Organization and Significant Accounting Policies

9 Months Ended

Sep. 30, 2022

Accounting Policies [Abstract]

Organization and Significant Accounting Policies

Note 1. Organization and Significant Accounting Policies

Organization and Business Operations

VirTra, Inc. (the “Company,” “VirTra,” “we,” “us” or “our”), located in Chandler, 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 outbreak of a novel strain of coronavirus (COVID-19). The pandemic has significantly impacted the economic conditions in the U.S. 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 resulted in reduced customer shipments and customer system installations. These developments have resulted in lower recognized revenue and possibly lower gross margin. To date, there have been minimal order cancellations; rather, due to disruption in the supply chain 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 Russian-Ukraine conflict is a global concern. The Company does not have any significant direct exposure to Russia or Ukraine through its operations, employee base, investments, or sanctions. We have no basis to evaluate the possible risks of this conflict.

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, 2021 included in the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2021 filed with the SEC on August 2, 2022. 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, 2022 and the results of our operations and cash flows for the periods presented. We derived the December 31, 2021 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, 2022 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, inventory reserves, accrual for warranty reserves, the carrying value of long-lived assets and intangible assets, income tax valuation allowances, and the allocation of the transaction price to the performance obligations in our contracts with customers.

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.

	Three Months ended September 30,
	2022									2021
	Commercial		Government		International			Total		Commercial		Government		International		Total
Simulators and accessories	$	198,886	$	2,641,214	$	369,906		$	3,210,006	$	1,370,466	$	2,645,312	$	723,471	$	4,739,249
Extended service-type warranties		29,798		650,839		14,368			695,005		31,910		656,870		25,180		713,960
Customized software and content		-		794,857		3,437			798,294		-		290,829		52,273		343,102
Installation and training		8,992		192,380		(5,860	)		195,512		42,952		190,098		59,500		292,550
Licensing and royalties		4,580		-		-			4,580		4,402		-		-		4,402
Total Sales Revenue	$	242,256	$	4,279,290	$	381,851		$	4,903,397	$	1,449,730	$	3,783,109	$	860,424	$	6,093,263

For the three months ended September 30, 2022, governmental customers comprised $4,279,290, or 87% of total net sales, commercial customers comprised $242,256, or 5% of total net sales, and international customers comprised $381,851, or 8% of total net sales. By comparison, for the three months ended September 30, 2021, governmental customers comprised $3,783,109, or 62%, of total net sales, commercial customers comprised $1,449,730, or 24%, of total net sales, and international customers comprised $860,424, or 14%, of total net sales.

Disaggregation of Revenue

	Nine Months ended September 30,
	2022								2021
	Commercial		Government		International		Total		Commercial		Government		International		Total
Simulators and accessories	$	1,412,539	$	11,175,641	$	3,013,844	$	15,602,024	$	2,183,796	$	7,828,503	$	1,907,588	$	11,919,887
Extended service-type warranties		91,836		2,129,077		59,675		2,280,588		79,531		2,001,423		74,196		2,155,150
Customized software and content		-		796,962		212,437		1,009,399		-		905,204		125,716		1,030,920
Installation and training		56,200		599,780		101,437		757,417		93,501		496,251		85,850		675,602
Licensing and royalties		4,580		-		-		4,580		8,805		-		-		8,805
Total Revenue	$	1,565,155	$	14,701,460	$	3,387,393	$	19,654,008	$	2,365,633	$	11,231,381	$	2,193,350	$	15,790,364

For the nine months ended September 30, 2022, governmental customers comprised $14,701,460, or 75% of total net sales, commercial customers comprised $1,565,155, or 8% of total net sales, and international customers comprised $3,387,393, or 17% of total net sales. By comparison, for the nine months ended September 30, 2021, governmental customers comprised $11,231,381, or 71% of total net sales, commercial customers comprised $2,365,633, or 15% of total net sales, and international customers comprised $2,193,350, or 14% of total net sales. For the nine months ended September 30, 2022 and 2021, the Company recorded $2,076,357 and $1,349,677, respectively, in STEP revenue, or 10.6% and 8.5%, respectively, of total net sales.

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 $2,657,876 and $2,371,531 at September 30, 2022 and December 31, 2021, 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 $416,939 and $1,764,034 as of September 30, 2022 and December 31, 2021, respectively. Deferred revenue for separately priced extended warranties longer than one year totaled $2,987,138 and $1,815,871 as of September 30, 2022 and December 31, 2021, respectively. The accrual for the one-year manufacturer’s warranty liability totaled $381,000 and $384,000 as of September 30, 2022 and December 31, 2021, respectively. During the three months ended September 30, 2022 and 2021, the Company recognized revenue of $1,364,519 and $713,960, 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, 2022 and 2021, the Company recognized revenue of $2,280,588 and $2,155,150, 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.

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, and accounts 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 $15,171,851 and $19,207,786 as of September 30, 2022 and December 31, 2021, respectively.

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.

Historically, the Company primarily sells its products to United States federal and state agencies. For the nine months ended September 30, 2022, one federal agency comprised 11.3% of total net sales. By comparison, for the nine months ended September 30, 2021, no single customer had a significant percentage of total revenue. For the three months ended September 30, 2022, one federal agency comprised 29.2% of total net sales. By comparison, for the three months ended September 30, 2021, one commercial customer comprised 20% of total net sales.

As of September 30, 2022, one federal agency comprised 36.3% of total accounts receivable. By comparison, as of December 31, 2021, the Company did not have any customer that accounted for more than 10% of total accounts receivable.

Net Income (Loss) per Common Share

The net income per common share is computed by dividing net income by the weighted average of common shares outstanding. Diluted net income per share reflects the potential dilution, using the treasury stock method, that would occur if outstanding stock options and warrants were exercised. Earnings per share computations are as follows:

Schedule of Earnings Per Share

	Three Months Ended September 30,					Nine Months Ended September 30,
	2022			2021		2022		2021
Net Income (loss)	$	(802,881	)	$	1,342,972	$	561,567	$	2,527,494
Weighted average common stock outstanding		10,867,745			10,792,520		10,850,912		9,745,091
Incremental shares from stock options		-			239,402		19,930		366,367
Weighted average common stock outstanding, diluted		10,867,745			11,031,922		10,870,842		10,111,458
Net income (loss) per common share and common equivalent share
Basic	$	(0.07	)	$	0.12	$	0.05	$	0.26
Diluted	$	(0.07	)	$	0.12	$	0.05	$	0.25