 2019, the Convertible Note’s maturity date was extended to August 2020,
all other promissory note terms remain unchanged. Under the terms of the Convertible Note, TEC remitted a payment of $16,000,
of which $14,972 was applied to accrued interest and $1,028 to principal. The Convertible Note’s principal and accrued interest
due as of March 31, 2020 and December 31, 2019 was $300,450 and $296,811, respectively. Because the Convertible Note is from a
related party and has a history of being extended, the asset may not be converted to cash within one year and is therefore classified
as long-term asset. Additionally, a reserve for collectability has been recorded as of March 31, 2020 and December 31, 2019 totaling
$9,340 and $5,701, respectively. See Note 8-Collaboration Agreement with Related Party.
Note
3. Inventory
Inventory
consisted of the following as of:
|
|
March
31, 2020
|
|
|
December
31, 2019
|
|
Raw
materials and work in process
|
|
$
|
2,265,738
|
|
|
$
|
2,070,066
|
|
Reserve
|
|
|
(120,652
|
)
|
|
|
(120,652
|
)
|
|
|
|
|
|
|
|
|
|
Total
inventory, net
|
|
$
|
2,145,086
|
|
|
$
|
1,949,414
|
|
The
Company regularly evaluates the useful life of its spare parts inventory and as a result, the Company classified $333,299 and
$351,236 of spare parts as Other Assets, long-term on the Balance Sheet at March 31, 2020 and December 31, 2019, respectively.
Note
4. Property and Equipment
Property
and equipment consisted of the following as of:
|
|
March
31, 2020
|
|
|
December
31, 2019
|
|
Computer
equipment
|
|
$
|
1,115,326
|
|
|
$
|
1,115,326
|
|
Furniture
and office equipment
|
|
|
223,925
|
|
|
|
223,925
|
|
Machinery
and equipment
|
|
|
1,096,898
|
|
|
|
1,096,898
|
|
STEP
equipment
|
|
|
678,843
|
|
|
|
481,946
|
|
Leasehold
improvements
|
|
|
334,934
|
|
|
|
334,934
|
|
|
|
|
|
|
|
|
|
|
Total
property and equipment
|
|
|
3,449,926
|
|
|
|
3,253,029
|
|
Less:
Accumulated depreciation
|
|
|
(2,312,285
|
)
|
|
|
(2,224,831
|
)
|
|
|
|
|
|
|
|
|
|
Property
and equipment, net
|
|
$
|
1,137,641
|
|
|
$
|
1,028,198
|
|
Depreciation
expense, including STEP depreciation, was $87,454 and $70,312 for the three months ended March 31, 2020 and 2019, respectively.
Note
5. Intangible Asset
Intangible
asset consisted of the following as of:
|
|
March
31, 2020
|
|
|
December
31, 2019
|
|
Patents
|
|
$
|
160,000
|
|
|
$
|
160,000
|
|
Capitalized
media content
|
|
|
89,265
|
|
|
|
66,078
|
|
|
|
|
|
|
|
|
|
|
Total
intangible asset
|
|
|
249,265
|
|
|
|
226,078
|
|
Less:
Accumulated amortization
|
|
|
(10,370
|
)
|
|
|
(8,148)
|
|
|
|
|
|
|
|
|
|
|
Intangible
asset, net
|
|
$
|
238,895
|
|
|
$
|
217,930
|
|
Amortization
expense was $2,222 and $1,481 for the three months ended March 31, 2020 and 2019, respectively.
Note
6. Leases
The
Company leases approximately 37,729 rentable square feet of office and warehouse space from an unaffiliated third party for our
corporate office, manufacturing, assembly, warehouse and shipping facility located at 7970 South Kyrene Road, Tempe, Arizona 85284.
From 2016 through March 2019, the Company leased approximately 4,529 rentable square feet of office and industrial space from
an unaffiliated third party for our machine shop at 2169 East 5th St., Tempe, Arizona 85284. In April 2019, the Company relocated
the machine shop from the Fifth St. location to 7910 South Kyrene Road, located within the same business complex as our main office.
The Company executed a lease amendment to add an additional 5,131 rentable square feet for the machine shop and extended its existing
office lease through April 2024. The Company’s lease agreements do not contain any residual value guarantees, restrictive
covenants or variable lease payments. The Company has not entered into any financing leases.
In
addition to base rent, the Company’s lease generally provides for additional payments for other charges, such as rental
tax. The lease includes fixed rent escalations. The Company’s lease does not include an option to renew.
The
Company determines if an arrangement is a lease at inception. Operating leases are recorded in operating lease right of use assets,
net, operating lease liability – short term, and operating lease liability – long-term on its condensed balance sheet.
Operating
lease assets represent the Company’s right to use an underlying asset for the lease term and lease liabilities represent
its obligation to make lease payments arising from the lease. Operating lease assets and liabilities are recognized at the commencement
date based on the present value of lease payments over the lease term. As the Company’s lease does not provide an implicit
rate, the Company uses its incremental borrowing rate based on the information available at commencement date in determining the
present value of lease payments. The incremental borrowing rate used at adoption was 4.5%. Significant judgement is required when
determining the Company’s incremental borrowing rate. The Company uses the implicit rate when readily determinable. Lease
expense for lease payments are recognized on a straight-line basis over the lease term.
Effective
January 1, 2019, the Company obtained a right-of-use asset in exchange for a new operating lease liability in the amount of $1,721,380
and derecognized $46,523 deferred rent for an adjusted operating lease right-of-use asset in the net amount of $1,674,857.
The
balance sheet classification of lease assets and liabilities as of March 31, 2020 was as follows:
Balance Sheet Classification
|
|
March 31, 2020
|
|
Assets
|
|
|
|
|
Operating lease right-of-use assets, January 1, 2020
|
|
$
|
1,390,873
|
|
Amortization for the three months ended March 31, 2020
|
|
|
(72,843
|
)
|
Total operating lease right-of-use asset, March 31, 2020
|
|
$
|
1,318,030
|
|
Liabilities
|
|
|
|
|
Current
|
|
|
|
|
Operating lease liability, short-term
|
|
$
|
303,182
|
|
Non-current
|
|
|
|
|
Operating lease liability, long-term
|
|
|
1,097,805
|
|
Total lease liabilities
|
|
$
|
1,400,987
|
|
Future
minimum lease payments as of March 31, 2020 under non-cancelable operating leases are as follows:
2020
|
|
$
|
270,018
|
|
2021
|
|
|
368,060
|
|
2022
|
|
|
379,097
|
|
2023
|
|
|
390,562
|
|
2024
|
|
|
131,152
|
|
Total lease payments
|
|
|
1,538,889
|
|
Less: imputed interest
|
|
|
(137,902
|
)
|
Operating lease liability
|
|
$
|
1,400,987
|
|
The
balance sheet classification of lease assets and liabilities as of December 31, 2019 was as follows:
Balance
Sheet Classification
|
|
December
31, 2019
|
|
Assets
|
|
|
|
|
Operating
lease right-of-use assets, January 1, 2019
|
|
$
|
1,674,857
|
|
Amortization
for the year ended December 31, 2019
|
|
|
(283,984
|
)
|
Total
operating lease right-of-use asset, December 31, 2019
|
|
$
|
1,390,873
|
|
Liabilities
|
|
|
|
|
Current
|
|
|
|
|
Operating
lease liability, short-term
|
|
$
|
297,244
|
|
Non-current
|
|
|
|
|
Operating
lease liability, long-term
|
|
|
1,174,882
|
|
Total
lease liabilities
|
|
$
|
1,472,126
|
|
Future
minimum lease payments as of December 31, 2019 under non-cancelable operating leases are as follows:
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 liability
|
|
$
|
1,472,126
|
|
Rent
expense for the three months ended March 31, 2020 and 2019 was $133,001 and $89,139, respectively.
Note
7. Accrued Expenses
Accrued
compensation and related costs consisted of the following as of:
|
|
March 31, 2020
|
|
|
December 31, 2019
|
|
|
|
|
|
|
|
|
Salaries and wages payable
|
|
$
|
406,163
|
|
|
$
|
192,161
|
|
Employee benefits payable
|
|
|
13,939
|
|
|
|
11,259
|
|
Accrued paid time off
|
|
|
262,032
|
|
|
|
287,846
|
|
Profit sharing payable
|
|
|
52,202
|
|
|
|
120,221
|
|
|
|
|
|
|
|
|
|
|
Total accrued compensation and related costs
|
|
$
|
734,336
|
|
|
$
|
611,487
|
|
Accrued
expenses and other current liabilities consisted of the following as of:
|
|
March 31, 2020
|
|
|
December 31, 2019
|
|
|
|
|
|
|
|
|
Manufacturer’s warranties
|
|
$
|
316,000
|
|
|
$
|
257,000
|
|
Warranties-other
|
|
|
44,176
|
|
|
|
74,176
|
|
Miscellaneous payable
|
|
|
9,916
|
|
|
|
1,193
|
|
Taxes payable
|
|
|
104,216
|
|
|
|
2,382
|
|
|
|
|
|
|
|
|
|
|
Total accrued expenses and other current liabilities
|
|
$
|
474,308
|
|
|
$
|
334,751
|
|
Note
8. Collaboration Agreement with Related Party
On
January 16, 2015, the Company entered into a Co-Venture Agreement (the “Co-Venture Agreement”) with MR, a wholly-owned
subsidiary of TEC, a related party. The Co-Venture Agreement grants TEC an exclusive non-transferrable license to use the Company’s
technology and certain equipment solely for use at locations to operate the concept, as defined in the Co-Venture Agreement. Additionally,
under the terms of the Co-Venture Agreement, equity representing 5% of MR’s ownership interest, on a fully-diluted basis,
was issued to the Company. Throughout the duration of the Co-Venture Agreement, TEC will pay the Company a royalty based on gross
revenue, as defined and subject to certain minimum royalties commencing with the first 12-month period subsequent to the respective
milestone date of June 1, 2017. Under the terms of the original agreement, if the total royalty payments for locations in the
United States and Canada together do not total at least the minimum royalty amount specified in the agreement, TEC may pay to
VirTra the difference between the amount of total royalty payments and the minimum specified in the agreement to maintain exclusivity.
On
August 16, 2017, the Company entered into the first amendment to the Co-Venture Agreement to permit TEC to sublicense the VirTra
technology to third party operators of stand-alone location-based entertainment companies. TEC agreed to pay the Company royalties
for any such sublicenses in an amount equal to 10% of the revenue paid to TEC in cases where TEC pays for the cost of the equipment
for such location or 14% of the revenue paid to TEC in cases where it does not pay for the cost of the equipment.
On
July 23, 2018, the Company entered into the second amendment to the Co-Venture Agreement with TEC to (i) confirm the minimum royalty
deficiency benefit due for the royalty period ended May 31, 2018; (ii) establish payment terms for the minimum royalty deficiency
benefit due, to include both cash and promissory note payment; (iii) clarify the exclusivity provisions of the Co-Venture Agreement;
and (iv) amend the minimum royalty calculations to only TEC branded facilities.
On
July 31, 2019, the Company executed the First Amendment to Convertible Promissory Note with TEC to extend the Convertible Note’s
maturity date for one additional year to August 1, 2020 and TEC remitted a payment of 20% of its net proceeds from its recent
public offering totaling $16,000. All other terms and conditions of the Convertible Note remain unchanged.
In
April 2018, MR effected a 1-for-12,000 reverse stock split, followed by a 2,000-for-1 forward stock split completed in November
2018. As a result, the Company holds, as of March 31, 2020 and December 31, 2019, 560,000 shares of TEC common stock representing
approximately 4.8% of the issued and outstanding common shares of TEC. The Company recorded its investment at cost minus impairment
as of March 31, 2020 and December 31, 2019, at $840,000.
In
addition, as of March 31 2020, the Company holds a warrant to purchase 25,577 shares of TEC common stock, adjusted for the 1-for-12,000
reverse stock split and the 2,000-for-1 forward stock split, at an exercise price of $2.4436 per share, as adjusted. This warrant
became exercisable on the date of grant of April 14, 2015 and expires on the tenth anniversary of the date of grant, if not earlier
pursuant to the terms of the option.
Note
9. Related Party Transactions
During
the three months ended March 31, 2020 and 2019, the Company redeemed 3,750 and $0 previously awarded options reaching expiration
from the Company’s COO. The redemption eliminated the stock options and resulted in a total of $3,639 and $0 in additional
compensation expense in 2020 and 2019, respectively.
During
the three months ended March 31, 2020 and 2019, the Company issued 7,500 and nil shares of common stock, $0.0001 par value per
share (the “Common Stock”), to related parties consisting of the CEO and one member of the Board of Directors for
previously awarded stock options at an exercise price of $6,300 and $0, respectively.
Mr.
Saltz, who is a member of our Board of Directors, is also Chairman of the Board of Directors of TEC, as well as a majority stockholder
of TEC. The Company has entered into a Co-Venture Agreement with TEC (See Note 8. Collaboration Agreement with Related Party.)
The Company owns 560,000 shares of TEC common stock representing approximately 4.8% of the issued and outstanding shares of TEC
common stock. The Company recognized $16,740 and $39,637 for license fees (royalties) for the three months ended March 31, 2020
and 2019, respectively, pursuant to the terms of the Co-Venture Agreement. As of March 31, 2020 and December 31, 2019, the Company
had accounts receivable balances outstanding from TEC of $8,727 and $14,323, respectively.
Mr.
Richardson, who is a member of our Board of Directors, is also acting CEO of Natural Point, Inc. (“Natural Point”),
a vendor of the Company. For the three months ended March 31, 2020 and 2019, the Company purchased specialized equipment from
Natural Point in the amount of $0 and $38,352, respectively. As of March 31, 2020 and December 31, 2019, the Company had $0 and
$34,865 accounts payable balance outstanding, respectively.
Note
10. Commitments and Contingencies
General
or Threatened Litigation
From
time to time, the Company is notified of threatened litigation or that a claim is being made against it. The Company evaluates
contingencies on an on-going basis and has established loss provisions for matters in which losses are probable and the amount
of loss can be reasonably estimated. There is no threatened litigation at this time.
Employment
Agreements
On
April 2, 2012, the Company entered into three-year Employment Agreements with its Chief Executive Officer and Chief Operating
Officer that call for base annual salaries of $195,000 and $175,000, respectively, subject to cost of living adjustments, and
contain automatic one-year extension provisions. These contracts have been renewed annually and have been adjusted based on the
same percentage increase approved for Company-wide cost-of-living adjustments.
Profit
Sharing
VirTra
provides a discretionary profit-sharing program that pays out a percentage of Company profits each year as a cash bonus to eligible
employees. The cash payment is typically split into two equal payments and distributed pro-rata in April and October of the following
year to only active employees. For the three months ended March 31, 2020 and 2019, there was no amount credited to operations
due to net loss in both respective periods. The 2020 profit-sharing estimate is revised quarterly and will be finalized after
year-end financial audit.
Note
11. Stockholders’ Equity
Authorized
Capital
Common
Stock
Authorized
Shares. The Company is authorized to issue 60,000,000 shares of common stock, of which (a) 50,000,000 shares shall be Common
Stock, (b) 2,500,000 shares shall be Class A common stock, par value $0.0001 per share (the “Class A Common Stock”),
and (c) 7,500,000 shares shall be Class B common stock, par value $0.0001 per share (the “Class B Common Stock”).
No Class A Common Stock or Class B Common Stock has been issued.
Rights
and Preferences. Voting Rights. Except as otherwise required by the Nevada Revised Statues or as provided by or pursuant to
the provisions of the Articles of Incorporation:
(i)
Each holder of Common Stock shall be entitled to one (1) vote for each share of Common Stock held of record by such holder. The
holders of shares of Common Stock shall not have cumulative voting rights.
(ii)
Each holder of Class A Common Stock shall be entitled to ten (10) votes for each share of Class A Common Stock held of record
by such holder. The holders of shares of Class A Common Stock shall not have cumulative voting rights.
(iii)
The holders of Common Stock and Class A Common Stock shall vote together as a single class on all matters on which stockholders
are generally entitled to vote.
(iv)
The holders of Class B Common Stock shall not be entitled to vote on any matter, except that the holders of Class B Common Stock
shall be entitled to vote separately as a class with respect to amendments to the Articles of Incorporation that increase or decrease
the aggregate number of authorized shares of such class, increase or decrease the par value of the shares of such class, or alter
or change the powers, preferences, or special rights of the shares of such class so as to affect them adversely.
Preferred
Stock
Authorized
Shares. The Company is authorized to issue 2,500,000 shares of preferred stock, par value $0.0001 per share (the “Preferred
Stock”).
Rights
and Preferences. The Board of Directors is authorized at any time, and from time to time, to provide for the issuance of shares
of Preferred Stock in one or more series, and to determine the designations, preferences, limitations and relative or other rights
of the Preferred Stock or any series thereof.
Stock
Repurchase
On
October 25, 2016, the Company’s Board of Directors authorized the repurchase of up to $1 million of its common stock under
Rule 10b-18 promulgated under the Securities Exchange Act of 1934, as amended. Purchases made pursuant to this authorization will
be made in the open market, in privately negotiated transactions, or pursuant to any trading plan that may be adopted in accordance
with the Rule 10b-18. The timing, manner, price and amount of any repurchases will be determined by the Company in its discretion
and will be subject to economic and market conditions, stock price, applicable legal requirements and other factors. On January
9, 2019, VirTra’s Board of Directors authorized an additional $1 million be allocated for the repurchase of VirTra’s
stock under the existing 10b-18 plan.
Treasury
Stock
During
the three months ended March 31, 2020 and 2019, the Company purchased nil and 68,239 additional treasury shares at an average
cost of $3.82 per shares, respectively. As of March 31, 2020, all treasury shares previously purchased had been cancelled and
returned to shares authorized.
Non-qualified
Stock Options
The
Company has periodically issued non-qualified stock options to key employees, officers and directors under a stock option compensation
plan approved by the Board of Directors in 2009. Terms of option grants are at the discretion of the Board of Directors and are
generally seven years. Upon the exercise of these options, the Company expects to issue new authorized shares of its common stock.
The following table summarizes all non-qualified stock options as of:
|
|
March
31, 2020
|
|
|
March
31, 2019
|
|
|
|
Number
of
|
|
|
Weighted
|
|
|
Number
of
|
|
|
Weighted
|
|
|
|
Stock
Options
|
|
|
Exercise
Price
|
|
|
Stock
Options
|
|
|
Exercise
Price
|
|
Options
outstanding, beginning of year
|
|
|
234,167
|
|
|
$
|
2.47
|
|
|
|
279,167
|
|
|
$
|
2.34
|
|
Granted
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Redeemed
|
|
|
(3,750
|
)
|
|
|
0.84
|
|
|
|
-
|
|
|
|
-
|
|
Exercised
|
|
|
(7,500
|
)
|
|
|
0.84
|
|
|
|
-
|
|
|
|
-
|
|
Expired
/ terminated
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Options
outstanding, end of quarter
|
|
|
222,917
|
|
|
$
|
2.55
|
|
|
|
279,167
|
|
|
$
|
2.34
|
|
Options
exercisable, end of quarter
|
|
|
222,917
|
|
|
$
|
2.55
|
|
|
|
279,167
|
|
|
$
|
2.34
|
|
The
Company did not have any non-vested stock options outstanding as of March 31, 2020 and December 31, 2019. The weighted average
contractual term for options outstanding and exercisable at March 31, 2020 and 2019 was 7 years. The aggregate intrinsic value
of the options outstanding and exercisable at March 31, 2020 and 2019 was $111,738 and $641,987, respectively. The total
intrinsic value of options exercised during the three months ended March 31, 2020 and 2019 was $10,575 and $0, respectively. For
the three months ended March 31, 2020 and 2019, the Company received payments related to the exercise of options in the amount
of $6,300 and $0, respectively. The aggregate intrinsic value is calculated as the difference between the exercise price of the
underlying options and the fair value of the Company’s common stock for those stock options that have an exercise price
lower than the fair value of the Company’s common stock. Options with an exercise price above the fair value of the Company’s
common stock are considered to have no intrinsic value.
2017
Equity Incentive Plan
On
August 23, 2017, our board approved, subject to stockholder approval at the annual meeting of stockholders on October 6, 2017,
the 2017 Equity Incentive Plan (the “Equity Plan”). The Equity Plan is intended to make available incentives that
will assist us to attract, retain and motivate employees, including officers, consultants and directors. We may provide these
incentives through the grant of stock options, stock appreciation rights, restricted stock, restricted stock units, performance
shares and units and other cash-based or stock-based awards.
A
total of 1,187,500 shares of our Common Stock was initially authorized and reserved for issuance under the Equity Plan. This reserve
automatically increased on January 1, 2020, and will increase each subsequent anniversary through 2027, by an amount equal to
the smaller of (a) 3% of the number of shares of Common Stock issued and outstanding on the immediately preceding December 31,
or (b) an amount determined by the board.
Awards
may be granted under the Equity Plan to our employees, including officers, directors or consultants or those of any present or
future parent or subsidiary corporation or other affiliated entity. All awards will be evidenced by a written agreement between
us and the holder of the award and may include any of the following: stock options, stock appreciation rights, restricted stock,
restricted stock units, performance shares and performance units and cash-based awards and other stock-based awards.
At
March 31, 2020 and 2019, there were no options issued under the Equity Plan.
Note
12. Subsequent Events
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, 2010, the Governor for the State of Arizona issued a stay-at-home order, currently in effect until May 15, 2020. 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. 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 only delays in when orders ship
or installations occur and all delayed orders remain in backlog. A significant adverse change in the business climate could affect
the value of the Company’s long-term investment in TEC, including its long-term notes receivable from TEC, currently there has not been a negative impact and 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.
In
April 2020, the Company applied for a Paycheck Protection Program loan (the “PPP loan”) from Wells Fargo Bank (the
“Lender”) in the aggregate principal amount of $1,310,714 under the Coronavirus Aid, Relief, and Economic Security
Act (the “CARES Act”), which was enacted March 27, 2020. The Company has been notified that it has received a guarantee
ID from the SBA for the PPP loan and executed a Promissory Note (the “Note”) with the Lender on May 8, 2020. The Note
matures on May 8, 2022 and bears interest at a rate of 1.00% per annum, payable monthly commencing November 6, 2020, following
an initial deferral period as specified under the PPP loan. The Note may be prepaid at any time prior to maturity with no prepayment
penalties. Proceeds from the PPP loan were received on May 12, 2020, and are expected to be used to fund designated expenses,
including certain payroll costs, group health care benefits and other permitted expenses, in accordance with the PPP loan. Under
the terms of the PPP loan, up to the entire amount of principal and accrued interest may be forgiven to the extent PPP loan proceeds
are used for qualifying expenses as described in the CARES Act and applicable implementing guidance issued by the U.S. Small Business
Administration under the PPP loan. The Company intends to use its entire PPP loan amount for designated qualifying expenses and
to apply for forgiveness in accordance with the terms of the PPP loan. No assurance can be given that the Company will obtain
forgiveness of the Loan in whole or in part. With respect to any portion of the PPP loan that is not forgiven, the PPP loan will
be subject to customary provisions for a loan of this type, including customary events of default relating to, among other things,
payment defaults, breaches of the provisions of the Note and cross-defaults on any other loan with the Lender or other creditors.
Effective May 11, 2020, the Company’s stock repurchase was suspended to follow the legal requirements for recipients of
a PPP loan under the CARES Act.