Form 1-A Issuer Information UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

FORM 1-A
REGULATION A OFFERING STATEMENT
UNDER THE SECURITIES ACT OF 1933
OMB APPROVAL

FORM 1-A

OMB Number: 3235-0286


Estimated average burden hours per response: 608.0

1-A: Filer Information

Issuer CIK
0001085243
Issuer CCC
XXXXXXXX
DOS File Number
Offering File Number
Is this a LIVE or TEST Filing? LIVE TEST
Would you like a Return Copy?
Notify via Filing Website only?
Since Last Filing?

Submission Contact Information

Name
Phone
E-Mail Address

1-A: Item 1. Issuer Information

Issuer Infomation

Exact name of issuer as specified in the issuer's charter
VIRTRA, INC.
Jurisdiction of Incorporation / Organization
NEVADA
Year of Incorporation
1993
CIK
0001085243
Primary Standard Industrial Classification Code
SERVICES-AMUSEMENT & RECREATION SERVICES
I.R.S. Employer Identification Number
93-1207631
Total number of full-time employees
74
Total number of part-time employees
0

Contact Infomation

Address of Principal Executive Offices

Address 1
7970 S. KYRENE ROAD
Address 2
City
TEMPE
State/Country
ARIZONA
Mailing Zip/ Postal Code
85284
Phone
480-968-1488

Provide the following information for the person the Securities and Exchange Commission's staff should call in connection with any pre-qualification review of the offering statement.

Name
LAURA ANTHONY
Address 1
Address 2
City
State/Country
Mailing Zip/ Postal Code
Phone

Provide up to two e-mail addresses to which the Securities and Exchange Commission's staff may send any comment letters relating to the offering statement. After qualification of the offering statement, such e-mail addresses are not required to remain active.

Financial Statements

Industry Group (select one) Banking Insurance Other

Use the financial statements for the most recent period contained in this offering statement to provide the following information about the issuer. The following table does not include all of the line items from the financial statements. Long Term Debt would include notes payable, bonds, mortgages, and similar obligations. To determine "Total Revenues" for all companies selecting "Other" for their industry group, refer to Article 5-03(b)(1) of Regulation S-X. For companies selecting "Insurance", refer to Article 7-04 of Regulation S-X for calculation of "Total Revenues" and paragraphs 5 and 7 of Article 7-04 for "Costs and Expenses Applicable to Revenues".

Balance Sheet Information

Cash and Cash Equivalents
$ 4283216.00
Investment Securities
$ 0.00
Total Investments
$
Accounts and Notes Receivable
$ 3725431.00
Loans
$
Property, Plant and Equipment (PP&E):
$ 0.00
Property and Equipment
$
Total Assets
$ 14749739.00
Accounts Payable and Accrued Liabilities
$ 604598.00
Policy Liabilities and Accruals
$
Deposits
$
Long Term Debt
$ 122777.00
Total Liabilities
$ 4704060.00
Total Stockholders' Equity
$ 10045679.00
Total Liabilities and Equity
$ 14749739.00

Statement of Comprehensive Income Information

Total Revenues
$ 9460852.00
Total Interest Income
$
Costs and Expenses Applicable to Revenues
$ 3280412.00
Total Interest Expenses
$
Depreciation and Amortization
$ 117108.00
Net Income
$ 2049979.00
Earnings Per Share - Basic
$ 0.13
Earnings Per Share - Diluted
$ 0.12
Name of Auditor (if any)
Friedman LLP

Outstanding Securities

Common Equity

Name of Class (if any) Common Equity
Common Stock
Common Equity Units Outstanding
15855291
Common Equity CUSIP (if any):
000000000
Common Equity Units Name of Trading Center or Quotation Medium (if any)
NONE

Preferred Equity

Preferred Equity Name of Class (if any)
Preferred Stock
Preferred Equity Units Outstanding
0
Preferred Equity CUSIP (if any)
000000000
Preferred Equity Name of Trading Center or Quotation Medium (if any)
NONE

Debt Securities

Debt Securities Name of Class (if any)
NONE
Debt Securities Units Outstanding
0
Debt Securities CUSIP (if any):
000000000
Debt Securities Name of Trading Center or Quotation Medium (if any)
NONE

1-A: Item 2. Issuer Eligibility

Issuer Eligibility

Check this box to certify that all of the following statements are true for the issuer(s)

1-A: Item 3. Application of Rule 262

Application Rule 262

Check this box to certify that, as of the time of this filing, each person described in Rule 262 of Regulation A is either not disqualified under that rule or is disqualified but has received a waiver of such disqualification.

Check this box if "bad actor" disclosure under Rule 262(d) is provided in Part II of the offering statement.

1-A: Item 4. Summary Information Regarding the Offering and Other Current or Proposed Offerings

Summary Infomation

Check the appropriate box to indicate whether you are conducting a Tier 1 or Tier 2 offering Tier1 Tier2
Check the appropriate box to indicate whether the financial statements have been audited Unaudited Audited
Types of Securities Offered in this Offering Statement (select all that apply)
Equity (common or preferred stock)
Does the issuer intend to offer the securities on a delayed or continuous basis pursuant to Rule 251(d)(3)? Yes No
Does the issuer intend this offering to last more than one year? Yes No
Does the issuer intend to price this offering after qualification pursuant to Rule 253(b)? Yes No
Will the issuer be conducting a best efforts offering? Yes No
Has the issuer used solicitation of interest communications in connection with the proposed offering? Yes No
Does the proposed offering involve the resale of securities by affiliates of the issuer? Yes No
Number of securities offered
4651163
Number of securities of that class outstanding
15855291

The information called for by this item below may be omitted if undetermined at the time of filing or submission, except that if a price range has been included in the offering statement, the midpoint of that range must be used to respond. Please refer to Rule 251(a) for the definition of "aggregate offering price" or "aggregate sales" as used in this item. Please leave the field blank if undetermined at this time and include a zero if a particular item is not applicable to the offering.

Price per security
$ 2.1500
The portion of the aggregate offering price attributable to securities being offered on behalf of the issuer
$ 10000000.00
The portion of the aggregate offering price attributable to securities being offered on behalf of selling securityholders
$ 0.00
The portion of the aggregate offering price attributable to all the securities of the issuer sold pursuant to a qualified offering statement within the 12 months before the qualification of this offering statement
$ 0.00
The estimated portion of aggregate sales attributable to securities that may be sold pursuant to any other qualified offering statement concurrently with securities being sold under this offering statement
$ 0.00
Total (the sum of the aggregate offering price and aggregate sales in the four preceding paragraphs)
$ 10000000.00

Anticipated fees in connection with this offering and names of service providers

Underwriters - Name of Service Provider
Boustead Securities, LLC
Underwriters - Fees
$ 225000.00
Sales Commissions - Name of Service Provider
Boustead Securities, LLC
Sales Commissions - Fee
$ 700000.00
Finders' Fees - Name of Service Provider
N/A
Finders' Fees - Fees
$ 0.00
Audit - Name of Service Provider
Friedman LLP/Semple, Marchal & Cooper, LLP
Audit - Fees
$ 30000.00
Legal - Name of Service Provider
Legal & Compliance, LLC
Legal - Fees
$ 40000.00
Promoters - Name of Service Provider
N/A
Promoters - Fees
$ 0.00
Blue Sky Compliance - Name of Service Provider
Legal & Compliance, LLC
Blue Sky Compliance - Fees
$ 7500.00
CRD Number of any broker or dealer listed:
141391
Estimated net proceeds to the issuer
$ 8945000.00
Clarification of responses (if necessary)
Net Proceeds Calculation of $8,945,000 includes Additional Expenses of: Cash Management Fee (estimated): $25,000; Technology Fees (Estimated): $25,000; and Other Offering Deposit Account Fees &Costs (estimate) $2,500.

1-A: Item 5. Jurisdictions in Which Securities are to be Offered

Jurisdictions in Which Securities are to be Offered

Using the list below, select the jurisdictions in which the issuer intends to offer the securities

Selected States and Jurisdictions
ALABAMA
ALASKA
ARIZONA
ARKANSAS
CALIFORNIA
COLORADO
CONNECTICUT
DELAWARE
FLORIDA
GEORGIA
HAWAII
IDAHO
ILLINOIS
INDIANA
IOWA
KANSAS
KENTUCKY
LOUISIANA
MAINE
MARYLAND
MASSACHUSETTS
MICHIGAN
MINNESOTA
MISSISSIPPI
MISSOURI
MONTANA
NEBRASKA
NEVADA
NEW HAMPSHIRE
NEW JERSEY
NEW MEXICO
NEW YORK
NORTH CAROLINA
NORTH DAKOTA
OHIO
OKLAHOMA
OREGON
PENNSYLVANIA
RHODE ISLAND
SOUTH CAROLINA
SOUTH DAKOTA
TENNESSEE
TEXAS
UTAH
VERMONT
VIRGINIA
WASHINGTON
WEST VIRGINIA
WISCONSIN
WYOMING
DISTRICT OF COLUMBIA
PUERTO RICO

Using the list below, select the jurisdictions in which the securities are to be offered by underwriters, dealers or sales persons or check the appropriate box

None
Same as the jurisdictions in which the issuer intends to offer the securities
Selected States and Jurisdictions

ALABAMA
ALASKA
ARIZONA
ARKANSAS
CALIFORNIA
COLORADO
CONNECTICUT
DELAWARE
FLORIDA
GEORGIA
HAWAII
IDAHO
ILLINOIS
INDIANA
IOWA
KANSAS
KENTUCKY
LOUISIANA
MAINE
MARYLAND
MASSACHUSETTS
MICHIGAN
MINNESOTA
MISSISSIPPI
MISSOURI
MONTANA
NEBRASKA
NEVADA
NEW HAMPSHIRE
NEW JERSEY
NEW MEXICO
NEW YORK
NORTH CAROLINA
NORTH DAKOTA
OHIO
OKLAHOMA
OREGON
PENNSYLVANIA
RHODE ISLAND
SOUTH CAROLINA
SOUTH DAKOTA
TENNESSEE
TEXAS
UTAH
VERMONT
VIRGINIA
WASHINGTON
WEST VIRGINIA
WISCONSIN
WYOMING
DISTRICT OF COLUMBIA
PUERTO RICO

1-A: Item 6. Unregistered Securities Issued or Sold Within One Year

Unregistered Securities Issued or Sold Within One Year

None

Unregistered Securities Issued

As to any unregistered securities issued by the issuer of any of its predecessors or affiliated issuers within one year before the filing of this Form 1-A, state:

(a)Name of such issuer
VIRTRA, INC.
(b)(1) Title of securities issued
Series A Preferred Stock (See attached for additional issuances)
(2) Total Amount of such securities issued
50000
(3) Amount of such securities sold by or for the account of any person who at the time was a director, officer, promoter or principal securityholder of the issuer of such securities, or was an underwriter of any securities of such issuer.
0
(c)(1) Aggregate consideration for which the securities were issued and basis for computing the amount thereof.
$2,500. Shares were sold at a purchase price of $0.05 per share.
(2) Aggregate consideration for which the securities listed in (b)(3) of this item (if any) were issued and the basis for computing the amount thereof (if different from the basis described in (c)(1)).

Unregistered Securities Issued

As to any unregistered securities issued by the issuer of any of its predecessors or affiliated issuers within one year before the filing of this Form 1-A, state:

(a)Name of such issuer
VIRTRA, INC.
(b)(1) Title of securities issued
Options to Purchase Common Stock
(2) Total Amount of such securities issued
103333
(3) Amount of such securities sold by or for the account of any person who at the time was a director, officer, promoter or principal securityholder of the issuer of such securities, or was an underwriter of any securities of such issuer.
103333
(c)(1) Aggregate consideration for which the securities were issued and basis for computing the amount thereof.
Aggregate value of options issued was $230,459.60 (an average of $2.23). Options were issued as compensation to certain officers and directors of the Company.
(2) Aggregate consideration for which the securities listed in (b)(3) of this item (if any) were issued and the basis for computing the amount thereof (if different from the basis described in (c)(1)).
Aggregate value of options issued was $230,459.60 (an average of $2.23). Options were issued as compensation to certain officers and directors of the Company.

Unregistered Securities Act

(e) Indicate the section of the Securities Act or Commission rule or regulation relied upon for exemption from the registration requirements of such Act and state briefly the facts relied upon for such exemption
Section 4(a)(2) of the Securities Act of 1933, as amended for transactions by an issuer not involving any public offering.

 

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 1-A

 

REGULATION A OFFERING CIRCULAR

UNDER THE SECURITIES ACT OF 1933

 

VirTra, Inc.

(Exact name of issuer as specified in its charter)

 

Nevada

(State of other jurisdiction of incorporation or organization)

 

7970 S. Kyrene Rd., Tempe, AZ 85284
 

Phone: (480) 968-1488

(Address, including zip code, and telephone number,

including area code of issuer’s principal executive office)

 

Robert D. Ferris

Chief Executive Officer

VirTra, Inc.

7970 S. Kyrene Rd., Tempe, AZ 85284
Phone: (480) 968-1488

 

(Name, address, including zip code, and telephone number,

including area code, of agent for service)

 

Copies to:

 

Laura Anthony, Esq.

Legal & Compliance, LLC

330 Clematis Street, Suite 217

West Palm Beach, FL 33401

Phone: 561-514-0936

Fax: 561-514-0832

 

Louis Taubman, Esq.

Hunter Taubman Fischer & Li LLC

1450 Broadway, 26th Floor

New York, NY 10018

Phone: 917-512-0827

Fax: 212-202-6380

 

 

3699   93-1207631
(Primary Standard Industrial
Classification Code Number)

 

 

(I.R.S. Employer
Identification Number)

 

 

 

     
 

 

Preliminary Offering Circular

September __, 2017

Subject to Completion

 

An Offering Circular pursuant to Regulation A relating to these securities has been filed with the Securities and Exchange Commission. Information contained in this Preliminary Offering Circular is subject to completion or amendment. These securities may not be sold nor may offers to buy be accepted before the Offering Circular filed with the Commission is qualified. This Preliminary Offering Circular shall not constitute an offer to sell or the solicitation of an offer to buy nor may there be any sales of these securities in any state in which such offer, solicitation or sale would be unlawful before registration or qualification under the laws of any such state. We may elect to satisfy our obligation to deliver a Final Offering Circular by sending you a notice within two business days after the completion of our sale to you that contains the URL where the Offering Circular was filed may be obtained.

 

VIRTRA, INC.

 

$5,000,000 Minimum Offering Amount ([__] Shares of Common Stock)

$10,000,000 Maximum Offering Amount ([__] Shares of Common Stock)

 

VirTra, Inc., a Nevada corporation (the “Company”), is offering a minimum of [__] shares of Common Stock and a maximum of [__] shares of Common Stock (the “Offered Shares”), par value of $0.0001 per share (the “Common Stock”) on a “best efforts” basis. We expect that the initial public offering price per share will be from $[__] to $[__] per share. This offering will terminate on [__], 2017, subject to extension for up to thirty (30) days with the mutual agreement of us and our Underwriters, as defined below; provided that, if we have received and accepted subscriptions for the minimum number of Offered Shares on or before [__], 2017, or the end of the thirty (30) day extension, if exercised, then we will close on the minimum offering amount (the “Initial Closing”) and this offering will continue until the earliest of (i) the date which is ninety (90) days after the Initial Closing, or (ii) with the mutual agreement of us and our Underwriters, a date which is less than ninety (90) days after the Initial Closing in order to coordinate with the commencement of exchange trading of our Common Stock, or (iii) the date on which the maximum offering amount is sold (such earliest date, the “Termination Date”). If, on the Initial Closing date, we have sold less than the maximum number of Offered Shares, then we may hold one or more additional closings for additional sales (each an “Additional Closing”), up to the maximum number of Offered Shares, and until the Termination Date. Our company and the Underwriters will consider various factors in determining the timing of any Additional Closings, including the amount of proceeds received at the Initial Closing, any Additional Closings that have already been held, the level of additional valid subscriptions received after the Initial Closing, the eligibility of additional investors under applicable laws and coordination with the commencement of exchange trading of our Common Stock.

 

Until we achieve the minimum offering amount, the proceeds for the offering will be kept in a non-interest bearing account (the “Offering Escrow Account”). Upon achievement of the minimum offering amount and the closing on such amount, the proceeds from the minimum offering amount will be distributed to us and the associated Offered Shares will be issued to the investors. Upon each Additional Closing, if any, the proceeds subject to that Additional Closing will be distributed to us and the associated Offered Shares will be issued to the investors in such Offered Shares. If the offering does not close, the proceeds for the offering will be promptly returned to investors, without deduction and without interest. FinTech Clearing, LLC will serve as the Offering Escrow Account agent. Checks should be made payable to FinTech Clearing, LLC (the “Deposit Account Agent”) as deposit account agent for VirTra, Inc.

 

The minimum purchase requirement per investor is $1,000; however, we can waive the minimum purchase requirement on a case-by-case basis in our sole discretion. We expect to commence the sale of the Offered Shares as of the date on which the Offering Statement the (“Offering Statement”) of which this Offering Circular is a part, is qualified by the United States Securities and Exchange Commission (the “SEC”).

 

Our Common Stock is quoted on the OTCQX tier of the OTC Markets under the symbol, “VTSI.” On September 7, 2017, the last reported sale price of our Common Stock on the OTCQX was $2.10 per share. We intend to apply to list our Common Stock on the NASDAQ Capital Market (“NASDAQ”) under the symbol “VTSI” after we register our common stock under the Securities Exchange Act of 1934, as amended (“Exchange Act”), upon the qualification of this offering. Our Common Stock will not commence trading on NASDAQ until a number of conditions are met for us to meet the initial listing requirements of NASDAQ. We will not consummate and close this offering without a listing approval letter from NASDAQ.

 

   -2-  
 

 

We have engaged Boustead Securities, LLC, a registered broker-dealer and a member of the Financial Industry Regulatory Authority (“FINRA”), as the underwriter (the “Underwriter”) to offer the Offered Shares to prospective investors in the United States on a best efforts basis, and our Underwriter will have the right to engage such other broker-dealers or agents as it determines to assist in such offering.

 

A maximum of $10,000,000 of Offered Shares will be offered worldwide. No sales of Offered Shares will be made anywhere in the world prior to the qualification of the Offering Statement by the SEC in the United States. All Offered Shares will be initially offered in all jurisdictions at the same U.S. dollar price that is set forth in this Offering Circular.

 

See “Underwriting” and “Description of Securities” for a description of our capital stock.

 

We are an “emerging growth company,” as such term is defined in Section 2(a)(19) of the Securities Act of 1933, as amended, and we will be subject to reduced public reporting requirements. See “Emerging Growth Company and Smaller Reporting Company Status.”

 

    Price to Public     Underwriting Discounts and Commissions(1) (2)     Proceeds,
Before
Expenses, to
Company(3)
 
Per Share   $     $     $  
Total (4)   $     $     $  

 

(1) This table depicts broker-dealer commissions of 7% of the gross offering proceeds. Please refer to the section entitled Underwriting” beginning on page __ of this Offering Circular for additional information regarding total underwriter compensation. In addition, we have agreed to reimburse the Underwriter for its reasonable out-of-pocket expenses subject to our prior written consent. We paid the Underwriter a non-refundable retainer fee of $25,000 and have agreed to pay up to an additional $75,000 for reimbursement of the Underwriter’s legal counsel fees, subject to certain conditions.

 

(2) In addition to the broker-dealer discounts and commissions included in the above table, our Underwriters will have the right to acquire warrants to purchase shares of our common stock equal to 7% of the aggregate shares sold in this offering (“Underwriter Warrants”). The Underwriter Warrants have an exercise price of 120% of the offering price.

 

(3) Does not include estimated offering expenses including, without limitation, legal, accounting, auditing, deposit Account Agent, transfer agent, other professional, printing, advertising, travel, marketing, blue-sky compliance and other expenses of this Offering. We estimate the total expenses of this Offering, excluding the Underwriter’s commissions and expenses, will be approximately $130,000.

 

Generally, no sale may be made to you in this offering if the aggregate purchase price you pay is more than 10% of the greater of your annual income or net worth. Different rules apply to accredited investors and non-natural persons. Before making any representation that your investment does not exceed applicable thresholds, we encourage you to review Rule 251(d)(2)(i)(C) of Regulation A. For general information on investing, we encourage you to refer to www.investor.gov.

 

An investment in our Common Stock is subject to certain risks and should be made only by persons or entities able to bear the risk of and to withstand the total loss of their investment. Prospective investors should carefully consider and review the RISK FACTORS beginning on page 11.

 

THE UNITED STATES SECURITIES AND EXCHANGE COMMISSION, OR THE COMMISSION, DOES NOT PASS UPON THE MERITS OR GIVE ITS APPROVAL TO ANY SECURITIES OFFERED OR THE TERMS OF THE OFFERING, NOR DOES IT PASS UPON THE ACCURACY OR COMPLETENESS OF ANY OFFERING CIRCULAR OR OTHER SELLING LITERATURE. THESE SECURITIES ARE OFFERED PURSUANT TO AN EXEMPTION FROM REGISTRATION WITH THE COMMISSION; HOWEVER, THE COMMISION HAS NOT MADE AN INDEPENDENT DETERMINATION THAT THE SECURITIES OFFERED ARE EXEMPT FROM REGISTRATION.

 

This Offering Circular follows the disclosure format of Part I of Form S-1 pursuant to the general instructions of Part II(a)(1)(ii) of Form 1-A.

 

 

The date of this Offering Circular is __________, 2017.

 

   -3-  
 

 

TABLE OF CONTENTS

 

  Page
Market and Industry Data and Forecasts 4
Trademarks and Copyrights 5
Cautionary Statement Regarding Forward-Looking Statements 5
Offering Circular Summary 5
The Offering 9
Summary Historical Financial Data 10
Risk Factors 11
Use of Proceeds 21
Capitalization 22
Market Price for Common Equity and Related Stockholder Matters 22
Determination of Offering Price 23
Dilution 23
Underwriting 25
Dividend Policy 30
Description of Business 30
Management’s Discussion and Analysis of Financial Condition and Results of Operations 37
Management 46
Corporate Governance 47
Executive Compensation 51
Security Ownership of Certain Beneficial Owners and Management 57
Certain Relationships and Related Party Transactions 58
Description of Capital Stock 60
Shares Eligible for Future Sale 62
Certain United States Federal Income Tax Consequences to Non-U.S. Holders 64
Legal Matters 66
Experts 66
Where You Can Find More Information 67
Index to Financial Statements 68

 

We have not authorized anyone to provide any information other than that contained or incorporated by reference in this Offering Circular prepared by us or to which we have referred you. We take no responsibility for, and can provide no assurance as to the reliability of, any other information that others may give you. This Offering Circular is an offer to sell only our Common Stock offered hereby but only under circumstances and in jurisdictions where it is lawful to do so. The information contained in this Offering Circular is current only as of its date, regardless of the time of delivery of this Offering Circular or any sale of the Common Stock.

 

For investors outside the United States: We have not done anything that would permit this Offering or possession or distribution of this Offering Circular in any jurisdiction where action for that purpose is required, other than the United States. You are required to inform yourselves about and to observe any restrictions relating to this Offering and the distribution of this Offering Circular.

 

MARKET AND INDUSTRY DATA AND FORECASTS

 

Certain market and industry data included in this Offering Circular is derived from information provided by third-party market research firms or third-party financial or analytics firms that we believe to be reliable. Market estimates are calculated by using independent industry publications, government publications and third-party forecasts in conjunction with our assumptions about our markets. We have not independently verified such third-party information. The market data used in this Offering Circular involves a number of assumptions and limitations, and you are cautioned not to give undue weight to such estimates. While we are not aware of any misstatements regarding any market, industry or similar data presented herein, such data involves risks and uncertainties and are subject to change based on various factors, including those discussed under the headings “Cautionary Statement Regarding Forward-Looking Statements” and “Risk Factors” in this Offering Circular. These and other factors could cause results to differ materially from those expressed in the estimates made by the independent parties and by us.

 

   -4-  
 

 

Certain data are also based on our good faith estimates, which are derived from management’s knowledge of the industry and independent sources. Industry publications, surveys and forecasts generally state that the information contained therein has been obtained from sources believed to be reliable, but there can be no assurance as to the accuracy or completeness of included information. We have not independently verified any of the data from third-party sources nor have we ascertained the underlying economic assumptions relied upon therein. Statements as to our market position are based on market data currently available to us. While we are not aware of any misstatements regarding the industry data presented herein, our estimates involve risks and uncertainties and are subject to change based on various factors, including those discussed under the heading “Risk Factors” in this Offering Circular. Similarly, we believe our internal research is reliable, even though such research has not been verified by any independent sources.

 

TRADEMARKS AND COPYRIGHTS

 

We own or have rights to trademarks or trade names that we use in connection with the operation of our business, including our corporate names, logos and website names. In addition, we own or have the rights to copyrights, trade secrets and other proprietary rights that protect the content of our products and the formulations for such products. This Offering Circular may also contain trademarks, service marks and trade names of other companies, which are the property of their respective owners. Our use or display of third parties’ trademarks, service marks, trade names or products in this Offering Circular is not intended to, and should not be read to, imply a relationship with or endorsement or sponsorship of us. Solely for convenience, some of the copyrights, trade names and trademarks referred to in this Offering Circular are listed without their ©, ® and ™ symbols, but we will assert, to the fullest extent under applicable law, our rights to our copyrights, trade names and trademarks. All other trademarks are the property of their respective owners.

 

CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS

 

This Offering Circular contains certain forward-looking statements that are subject to various risks and uncertainties. Forward-looking statements are generally identifiable by use of forward-looking terminology such as “may,” “will,” “should,” “potential,” “intend,” “expect,” “outlook,” “seek,” “anticipate,” “estimate,” “approximately,” “believe,” “could,” “project,” “predict,” or other similar words or expressions. Forward-looking statements are based on certain assumptions, discuss future expectations, describe future plans and strategies, contain financial and operating projections or state other forward-looking information. Our ability to predict results or the actual effect of future events, actions, plans or strategies is inherently uncertain. Although we believe that the expectations reflected in our forward-looking statements are based on reasonable assumptions, our actual results and performance could differ materially from those set forth or anticipated in our forward-looking statements. Factors that could have a material adverse effect on our forward-looking statements and upon our business, results of operations, financial condition, funds derived from operations, cash available for dividends, cash flows, liquidity and prospects include, but are not limited to, the factors referenced in this Offering Circular, including those set forth below.

 

When considering forward-looking statements, you should keep in mind the risk factors and other cautionary statements in this Offering Circular. Readers are cautioned not to place undue reliance on any of these forward-looking statements, which reflect our views as of the date of this Offering Circular. The matters summarized below and elsewhere in this Offering Circular could cause our actual results and performance to differ materially from those set forth or anticipated in forward-looking statements. Accordingly, we cannot guarantee future results or performance. Furthermore, except as required by law, we are under no duty to, and we do not intend to, update any of our forward-looking statements after the date of this Offering Circular, whether as a result of new information, future events or otherwise.

 

OFFERING CIRCULAR SUMMARY

 

This summary of the Offering Circular highlights material information concerning our business and this offering. This summary does not contain all of the information that you should consider before making your investment decision. You should carefully read the entire Offering Circular, including the information presented under the section entitled “Risk Factors”. This summary contains forward-looking statements that involve risks and uncertainties. Our actual results may differ significantly from future results contemplated in the forward-looking statements as a result of factors such as those set forth in “Risk Factors” and “Cautionary Statement Regarding Forward-Looking Statements.”

 

   -5-  
 

 

In this Offering Circular, unless the context indicates otherwise, “VirTra,” the “Company,” “we,” “our,” “ours” or “us” refer to VirTra, Inc., a Nevada corporation.

 

Our Corporate History

 

VirTra, Inc. is a corporation organized and existing under the laws of the State of Nevada. The original business started in 1993 as Ferris Productions, Inc. In September 2001, Ferris Productions, Inc. merged with GameCom, Inc. to ultimately become VirTra Systems, Inc., a Texas Corporation.

 

Effective as of October 1, 2016 (the “Effective Date”), we completed a conversion from a Texas corporation to a Nevada corporation pursuant to a Redomestication Plan of Conversion (the “Plan of Conversion”) that was approved by our Board of Directors on June 23, 2016 and our shareholders on September 16, 2016. On the Effective Date, 15,855,005 shares of common stock of VirTra Systems, Inc., a Texas corporation, were converted into 15,855,005 shares of Common Stock of VirTra, Inc., a Nevada corporation. No shareholders exercised appraisal rights or dissenters’ rights for such shares in accordance with the Texas Business Organization Code.

 

As part of the Plan of Conversion, we filed Articles of Incorporation in Nevada whereby we changed our name from VirTra Systems, Inc. to VirTra, Inc. and revised our capitalization. Our Articles of Incorporation filed in Nevada authorize us to issue 125,000,000 shares, of which (1) 120,000,000 shares shall be Common Stock, par value $0.0001 per share (the “Common Stock”), of which (a) 100,000,000 shares shall be Common Stock, par value $0.0001, (b) 5,000,000 shares shall be Class A Common Stock, par value $0.0001 per share (the “Class A Common Stock”), and (c) 15,000,000 shares shall be Class B Common Stock, par value $0.0001 per share (the “Class B Common Stock”) and (2) 5,000,000 shares shall be Preferred Stock, par value $0.0001 per share, which may, at the sole discretion of the Board of Directors be issued in one or more series (the “Preferred Stock”). We also adopted new bylaws as part of the Plan of Conversion.

 

Effective October 20, 2016, we effected a 1 for 10 reverse stock split of our issued and outstanding Common Stock (the “Reverse Stock Split”). All references to shares of our common stock in Offering Circular refer to the number of shares of common stock after giving effect to the Reverse Stock Split (unless otherwise indicated).

 

Business Overview

 

We develop, sell and support use of force training and marksmanship firearms training systems and accessories for law enforcement, military and civilian use. Our simulators use software, hardware and content to create uniquely effective and realistic training that does not require live ammunition or less-than-lethal munitions, which can both save money and provide certain training capabilities unavailable to live fire exercises. We have developed a higher standard in simulation training including capabilities such as: multi-screen video based scenarios, unique scenario authoring ability, superior training scenarios, the patented Threat-Fire™ shoot-back system, powerful gas-powered simulated recoil weapons, and more.

 

Also, we are engaged in licensing our technology to Modern Round Entertainment Corporation (“MREC”), a developer and operator of a combined dining and entertainment concept centered on an indoor shooting experience.

 

Business Strategy

 

We have four main customer groups, namely, law enforcement, military, educational (includes colleges and police academies), and civilian. These are very different markets and require different sales and marketing programs as well as personnel. Our focus is to expand the market share and scope of our training simulators sales to these identified customer groups by pursuing the following key growth strategies:

 

   -6-  
 

 

  Build Our Core Business. Our goal is to profitably grow our market share by continuing to develop, produce and market the most effective simulators possible. Through disciplined growth in our business, we have achieved a solid balance sheet by increasing our working capital and no bank debt. We plan to add staff to our experienced management team, as needed, to meet the expected increase in demand for our products and services as we increase our marketing and sales activities.
     
  Increase Total Addressable Market. We plan to increase the size of our total addressable market. This effort will focus on new marketing and new product and/or service offerings for the purpose of widening the number of types of customers who might consider our products or services uniquely compelling.
     
  Broaden Product Offerings. Since formation in 1993, our company has had a proud tradition of innovation in the field of simulation and virtual reality. We plan to release revolutionary new products and services as well as continue incremental improvements to existing product lines. In some cases, the company may enter a new market segment via the introduction of a new type of product or service.
     
  Partners and Acquisitions. We try to spend our time and funds wisely and not tackle tasks that can be done more efficiently with partners. For example, international distribution is often best accomplished through a local distributor or agent. We are also open to the potential of acquiring additional businesses or of being acquired ourselves, based on what is expected to be optimal for our long-term future and our shareholders.

 

Simulator Product Offerings

 

Our simulator products include the following:

 

  V-300™ Simulator – a 300° wrap-around screen with video capability is the higher standard for simulation training
     
  V-180™ Simulator – a 180° screen with video capability is for smaller spaces or smaller budgets
     
  V-100™ Simulator – a single-screen based simulator system
     
  The V-100™ MIL is sold to various military commands throughout the world and can support any local language. The system is extremely compact and can even share space with a standard classroom or squeeze into almost any existing facility. If a portable firearms simulator is needed, this model offers the most compact single-screen simulator on the market today – everything organized into one standard case.
     
  V-ST™ Simulator – a highly-realistic single screen simulated shooting range simulator with the ability to scale to multiple screens
     
  Top Subject Matter Expert Content – content supplied with our simulators is approved by top training experts
     
  V-Author™ Software – allows users to create, edit, and train with content specific to agency’s objectives
     
  Simulated Recoil – a wide range of highly realistic and reliable simulated recoil kits/weapons
     
  Return Fire Device – the patented Threat-Fire™ device which applies real-world stress on the trainees during simulation training

 

Our Board of Directors

 

We operate under the direction of our board of directors, Robert D. Ferris, Matthew Burlend, Jeffrey Brown, and Mitchell A. Saltz, who are accountable to us and our stockholders as fiduciaries. Our board of directors has ultimate responsibility for our operations, corporate governance, compliance and disclosure. The number of directors are fixed by our board of directors, subject to our articles of incorporation and our bylaws.

 

Board Leadership Structure and Board’s Role in Risk Oversight

 

Our board of directors has a Chairman, Mr. Ferris. The Chairman has authority, among other things, to preside over board of director’s meetings and set the agenda for board of director’s meetings. We currently have two independent board members, Messrs. Brown and Saltz and the board of directors has nominated Jim Richardson to stand for election as an independent director at the annual meeting of stockholders to be held on October 6, 2017.

 

   -7-  
 

 

Board Committees

 

Our board of directors has established three standing committees —audit, compensation and nominating and corporate governance —each of which operate under a charter that has been approved by our board of directors. If elected at the annual meeting, it is anticipated that Mr. Richardson will serve as an independent member on each of the audit committee, compensation committee and corporate governance committee in order to comply with the corporate governance requirements of the NASDAQ Listing Rules.

 

Risks Affecting Us

 

An investment in the Offered Shares involves a high degree of risk. You should carefully consider the risks summarized below. These risks are discussed more fully in the “Risk Factors” section immediately following this Offering Circular Summary. These risks include, but are not limited to, the following:

 

  our dependence on government contracts for substantially all of our revenues;
     
  intense competition;
     
  our inability to anticipate customer preferences or to effectively identify, market and sell future products;
     
  assertions by third parties of infringement or other violation by us of their intellectual property rights.
     
  our dependence on our executive officers;
     
  our inability to implement and maintain effective internal control over financial reporting;
     
  costs incurred and substantial management time devoted as a result of operating as a public company; and
     
  volatility of the price of our Common Stock.

 

Emerging Growth Company and Smaller Reporting Company Status

 

Emerging Growth Company. We are an “emerging growth company” as defined in Section 2(a)(19) of the Securities Act of 1933, as amended (the “Securities Act”), as modified by the Jumpstart Our Business Startups Act of 2012 (the “JOBS Act”). As such, we are eligible to take advantage of certain exemptions from various reporting requirements that are applicable to other public companies that are not “emerging growth companies” including, but not limited to, not being required to comply with the auditor attestation requirements of Section 404 of the Sarbanes-Oxley Act of 2002 (the “Sarbanes-Oxley Act”), reduced disclosure obligations regarding executive compensation in our periodic reports and proxy statements, and exemptions from the requirements of holding a non-binding advisory vote on executive compensation and stockholder approval of any golden parachute payments not previously approved. We intend to take advantage of all of these exemptions.

 

In addition, Section 107 of the JOBS Act also provides that an “emerging growth company” can take advantage of the extended transition period provided in Section 7(a)(2)(B) of the Securities Act for complying with new or revised accounting standards, and delay compliance with new or revised accounting standards until those standards are applicable to private companies. We have elected to take advantage of the benefits of this extended transition period.

 

We could be an emerging growth company until the last day of the first fiscal year following the fifth anniversary of our first common equity offering, although circumstances could cause us to lose that status earlier if our annual revenues exceed $1.0 billion, if we issue more than $1.0 billion in non-convertible debt in any three-year period, or if we become a “large accelerated filer” as defined in Rule 12b-2 under the Exchange Act.

 

Smaller Reporting Company. We also qualify as a “smaller reporting company” under Rule 12b-2 of the Exchange Act, which is defined as a company with a public equity float of less than $75 million. To the extent that we remain a smaller reporting company at such time as we are no longer an emerging growth company, we will still have reduced disclosure requirements for our public filings some of which are similar to those of an emerging growth company, including not being required to comply with the auditor attestation requirements of Section 404 of the Sarbanes-Oxley Act and the reduced disclosure obligations regarding executive compensation in our periodic reports and proxy statements.

 

   -8-  
 

 

Company Information

 

Our principal office is located at 7970 S. Kyrene Road, Tempe Arizona 85284 and our phone number is (480) 968-1488. Our corporate website address is www.virtra.com. Information contained on, or accessible through, our website is not a part of, and is not incorporated by reference into, this Offering Circular.

 

THE OFFERING

 

Issuer   VirTra, Inc.
     
Securities Offered   A minimum of [__] and a maximum of [__] shares of our Common Stock, par value $0.0001 (“Common Stock”) at an offering price of $[__] per share (the “Offered Shares”).
     
Offering Price   $[___] per Share.
     
Number of Shares Outstanding Before the Offering   There are outstanding as of the date hereof the following shares of our capital stock: _______ shares of Common Stock and no shares of Class A Common Stock, Class B Common Stock, or Preferred Stock outstanding.
     
Number of Shares Outstanding After the Offering   [__] shares, if the minimum amount of Offered Shares are sold, and [__] shares, if the maximum amount of Offered Shares are sold. (1)
     
Minimum offering amount:   [__] shares at $[__] per share, or $5,000,000
     
Maximum offering amount:   [__] shares at $[__] per share, or $10,000,000
     
Minimum Investment Amount   The minimum subscription amount per investor is $1,000, and subscriptions, once received, are irrevocable.
     
Proposed NASDAQ listing:   We intend to apply to list our Common Stock on the NASDAQ Capital Market (“NASDAQ”) under the symbol “VTSI.” Our Common Stock will not commence trading on NASDAQ until all of the following conditions are met: (i) the Initial Closing has occurred and we have raised the minimum amount of offering proceeds necessary for us to meet the initial listing requirements of NASDAQ, among other considerations; (ii) the offering is terminated; and (iii) we have filed a post-qualification amendment to the Offering Circular and a registration statement on Form 8-A (“Form 8-A”) under the Securities Exchange Act of 1934 (the “Exchange Act”), and such post-qualification amendment is qualified by the SEC and the Form 8-A has become effective. Pursuant to applicable rules under Regulation A, the Form 8-A will not become effective until the SEC qualifies the post-qualification amendment. We intend to file the post-qualification amendment and request its qualification immediately prior to the termination of the offering in order that the Form 8-A may become effective as soon as practicable. Even if we meet the minimum requirements for listing on NASDAQ, we may wait before terminating the offering and commencing the trading of our Common Stock on NASDAQ in order to raise additional proceeds. As a result, you may experience a delay between the closing of your purchase of our shares of Common Stock and the commencement of exchange trading of our Common Stock.

 

   -9-  
 

 

Investment Amount Restrictions   Generally, no sale may be made to you in this Offering if the aggregate purchase price you pay is more than 10% of the greater of your annual income or net worth. Different rules apply to accredited investors and non-natural persons. Before making any representation that your investment does not exceed applicable thresholds, we encourage you to review Rule 251(d)(2)(i)(c) of Regulation A. For general information on investing, we encourage you to refer to www.investor.gov.
     
U.S. offering:  

We have engaged Boustead Securities, LLC, as the Underwriter to offer the Offered Shares to prospective investors in the United States, on a best efforts basis, and our Underwriter will have the right to engage such other broker-dealers or agents as it determines to assist in such offering.

A maximum of $10,000,000 of Offered Shares will be offered worldwide. No sales of Offered Shares will be made anywhere in the world prior to the qualification of the Offering Circular by the SEC in the United States. All Offered Shares will be initially offered everywhere in the world at the same U.S. dollar price that is set forth in this Offering Circular; after the initial offering of the Offered Shares, the offering price and other selling terms may be subject to change.

     
Risk factors   Investing in our Common Stock involves risks. See the section entitled “Risk Factors” in this Offering Circular and other information included in this Offering Circular for a discussion of factors you should carefully consider before deciding to invest in our Common Stock.
     
Use of proceeds   If we sell all of the Offered Shares, we estimate that our net proceeds (after underwriting discount and commissions and our estimated other offering expenses) will be approximately $8,945,000. We intend to use the net proceeds to us from this offering for general corporate purposes, including working capital, sales and marketing activities and general and administrative purposes. See the section titled “Use of Proceeds” for additional information.

 

(1) The number of shares of our Common Stock to be outstanding after this offering is based on 15,855,291 shares of our Common Stock outstanding as of August 17, 2017 and excludes:

 

  1,120,833 shares of Common Stock issuable upon the exercise of options outstanding as of June 30, 2017, at a weighted average exercise price of $0.84 per share;

 

SUMMARY HISTORICAL FINANCIAL DATA

 

The following table summarizes our financial data for the periods and the dates indicated. The statement of operations data for the years ended December 31, 2016 and 2015 and the balance sheet data as of December 31, 2016 and 2015 have been derived from our audited financial statements, included elsewhere in this Offering Circular. The statement of operations data for the six months ended June 30, 2017 and 2016 and the balance sheet data as of June 30, 2017 have been derived from our unaudited financial statements, included elsewhere in this Offering Circular.

 

Our historical results are included for illustrative and informational purposes only and are not necessarily indicative of results we expect in future periods. You should read the following summary financial data in conjunction with “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and our financial statements and related notes appearing elsewhere in this Offering Circular.

 

   -10-  
 

 

    Year Ended December 31,     Six Months Ended June 30,  
    2016     2015     2017     2016  
                         
Statement of Operations Data                                
Total revenues   $ 15,652,168     $ 13,342,336     $ 9,460,852     $ 9,618,176  
Cost of sales     5,970,058       5,652,125       3,280,412       3,511,725  
Gross profit     9,682,110       7,690,211       6,180,440       6,106,451  
Net operating expenses     7,555,784       6,199,628       4,086,166       3,662,900  
Income from operations     2,126,326       1,490,583       2,094,274       2,443,551  
Net other income     26,448       135,962       33,705       (7,136 )
Income before income taxes     2,152,774       1,626,545       2,127,979       2,436,415  
Provision for income taxes     (102,752 )     (89,562 )     78,000       65,203  
Net Income   $ 2,050,022     $ 1,536,983     $ 2,049,979     $ 2,371,212  
Earnings per common share                                
Basic   $ 0.13     $ 0.10     $ 0.13       0.15  
Diluted   $ 0.12     $ 0.09     $ 0.12       0.14  
Balance Sheet Data (at period end)                                
Cash and cash equivalents   $ 3,703,579     $ 3,317,020     $ 4,283,216          
Working capital (1)   $ 5,268,654     $ 3,878,996     $ 7,433,993          
Total assets   $ 9,911,989     $ 7,270,007     $ 14,749,739          
Total liabilities   $ 3,501,710     $ 2,898,368     $ 4,704,060          
Total stockholders’ equity   $ 6,410,279     $ 4,371,639     $ 10,045,679          

 

(1) Working capital represents total current assets less total current liabilities.

 

RISK FACTORS

 

The purchase of the securities offered hereby involves a high degree of risk. Each prospective investor should consult his, her or its own counsel, accountant and other advisors as to legal, tax, business, financial, and related aspects of an investment in the securities offered hereby. Prospective investors should carefully consider the following specific risk factors, in addition to the other information set forth in this Offering Circular, before purchasing the securities offered hereby.

 

RISKS RELATED TO OUR BUSINESS

 

We depend on government contracts for substantially all of our revenues and the loss of government contracts or a delay or decline in funding of existing or future government contracts could decrease our backlog or adversely affect our sales and cash flows and our ability to fund our growth.

 

Our revenues from contracts, directly or indirectly, with foreign and U.S. state, regional and local governmental agencies represented substantially all of our total revenues in fiscal year 2016. Although these various government agencies are subject to common budgetary pressures and other factors, many of our various government customers exercise independent purchasing decisions. As a result of the concentration of business with governmental agencies, we are vulnerable to adverse changes in our revenues, income and cash flows if a significant number of our government contracts, subcontracts or prospects are delayed or canceled for budgetary or other reasons.

 

The factors that could cause us to lose these contracts and could decrease our backlog or otherwise materially harm our business, prospects, financial condition or results of operations include:

 

  budget constraints affecting government spending generally, or specific departments or agencies such as U.S. or foreign defense and transit agencies and regional transit agencies, and changes in fiscal policies or a reduction of available funding;
     
  re-allocation of government resources as the result of actual or threatened terrorism or hostile activities or for other reasons;
     
  disruptions in our customers’ ability to access funding from capital markets;

 

   -11-  
 

 

  curtailment of governments’ use of outsourced service providers and governments’ in-sourcing of certain services;
     
  the adoption of new laws or regulations pertaining to government procurement;
     
  government appropriations delays or blanket reductions in departmental budgets;
     
  suspension or prohibition from contracting with the government or any significant agency with which we conduct business;
     
  increased use of shorter duration awards, which increases the frequency we may need to recompete for work;
     
  impairment of our reputation or relationships with any significant government agency with which we conduct business;
     
  decreased use of small business set asides or changes to the definition of small business by government agencies;
     
  increased use of lowest-priced, technically acceptable contract award criteria by government agencies;
     
  increased aggressiveness by the government in seeking rights in technical data, computer software, and computer software documentation that we deliver under a contract, which may result in “leveling the playing field” for competitors on follow-on procurements;
     
  impairment of our ability to provide third-party guarantees and letters of credit; and
     
  delays in the payment of our invoices by government payment offices.

 

Government spending priorities and terms may change in a manner adverse to our businesses.

 

A significant percentage of our revenue comes from domestic and foreign police forces. If these government entities have to cut their budgets, it is possible that we will lose this source of revenue, which could materially adversely affect our business, prospects, financial condition or results of operations. We are working at diversifying our business so that we are not as dependent, but there is no assurance that we will be successful at doing so.

 

Intense competition could negatively impact our sales and operating results.

 

Our products are sold in highly competitive markets with limited barriers to entry. We compete against a number of established companies that provide similar products and services, some of which have financial, technical, marketing, sales, manufacturing, distribution and other resources significantly greater than ours. There are also companies whose products do not compete directly, but are sometimes closely related to the products we offer. Meggitt Training Systems, Arotech, Inc., Ti Training Corp., Cubic, Inc. and Laser Shot, Inc. are our main competitors in some or all of our markets.

 

We believe that our products and services are superior to those offered by our competitors based on our strength in developing higher quality software solutions and our extensive library of training scenario content that would require a substantial investment by a competitor to offer a comparable product. The introduction by competitors of lower-priced or more innovative products could, however, result in a significant decline in our revenues and have a material adverse effect on our operating results, financial position and cash flows.

 

If we are unable to anticipate customer preferences or to effectively identify, market and sell future products, our future revenues and operating results could be adversely affected.

 

Our future success depends on our ability to effectively identify, market and sell new products that respond to new and evolving customer preferences. Accordingly, our revenues and operating results may be adversely affected if we are unable to identify or acquire rights to new products that satisfy customer preferences. In addition, any new products that we market may not generate sufficient revenues to recoup their identification, development, acquisition, marketing, selling and other costs.

 

   -12-  
 

 

Decline in state and local government spending would likely negatively affect our product revenues and earnings.

 

Success of each of the products we plan to sell depends substantially on the amount of funds budgeted by state and local government agencies that make up our current and potential customers. Global credit and financial markets have experienced extreme disruptions in the recent past, including severely diminished liquidity and credit availability, declines in consumer confidence, declines in economic growth, increases in unemployment rates and uncertainty about economic stability. There can be no assurance that similar disruptions will not occur in the future. Deterioration in general economic conditions may result in lower tax revenues that could lead to reductions in government spending, especially spending for discretionary simulation training products such as ours. Poor economic conditions could in turn lead to substantial decreases in our net sales or have a material adverse effect on our operating results, financial position and cash flows.

 

We may not be able to receive or retain the necessary licenses or authorizations required for us to export or re-export our products, technical data or services, or to transfer technology from foreign sources and to work collaboratively with them. Denials of such licenses and authorizations could have a material adverse effect on our business and results of operations.

 

U.S. regulations concerning export controls require us to screen potential customers, destinations, and technology to ensure that sensitive equipment, technology and services are not exported in violation of U.S. policy or diverted to improper uses or users. In order for us to export certain products, technical data or services, we are required to obtain licenses from the U.S. government, often on a transaction-by-transaction basis. These licenses are generally required for the export of the military versions of our products and technical data and for defense services. We cannot be sure of our ability to obtain the U.S. government licenses or other approvals required to export our products, technical data and services for sales to foreign governments, foreign commercial customers or foreign destinations.

 

In addition, in order for us to obtain certain technical know-how from foreign vendors and to collaborate on improvements on such technology with foreign vendors, we may need to obtain U.S. government approval for such collaboration through manufacturing license or technical assistance agreements approved by U.S. government export control agencies. The U.S. government has the right, without notice, to revoke or suspend export licenses and authorizations for reasons of foreign policy, issues over which we have no control. Failure to receive required licenses or authorizations would hinder our ability to export our products, data and services and to use some advanced technology from foreign sources. This could have a material adverse effect on our business, results of operations and financial condition.

 

Our failure to comply with export control rules could have a material adverse effect on our business.

 

Our failure to comply with the export control rules described above could expose us to significant criminal or civil enforcement action by the U.S. government, and a conviction could result in denial of export privileges, as well as contractual suspension or debarment under U.S. government contracts, either of which could have a material adverse effect on our business, results of operations and financial condition.

 

Failure to comply with the United States Foreign Corrupt Practices Act could subject us to penalties and other adverse consequences.

 

We are subject to the United States Foreign Corrupt Practices Act, which generally prohibits United States companies from engaging in bribery or other prohibited payments to foreign officials for the purpose of obtaining or retaining business. Corruption, extortion, bribery, pay-offs, theft and other fraudulent practices occur from time-to-time in the foreign countries where we sell our products and services. We can make no assurance, however, that our employees or other agents will not engage in such conduct for which we might be held responsible. If our employees or other agents are found to have engaged in such practices, we could suffer severe penalties and other consequences that may have a material adverse effect on our business, financial condition and results of operations.

 

   -13-  
 

 

We may face competition from providers of comparable products. Increased competition in those product categories could negatively affect our future revenues and operating results.

 

Since we will not be the only seller and since we have a limited number of patents, the introduction of comparable products designed to compete with our products may increase in the future. With so much focus on homeland security and terrorism, it is possible that more companies will enter our business and sell new and/or innovative training tools. One area of particular concern is new virtual reality (VR) hardware and software. If other companies are able to create new training tools that are more realistic or effective, we may not be able to compete effectively. Introduction by competitors of comparable products, a maturing product lifecycle or other factors could result in a decline in our revenues derived from these products. A significant decline in our sales of these products, without offsetting sales gains, would have a material adverse effect on our operating results, financial position and cash flows.

 

We operate in a highly competitive market and the size and resources of some of our competitors may allow them to compete more effectively than we can, resulting in a loss of our market share and a decrease in our revenues and gross profit.

 

The markets for law enforcement, military, educational and commercial simulation training are highly competitive and include many new competitors as well as increased competition from established companies expanding their production and marketing of performance products. Despite owning patents, trademarks and copyrights, our current and future competitors could manufacture and sell products with performance characteristics and functionality similar to the products we sell and that we plan to sell. Some of our competitors are large companies with strong worldwide brand recognition, such as Cubic and Meggitt that have significantly greater financial, distribution, marketing and other resources than we do. Some of our competitors have significant competitive advantages, including longer operating histories, larger sales forces, bigger advertising budgets, better brand recognition, greater economies of scale and long-term relationships with key military customers that are potentially highly valuable because of the significant volume that our competitors sell to them.

 

As a result, these competitors may be better equipped than we are to influence customer preferences or otherwise increase their market share by:

 

  quickly adapting to changes in customer requirements;
     
  readily taking advantage of acquisition and other opportunities;
     
  discounting excess inventory that has been written down or written off;
     
  devoting resources to the marketing and sale of their products, including significant advertising, media placement and product endorsement;
     
  adopting aggressive pricing policies; and
     
  engaging in lengthy and costly intellectual property and other disputes.

 

Some of the components of our products pose potential safety risks which could create potential liability exposure for us.

 

Some of the components of our products contain elements that may pose potential safety risks. In addition to these risks, there can be no assurance that accidents in the facilities that use our products will not occur. Any accident, whether occasioned by the use of all or any part of our products or technology or by our customers’ operations, could adversely affect commercial acceptance of our products and could result in claims for damages resulting from injuries or death. Any of these occurrences would materially adversely affect our operations and financial condition. In the event that our products fail to perform as specified, users of these products may assert claims for substantial amounts. These claims could have a materially adverse effect on our financial condition and results of operations. There is no assurance that the amount of the general product liability insurance that we maintain will be sufficient to cover potential claims or that the present amount of insurance can be maintained at the present level of cost, or at all.

 

Assertions by third parties of infringement or other violation by us of their intellectual property rights could result in significant costs and substantially harm our business and operating results.

 

Companies engaged in the sales of products are frequently subject to litigation based on allegations of infringement, misappropriation or other violations of intellectual property rights. Some companies, including some of our competitors, own large numbers of patents, copyrights, trademarks and trade secrets, which they may use to assert claims against us. Third parties may in the future assert that we have infringed, misappropriated or otherwise violated their intellectual property rights. Existing laws and regulations are evolving and subject to different interpretations, and various federal and state legislative or regulatory bodies may expand current or enact new laws or regulations. We cannot guarantee you that we are not infringing or violating any third-party intellectual property rights.

 

   -14-  
 

 

We cannot predict whether assertions of third-party intellectual property rights or any infringement or misappropriation claims arising from such assertions will substantially harm our business and operating results. If we are forced to defend against any infringement or misappropriation claims, we may be required to expend significant time and financial resources on the defense of such claims, even if without merit, settled out of court, or determined in our favor. Furthermore, an adverse outcome of a dispute may require us to: pay damages, potentially including treble damages and attorneys’ fees, if we are found to have willfully infringed a party’s intellectual property; cease making, licensing or using products or services that are alleged to infringe or misappropriate the intellectual property of others; expend additional development resources to redesign our products; enter into potentially unfavorable royalty or license agreements in order to obtain the right to use necessary technologies or materials; or to indemnify our partners and other third parties. Royalty or licensing agreements, if required or desirable, may be unavailable on terms acceptable to us, or at all, and may require significant royalty payments and other expenditures. In addition, we do not carry broadly applicable patent liability insurance and any lawsuits regarding patent rights, regardless of their success, could be expensive to resolve and would divert the time and attention of our management and technical personnel.

 

Our business is dependent on proprietary rights that may be difficult to protect and could affect our ability to compete effectively.

 

Our ability to compete effectively will depend on our ability to maintain the proprietary nature of our technology and content through a combination of patent, trademark, copywrite and trade secret protection, non-disclosure agreements and licensing arrangements.

 

Litigation, or participation in administrative proceedings, may be necessary to protect our proprietary rights. This type of litigation can be costly and time consuming and could divert company resources and management attention to defend our rights, and this could harm us even if we were to be successful in the litigation and there is no guarantee we would be successful in such litigation. In the absence of patent protection, and despite our reliance upon our proprietary confidential information, our competitors may be able to use innovations similar to those used by us to design and manufacture products directly competitive with our products. In addition, no assurance can be given that others will not obtain patents that we will need to license or design around. To the extent any of our products are covered by third-party patents, we could need to acquire a license under such patents to develop and market our products.

 

Despite our efforts to safeguard and maintain our proprietary rights, we may not be successful in doing so. In addition, competition is intense, and there can be no assurance that our competitors will not independently develop or patent technologies that are substantially equivalent or superior to our technology. In the event of patent litigation, we cannot assure you that a court would determine that we were the first creator of inventions covered by our issued patents or pending patent applications or that we were the first to file patent applications for those inventions. If existing or future third-party patents containing broad claims were upheld by the courts or if we were found to infringe third-party patents, we may not be able to obtain the required licenses from the holders of such patents on acceptable terms, if at all. Failure to obtain these licenses could cause delays in the introduction of our products or necessitate costly attempts to design around such patents, or could foreclose the development, manufacture or sale of our products. We could also incur substantial costs in defending ourselves in patent infringement suits brought by others and in prosecuting patent infringement suits against infringers.

 

We also rely on trade secrets and proprietary know-how that we seek to protect, in part, through non-disclosure and confidentiality agreements with our customers, employees, consultants, and entities with which we maintain strategic relationships. We cannot assure you that these agreements will not be breached, that we would have adequate remedies for any breach or that our trade secrets will not otherwise become known or be independently developed by competitors.

 

   -15-  
 

 

We depend on our executive officers, the loss of whom could materially harm our business.

 

We rely upon the accumulated knowledge, skills and experience of our executive officers and significant employees. Our Chief Executive Officer, Robert Ferris, built our business from inception and, along with other members of the management team, are responsible for many of the products and clients that we have today. If they were to leave us or become incapacitated, we might suffer in our planning and execution of business strategy and operations, impacting our financial results. We also do not maintain any key man life insurance policies for any of our employees.

 

If we are unable to implement and maintain effective internal control over financial reporting in the future, investors may lose confidence in the accuracy and completeness of our financial reports and the market price of our Common Stock may decline.

 

As a public company, we will be required to maintain internal control over financial reporting and to report any material weaknesses in such internal control. Further, we will be required to report any changes in internal controls on a quarterly basis. In addition, we will be required to furnish a report by management on the effectiveness of internal control over financial reporting pursuant to Section 404 of the Sarbanes-Oxley Act. We will design, implement, and test the internal controls over financial reporting required to comply with these obligations. If we identify material weaknesses in our internal control over financial reporting, if we are unable to comply with the requirements of Section 404 in a timely manner or assert that our internal control over financial reporting is ineffective, investors may lose confidence in the accuracy and completeness of our financial reports and the market price of the Common Stock could be negatively affected. We also could become subject to investigations by the stock exchange on which the securities are listed, the Commission, or other regulatory authorities, which could require additional financial and management resources.

 

As an “emerging growth company” under the JOBS Act, we are permitted to rely on exemptions from certain disclosure requirements.

 

We qualify as an “emerging growth company” under the JOBS Act. As a result, we are permitted to, and intend to, rely on exemptions from certain disclosure requirements. For so long as we are an emerging growth company, we will not be required to:

 

  have an auditor report on our internal control over financial reporting pursuant to Section 404(b) of the Sarbanes-Oxley Act;
     
  comply with any requirement that may be adopted by the Public Company Accounting Oversight Board regarding mandatory audit firm rotation or a supplement to the auditor’s report providing additional information about the audit and the financial statements (i.e., an auditor discussion and analysis);
     
  submit certain executive compensation matters to stockholder advisory votes, such as “say-on-pay” and “say-on-frequency”; and
     
  disclose certain executive compensation related items such as the correlation between executive compensation and performance and comparisons of the chief executive officer’s compensation to median employee compensation.

 

In addition, Section 102 of the JOBS Act also provides that an emerging growth company can take advantage of the extended transition period provided in Section 7(a)(2)(B) of the Securities Act for complying with new or revised accounting standards. We have elected to take advantage of the benefits of this extended transition period. Our financial statements may therefore not be comparable to those of companies that comply with such new or revised accounting standards.

 

We will remain an “emerging growth company” for up to five years, or until the earliest of (i) the last day of the first fiscal year in which our total annual gross revenues exceed $1 billion, (ii) the date that we become a “large accelerated filer” as defined in Rule 12b-2 under the Exchange Act, which would occur if the market value of our ordinary shares that is held by non-affiliates exceeds $700 million as of the last business day of our most recently completed second fiscal quarter or (iii) the date on which we have issued more than $1 billion in non-convertible debt during the preceding three year period.

 

   -16-  
 

 

Until such time, however, we cannot predict if investors will find our Common Stock less attractive because we may rely on these exemptions. If some investors find our Common Stock less attractive as a result, there may be a less active trading market for our Common Stock and the price of our securities may be more volatile.

 

As an emerging growth company, our auditor is not required to attest to the effectiveness of our internal controls.

 

Our independent registered public accounting firm is not required to attest to the effectiveness of our internal control over financial reporting while we are an emerging growth company or a smaller reporting company as defined under rules promulgated by the SEC. This means that the effectiveness of our financial operations may differ from our peer companies in that they may be required to obtain independent registered public accounting firm attestations as to the effectiveness of their internal controls over financial reporting and we are not. While our management will be required to attest to internal control over financial reporting and we will be required to detail changes to our internal controls on a quarterly basis, we cannot provide assurance that the independent registered public accounting firm’s review process in assessing the effectiveness of our internal controls over financial reporting, if obtained, would not find one or more material weaknesses or significant deficiencies. Further, once we cease to be an emerging growth company and no longer qualify as a smaller reporting company, we will be subject to independent registered public accounting firm attestation regarding the effectiveness of our internal controls over financial reporting. Even if management finds such controls to be effective, our independent registered public accounting firm may decline to attest to the effectiveness of such internal controls and issue a qualified report.

 

If we become a public company (reporting under the Exchange Act), we will incur significant increased costs as a result of operating as a public company, and our management will be required to devote substantial time to new compliance initiatives.

 

If we become a company with an obligation to file reports with the SEC under Exchange Act after we register our common stock under the Exchange Act upon the qualification of this offering, we will incur significant legal, accounting and other expenses that we did not incur as a private company whose shares were quoted on the OTC Markets. In addition, the Sarbanes-Oxley Act imposes various requirements on public companies including requiring establishment and maintenance of effective disclosure and financial controls. Our management and other personnel will need to devote a substantial amount of time to these compliance initiatives. Moreover, these rules and regulations have increased and will continue to increase our legal and financial compliance costs and will make some activities more time-consuming and costly. For example, we expect that these rules and regulations may make it more difficult and more expensive for us to obtain directors’ and officers’ liability insurance, which could make it more difficult for us to attract and retain qualified members of our board of directors. We cannot predict or estimate the amount of additional costs we will incur to meet our additional disclosure obligations under the Exchange Act or the timing of such costs.

 

The Sarbanes-Oxley Act requires, among other things, that we maintain effective internal control over financial reporting and disclosure controls and procedures. In particular, we must perform system and process evaluation and testing of our internal control over financial reporting to allow management to report on the effectiveness of our internal control over financial reporting, as required by Section 404 of the Sarbanes-Oxley Act. In addition, we will be required to have our independent registered public accounting firm attest to the effectiveness of our internal control over financial reporting the later of our second annual report on Form 10-K or the first annual report on Form 10-K following the date on which we are no longer an emerging growth company and no longer qualify as a smaller reporting company. Our compliance with Section 404 of the Sarbanes-Oxley Act will require that we incur substantial accounting expense and expend significant management efforts including hiring additional accounting and financial staff with appropriate public company experience and technical accounting knowledge. If we are not able to comply with the requirements of Section 404 in a timely manner, or if we or our independent registered public accounting firm identify deficiencies in our internal control over financial reporting that are deemed to be material weaknesses, the market price of our stock could decline and we could be subject to sanctions or investigations by the SEC or other regulatory authorities, which would require additional financial and management resources.

 

Our ability to successfully implement our business plan and comply with Section 404 requires us to be able to prepare timely and accurate financial statements. We expect that we will need to continue to improve existing, and implement new operational and financial systems, procedures and controls to manage our business effectively. Any delay in the implementation of, or disruption in the transition to, new or enhanced systems, procedures or controls, may cause our operations to suffer and we may be unable to conclude that our internal control over financial reporting is effective and to obtain an unqualified report on internal controls from our auditors as required under Section 404 of the Sarbanes-Oxley Act. This, in turn, could have an adverse impact on trading prices for our Common Stock, and could adversely affect our ability to access the capital markets.

 

   -17-  
 

 

If we do not become a public company, compliance with Regulation A and reporting to the SEC could be costly, and our management will be required to devote substantial time to the compliance requirements of Regulation A.

 

If we do not become a public company, compliance with Regulation A could be costly and requires legal and accounting expertise. Because the new rules implementing Title IV of the Jumpstart Our Business Startups Act of 2012 took effect in June 2015, we have no experience complying with the new provisions of Regulation A or making the public filings required by the rule. Besides qualifying this Form 1-A, we must file an annual report on Form 1-K, a semiannual report on Form 1-SA, and current reports on Form 1-U.

 

Our legal and financial staff may need to be increased in order to comply with Regulation A. Compliance with Regulation A will also require greater expenditures on outside counsel, outside auditors, and financial printers in order to remain in compliance. Failure to remain in compliance with Regulation A may subject us to sanctions, penalties, and reputational damage and would adversely affect our results of operations.

 

Risks Relating to Our Stock and this Offering

 

We may not satisfy NASDAQ’s initial listing standards and, even if we do, we may experience a delay in the initial trading of our Common Stock on NASDAQ.

 

We intend to apply to list our Common Stock on the NASDAQ Capital Market (“NASDAQ”) under the symbol “VTSI.” Our Common Stock will not commence trading on NASDAQ until a number of conditions are met, including that we have raised the minimum amount of offering proceeds necessary for us to meet the initial listing requirements of NASDAQ. There is no guarantee that we will be able to sell a sufficient number of shares to raise the required minimum amount of offering proceeds. Assuming we sell a sufficient number of shares to list on NASDAQ, we expect trading to commence following the Termination Date of this offering. However, we may wait before terminating the offering and commencing the trading of our Common Stock on NASDAQ in order to raise additional proceeds. In addition, in order to list, we will be required to, among other things, file with the SEC a post-qualification amendment to the Offering Statement, and then file an SEC Form 8-A in order to register our shares under the Exchange Act. The post-qualification amendment of the Offering Statement is subject to review by the SEC, and there is no guarantee that such amendment will be qualified quickly after filing. Any delay in the qualification of the post-qualification amendment may cause a delay in the initial trading of our Common Stock on NASDAQ. For all of the foregoing reasons, you may experience a delay between the closing of your purchase of our Common Stock and the commencement of exchange trading of our Common Stock.

 

Investors may have to wait up to ninety (90) days from the date of their investment before obtaining the shares of Common Stock purchased in this offering.

 

If and when we consummate an Initial Closing, the offering will continue until a date which is the earliest of: (i) ninety (90) days after the Initial Closing; or (ii) with the mutual agreement of us and our Underwriters, a date which is less than ninety (90) days after the Initial Closing in order to coordinate with the commencement of exchange trading of our Common Stock; or (iii) the date on which the maximum offering amount is sold. Additionally, in its discretion, the Company may elect to not hold another closing following the Initial Closing. Accordingly, any investors that invest in this offering after the Initial Closing may not receive shares of Common Stock until ninety (90) days after such investment is made, or not at all if there are no closings after the Initial Closing (in which case outstanding investment amounts will be returned, without deduction and generally without interest). During this period you will not have access to your investment, nor will you have shares of Common Stock.

 

   -18-  
 

 

NASDAQ may delist our Common Stock from trading on its exchange, which could limit stockholders’ ability to trade our Common Stock.

 

In the event we are able to list our Common Stock on the NASDAQ Capital Market, NASDAQ will require us to meet certain financial, public float, bid price and liquidity standards on an ongoing basis in order to continue the listing of our Common Stock. If we fail to meet these continued listing requirements, our Common Stock may be subject to delisting. If our Common Stock is delisted and we are not able to list our Common Stock on another national securities exchange, we expect our securities would be quoted on an over-the-counter market. If this were to occur, our stockholders could face significant material adverse consequences, including limited availability of market quotations for our Common Stock and reduced liquidity for the trading of our securities. In addition, we could experience a decreased ability to issue additional securities and obtain additional financing in the future.

 

Our Common Stock price is likely to be highly volatile because of several factors, including a limited public float.

 

The market price of our Common Stock has been volatile in the past and the market price of our Common Stock could be volatile in the future. You may not be able to resell shares of our Common Stock following periods of volatility because of the market’s adverse reaction to volatility.

 

Other factors that could cause such volatility may include, among other things:

 

  actual or anticipated fluctuations in our operating results, including the loss of a large or key customer or vendor;
     
  the absence of securities analysts covering us and distributing research and recommendations about us;
     
  we may have a low trading volume for a number of reasons, including that a large portion of our stock is closely held;
     
  overall stock market fluctuations;
     
  announcements concerning our business or those of our competitors;
     
  actual or perceived limitations on our ability to raise capital when we require it, and to raise such capital on favorable terms;
     
  conditions or trends in the industry;
     
  litigation;
     
  changes in market valuations of other similar companies;
     
  future sales of Common Stock;
     
  departure of key personnel or failure to hire key personnel; and
     
  general market conditions.

 

Any of these factors could have a significant and adverse impact on the market price of our Common Stock. In addition, the stock market in general has at times experienced extreme volatility and rapid decline that has often been unrelated or disproportionate to the operating performance of particular companies. These broad market fluctuations may adversely affect the trading price of our Common Stock, regardless of our actual operating performance.

 

This is a fixed price offering and the fixed offering price may not accurately represent the current value of us or our assets at any particular time. Therefore, the purchase price you pay for the Offered Shares may not be supported by the value of our assets at the time of your purchase or in the future.

 

This is a fixed price offering, which means that the offering price for our Shares is fixed and will not vary based on the underlying value of our assets at any time. Our board of directors has determined the offering price in our sole discretion. The fixed offering price for the Offered Shares has not been based on appraisals of any assets we own or may own, or of our Company as a whole, nor do we intend to obtain such appraisals. Therefore, the fixed offering price established for the Offered Shares may not be supported by the current value of our Company or our assets at any particular time.

 

   -19-  
 

 

Because our officers and board of directors will make all management decisions, you should only purchase our securities if you are comfortable entrusting our directors to make all decisions.

 

Our board of directors will have the sole right to make all decisions with respect to our management. Investors will not have an opportunity to evaluate the specific projects that will be financed with future operating income. You should not purchase our securities unless you are willing to entrust all aspects of our management to our officers and directors.

 

We may need to raise additional capital. If we are unable to raise necessary additional capital, our business may fail or our operating results and our stock price may be materially adversely affected.

 

As an emerging growth company, we will need to secure adequate funding for opportunities we may encounter. Such opportunities may include acquiring complementary businesses, securing new marketing and sales opportunities, giving bonuses to employees to reward them for past service and incentivize them for future successes. Selling additional stock, either privately or publicly, would dilute the equity interests of our stockholders. If we borrow more money, we will have to pay interest and may also have to agree to restrictions that limit our operating flexibility. If we are unable to obtain adequate financing, we may have to curtail our operations and our business could fail.

 

Our issuance of additional Common Stock in exchange for services or to repay debt would dilute your proportionate ownership and voting rights and could have a negative impact on the market price of our Common Stock.

 

We may generally issue shares of Common Stock and Common Stock issuable upon exercise of stock options and warrants to pay for debt or services, without further approval by our stockholders based upon such factors as our board of directors may deem relevant at that time. It is possible that we will issue additional shares of Common Stock under circumstances we may deem appropriate at the time.

 

Our management team will have immediate and broad discretion over the use of the net proceeds from our offering and we may use the net proceeds in ways with which you disagree.

 

The net proceeds from our offering will be immediately available to our management to use at their discretion. We currently intend to use the net proceeds from our offering for working capital purposes, including the funding of new developments, inventory and expanding our sales and marketing efforts, as well as for general corporate purposes. See “Use of Proceeds.” We have not allocated specific amounts of the net proceeds from this offering for any of the foregoing purposes. Accordingly, our management will have significant discretion and flexibility in applying the net proceeds of this offering. You will be relying on the judgment of our management with regard to the use of these net proceeds, and you will not have the opportunity, as part of your investment decision, to assess whether the proceeds are being used appropriately. It is possible that the net proceeds will be invested in a way that does not yield a favorable, or any, return for us or our stockholders. The failure of our management to use such funds effectively could have a material adverse effect on our business, prospects, financial condition, and results of operation.

 

Shares eligible for future sale may adversely affect the market.

 

From time to time, certain of our stockholders may be eligible to sell all or some of their shares of Common Stock by means of ordinary brokerage transactions in the open market pursuant to Rule 144 promulgated under the Securities Act, subject to certain limitations. In general, pursuant to Rule 144, non-affiliate stockholders may sell freely after six months, subject only to the current public information requirement. Affiliates may sell after six months, subject to the Rule 144 volume, manner of sale (for equity securities), current public information, and notice requirements. Of the approximately 15,855,291 shares of our Common Stock outstanding as of August 17, 2017, approximately 15,126,811 shares are tradable without restriction. In addition, all of the shares of Common Stock sold in this offering will be freely tradable without restrictions or further registration under the Securities Act, except for any shares held by our affiliates as defined in Rule 144 under the Securities Act. Given the limited trading of our Common Stock, resale of even a small number of shares of our Common Stock pursuant to Rule 144 or an effective registration statement may adversely affect the market price of our Common Stock.

 

   -20-  
 

 

Our equity incentive plan allows us to issue stock options and award shares of our Common Stock. We may in the future create additional equity incentive plans, which may at that time require us to file a registration statement under the Securities Act to cover the issuance of shares upon the exercise or vesting of awards granted or otherwise purchased under those plans. As a result, any shares issued or granted under the plans may be freely tradable in the public market. If equity securities are issued under the plans, if implemented, and it is perceived that they will be sold in the public market, then the price of our Common Stock could decline substantially.

 

No holders of any shares of our Common Stock have rights to require us to file registration statements for the public resale of such shares.

 

Provisions of our Articles of Incorporation and Bylaws may delay or prevent a takeover which may not be in the best interests of our stockholders.

 

Provisions of our Articles of Incorporation and our Bylaws may be deemed to have anti-takeover effects, which include when and by whom special meetings of our stockholders may be called, and may delay, defer or prevent a takeover attempt. In addition, certain provisions of the Nevada Revised Statutes also may be deemed to have certain anti-takeover effects which include that control of shares acquired in excess of certain specified thresholds will not possess any voting rights unless these voting rights are approved by a majority of a corporation’s disinterested stockholders. Further, our Articles of Incorporation authorize the issuance of up to 5,000,000 shares of preferred stock with such rights and preferences as may be determined from time to time by our board of directors in their sole discretion. Our board of directors may, without stockholder approval, issue additional series of preferred stock with dividends, liquidation, conversion, voting or other rights that could adversely affect the voting power or other rights of the holders of our Common Stock.

 

We have never paid dividends on our Common Stock and have no plans to do so in the future.

 

Holders of shares of our Common Stock are entitled to receive such dividends as may be declared by our board of directors. To date, we have paid no cash dividends on our shares of Common Stock and we do not expect to pay cash dividends on our Common Stock in the foreseeable future. We intend to retain future earnings, if any, to provide funds for operations of our business. Therefore, any return investors in our Common Stock may have will be in the form of appreciation, if any, in the market value of their shares of Common Stock. See “Dividend Policy.”

 

USE OF PROCEEDS

 

We anticipate that the net proceeds of the Offering will be used for the following purposes in the following order: (a) first towards the fees and expenses (legal, auditing, accounting, transfer agent and financial printer) associated with qualification of Offering under Regulation A; and (b) the balance of capital raised for general corporate purposes, including working capital, sales and marketing activities and general and administrative purposes. In the event that we sell less than the maximum shares offered in the Offering, our first priority is to pay fees associated with the qualification of this Offering under Regulation A. No proceeds will be used to compensate or otherwise make payments to officers or directors except for ordinary payments under employment or consulting agreements.

 

The proceeds of this Offering will be $10,000,000 if all of the Shares offered hereunder are purchased. However, we cannot guarantee that we will sell all of the Shares we are offering. The following table summarizes how we anticipate using the gross proceeds of this Offering, depending upon whether we sell 50%, 75%, or 100% of the Shares being offered in the Offering:

 

    If 50% of Shares Sold     If 75% of Shares Sold     If 100% of Shares Sold  
Gross Proceeds   $ 5,000,000     $ 7,500,000     $ 10,000,000  
                         
Our intended use of the net proceeds is as follows:                        
Fees for Qualification of Offering under Regulation A     (________ )     (_________ )     (__________ )
                        )
Working Capital     (________ )     (_________ )     (__________ )
General Corporate Purposes     (________ )     (_________ )     (__________ )
Total Use of Proceeds                        

 

   -21-  
 

 

CAPITALIZATION

 

The following table shows our cash and cash equivalents and capitalization as of June 30, 2017.

 

We derived this table from, and it should be read in conjunction with and is qualified in its entirety by reference to, our historical financial statements and the accompanying notes included elsewhere in this Offering Circular. You should also read this table in conjunction with “Management’s Discussion and Analysis of Financial Condition and Results of Operations.”

 

    As of June 30, 2017  
    Actual        
             
Cash and cash equivalents   $ 4,283,216        
Stockholders’ equity:                
Common stock, $0.0001 par value; 100,000,000 shares authorized and 15,848,105 shares issued and outstanding on an actual basis     1,586          
Class A Common stock, $0.0001 par value; 5,000,000 shares authorized and no shares issued and outstanding on an actual basis     -          
Class B Common stock, $0.0001 par value; 15,000,000 shares authorized and no shares issued and outstanding on an actual basis     -          
Preferred stock, $0.0001 par value; 5,000,000 shares authorized and no shares issued and outstanding on an actual basis     -          
Treasury stock at cost, 6,900 shares and outstanding as of June 30, 2017     (13,800 )        
Additional paid-in capital     15,727,265          
Accumulated deficit     (5,669,372 )        
Total stockholders’ equity     10,045,679          
Total capitalization   $ 10,045,679          

 

  The number of shares of Common Stock outstanding excludes the following securities (unless stated otherwise above):

 

  1,838,764 shares of our Common Stock issuable upon the exercises of our outstanding warrants exercisable at a price of $1.36 per share through January 16, 2020. We redeemed these warrants on August 16, 2017. See “Description of Business - Modern Round Co-Venture Agreement”; and
     
  1,120,833 shares of our Common Stock issuable upon the exercise of our outstanding stock options exercisable at a weighted exercise price of $0.84 per share through January 16, 2020.

 

MARKET PRICE FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS

 

Market Information

 

Our Common Stock is currently quoted on the OTCQX tier of the OTC Markets Group. The OTC Market is a computer network that provides information on current “bids” and “asks”, as well as volume information.

 

The following table sets forth the range of high and low closing bid quotations for our Common Stock for each of the periods indicated as reported by the OTC Markets. These quotations reflect inter-dealer prices, without retail mark-up, mark-down or commission and may not necessarily represent actual transactions.

 

   -22-  
 

 

2015   Low     High  
January 1 - March 31   $ 1.33     $ 1.73  
April 1 - June 30   $ 0.95     $ 1.60  
July 1 - September 30   $ 0.80     $ 1.15  
October 1 - December 31   $ 0.82     $ 1.40  
2016                
January 1 - March 31   $ 1.101     $ 1.399  
April 1 - June 30   $ 1.115     $ 2.10  
July 1 - September 30   $ 2.00     $ 3.05  
October 1 - December 31   $ 2.60     $ 3.21  
2017                
January 1 - March 31   $ 1.796     $ 2.64  
April 1 - June 30   $ 1.76     $ 2.59  

 

Holders of Common Stock

 

As of August 17, 2017, 15,855,291 shares of our Common Stock were issued and outstanding and held by approximately 159 holders of record. In addition, we have no shares of Class A Common Stock, Class B Common Stock or Preferred Stock issued and outstanding.

 

DETERMINATION OF OFFERING PRICE

 

The public offering price of the shares was determined by negotiation between us and the Underwriter. That public offering price is subject to change as a result of market conditions and other factors. The principal factors considered in determining the public offering price of the shares included:

 

  the information in this Offering Circular and otherwise available to the Underwriter, including our financial information;
     
  the history and the prospects for the industry in which we compete;
     
  the ability of our management;
     
  the prospects for our future earnings;
     
  the present state of our development and our current financial condition;
     
  the general condition of the economy and the securities markets in the United States at the time of this offering;
     
  the market price of our Common Stock quoted on the OTCQX;
     
  the recent market prices of, and the demand for, publicly-traded securities of generally comparable companies; and
     
  other factors as were deemed relevant.

 

DILUTION

 

Dilution is the amount by which the offering price paid by purchasers of Common Stock sold in this offering will exceed the pro forma net tangible book value per share of Common Stock after the offering. As of June 30, 2017, our net tangible book value was approximately $10,045,679, or $0.60 per share, assuming the exercise of all outstanding options and warrants to purchase Common Stock. Net tangible book value is the value of our total tangible assets less total liabilities.

 

Based on the initial offering price of $[____] per one share of Common Stock, on an as adjusted basis as of December 31, 2016, after giving effect to the offering of shares of Common Stock and the application of the related net proceeds, our net tangible book value would be:

 

   -23-  
 

 

(i) $_________, or $_____ per share of Common Stock, assuming the sale of 100% of the shares offered (__________ shares) with net proceeds in the amount of $________ after deducting estimated broker commissions of $_________ and estimated offering expenses of $_________;

 

(ii) $_________, or $_____ per share of Common Stock, assuming the sale of 75% of the shares offered (__________ shares) with net proceeds in the amount of $________ after deducting estimated broker commissions of $_________ and estimated offering expenses of $_________; and

 

(iii) $_________, or $_____ per share of Common Stock, assuming the sale of 50% of the shares offered (__________ shares) with net proceeds in the amount of $________ after deducting estimated broker commissions of $_________ and estimated offering expenses of $_________.

 

Purchasers of shares of Common Stock in this offering will experience immediate and substantial dilution in net tangible book value per share for financial accounting purposes, as illustrated in the following table on an approximate dollar per share basis, depending upon whether we sell 100%, 75% or 50% of the shares being offered in this offering:

 

Percentage of offering shares of Common Stock sold     100%       75%       50%  
Offering price per share of Common Stock   $ [___]     $ [___]     $ [___]  
Net tangible book value per share of Common Stock before this offering   $       $       $    
Increase in net tangible book value per share attributable to new investors   $       $       $    
Pro forma net tangible book value per share after this offering   $       $       $    
Immediate dilution in net tangible book value per share to new investors   $       $       $    

 

The following tables sets forth depending upon whether we sell 100%, 75%, or 50% of the shares being offered in this offering, as of June 30, 2017, the number of shares of Common Stock purchased from us, the total consideration paid to us and the average price per share paid by existing stockholders and to be paid by new investors purchasing shares of Common Stock in this offering, after giving pro forma effect to the exercise of all outstanding warrants to purchase Common Stock and the conversion of outstanding preferred stock into Common Stock, and the new investors in this offering at the offering price of $[___] per share of Common Stock, together with the total consideration paid an average price per share paid by each of these groups, before deducting estimated offering expenses.

 

    100% of the Offered Shares Sold  
    Shares Purchased     Total Consideration     Average Price  
    Number     Percent     Amount     Percent     per Share  
Existing stockholders as of June 30, 2017           %   $       % %   $  
New investors             %   $       % %   $ [___]  
Total             100.0 %   $       100.0 %   $  

 

    75% of the Offered Shares Sold  
    Shares Purchased    

Total Consideration

    Average Price  
    Number     Percent     Amount     Percent     per Share  
Existing stockholders as of June 30, 2017           %   $       %   $  
New investors             %   $       %   $ [___]  
Total             100.0 %   $       100.0 %   $  

 

   -24-  
 

 

    50% of the Offered Shares Sold  
    Shares Purchased     Total Consideration     Average Price  
    Number     Percent     Amount     Percent     per Share  
Existing stockholders as of June 30, 2017           %   $       %   $  
New investors             %   $       %   $  [___]  
Total             100.0 %   $       100.0 %   $  

 

UNDERWRITING

 

We have entered into an underwriting agreement with the Underwriter, with respect to the shares of our Common Stock in this offering. Under the terms and subject to the conditions contained in the underwriting agreement, we have agreed to issue and sell to the public through the Underwriters, and the Underwriters has agreed to offer and sell, up to [_] shares of our Common Stock, on a best efforts basis.

 

The underwriting agreement provides that the obligation of the Underwriter to arrange for the offer and sale of the shares of our Common Stock, on a best efforts basis, is subject to certain conditions precedent. The Underwriter is under no obligation to purchase any shares of our Common Stock for its own account. As a “best efforts” offering, there can be no assurance that the offering contemplated hereby will ultimately be consummated, or even if consummated that we will in fact obtain a listing on NASDAQ. The Underwriter may, but is not obligated to, retain other selected dealers that are qualified to offer and sell the shares and that are members of the Financial Industry Regulatory Authority, Inc. The Underwriter proposes to offer the shares to investors at the public offering price, and will receive cash equal to seven percent (7%) of the gross amount to be disbursed to the Company. The gross proceeds of this offering will be deposited in an Offering Deposit Account established by us, until we have sold a minimum of [__] shares of Common Stock and otherwise satisfy the listing conditions to trade our Common Stock on NASDAQ. Unless sooner withdrawn or canceled by us or the Underwriter, the offering will continue until (i) not less than [____] shares of Common Stock have been sold, or (ii) close of business on [__], 2017, unless extended by us and the Underwriters to not later than [ ] (90 days after the date of this Offering Circular). Once we satisfy the minimum stock sale and NASDAQ listing conditions, the funds will be released to us less offering expenses, including but not limited to, underwriter’s fees and expenses.

 

We intend to apply to NASDAQ to list shares our Common Stock under the symbol “VTSI.” In order to list, we will have to comply with NASDAQ listing standards and approval from NASDAQ will be conditional upon meeting these listing standards. We expect our Common Stock to begin trading on NASDAQ upon the consummation of the Offering.

 

   -25-  
 

 

The following table and the two succeeding paragraphs summarize the underwriting compensation and estimated expenses we will pay:

 

    Public Offering Price     Underwriting
Commissions
    Proceeds to Us, Before Expenses  
Per share   $     $     $  
Total minimum offering   $     $     $  
Total maximum offering   $     $     $  

 

We have agreed to reimburse the Underwriter for expenses incurred relating to the offering, including all actual fees and expenses incurred by the Underwriters in connection with, among other things, due diligence costs, the Underwriter’s “road show” expenses, which shall not exceed $[    ], and the fees and expenses of the Underwriter’s counsel, which shall not exceed $75,000. We estimate that the total expenses of this offering, excluding underwriting commissions described above, will be approximately $[    ]. We have also agreed to pay the Underwriters an advisory fee of $100,000 paid or payable as follows: $25,000 upon the execution of the engagement agreement, $25,000 upon the earlier of (i) the filing of this Offering Circular or (ii) upon the filing of an application for listing on NASDAQ and $50,000 upon the receipt of the minimum offering amount of $5,000,000 by the Company.

 

As additional compensation to the Underwriter, upon consummation of this offering, we will issue to the Underwriter or its designees warrants to purchase an aggregate number of shares of our Common Stock equal to 7% of the number of shares of Common Stock issued in this offering, at an exercise price per share equal to 120% of the initial public offering price (the “Underwriter Warrants”). The Underwriter Warrants and the underlying shares of Common Stock will not be exercised, sold, transferred, assigned, or hypothecated or be the subject of any hedging, short sale, derivative, put or call transaction that would result in the effective economic disposition of the Underwriter Warrants by any person for a period of 180 days from the qualification date of the offering circular for this offering in accordance with FINRA Rule 5110. The Underwriter Warrants will expire on the fifth anniversary of the qualification date of the offering, in accordance with FINRA Rule 5110(f)(2)(G)(i).

 

The Underwriter has informed us that they may provide an allowance not in excess of $[     ] per share to other dealers out of the Underwriter’s commission of $[     ] per share.

 

An offering circular in electronic format may be made available on the websites maintained by the Underwriter, or selling group members, if any, participating in the offering. The Underwriter may agree to allocate a number of shares to selling group members for sale to their online brokerage account holders. Internet distributions will be allocated by the Underwriter and selling group members that may make Internet distributions on the same basis as other allocations.

 

We have agreed that we will not: (i) offer, pledge, sell, contract to sell, sell any option or contract to purchase, purchase any option or contract to sell, grant any option, right or warrant to purchase, lend, or otherwise transfer or dispose of, directly or indirectly, any shares of capital stock of our company or any securities convertible into or exercisable or exchangeable for shares of capital stock of our company; (ii) file or cause to be filed any registration statement with the SEC relating to the offering of any shares of capital stock of our company or any securities convertible into or exercisable or exchangeable for shares of capital stock of our company; or (iii) enter into any swap or other arrangement that transfers to another, in whole or in part, any of the economic consequences of ownership of capital stock of our company, whether any such transaction described in clause (i), (ii) or (iii) above is to be settled by delivery of shares of capital stock of our company or such other securities, in cash or otherwise, in each case without the prior consent of the Underwriter for a period of twelve months after the date of this Offering Circular, other than (A) the shares of our Common Stock to be sold hereunder, (B) the issuance by us of shares of our Common Stock upon the exercise of a stock option or warrant or the conversion of a security outstanding on the date of this offering, hereafter issued pursuant to our currently existing or hereafter adopted equity compensation plans or employment or consulting agreements or arrangements of which the Underwriters have been advised in writing or which have been filed with the Commission or (C) the issuance by us of stock options or shares of capital stock of our company under any currently existing or hereafter adopted equity compensation plan or employment/consulting agreements or arrangements of our company. There are exceptions to these restrictions if our price per share exceeds certain amounts for a five-day period.

 

Mr. Ferris, our Chief Executive Officer, has entered into a lock-up agreement with the Underwriter. Under the lock-up agreement, subject to certain exceptions, Mr. Ferris may not, without the prior written approval of the Underwriter, offer, sell, contract to sell, pledge, or otherwise dispose of, directly or indirectly, or hedge our Common Stock or securities convertible into or exchangeable or exercisable for our Common Stock. These restrictions will be in effect for a period of approximately one year after the date of this Offering Circular.

 

   -26-  
 

 

The underwriting agreement provides that we will indemnify the Underwriter against certain liabilities, including liabilities under the Securities Act, or contribute to payments the Underwriter may be required to make in respect thereof.

 

We intend to apply to have our Common Stock approved for listing on NASDAQ under the symbol “VTSI.” If the application is approved, trading of our Common Stock on NASDAQ is expected to begin within five days after the date of initial issuance of the Common Stock. We will not consummate and close this offering without a listing approval letter from NASDAQ. Our receipt of a listing approval letter is not the same as an actual listing on NASDAQ. The listing approval letter will serve only to confirm that, if we sell a number of shares in this best efforts offering sufficient to satisfy applicable listing criteria, our Common Stock will in fact be listed.

 

We intend to market the Offered Shares in this Offering, in whole or in part, through the FlashFunders™ online platform located at http://www.flashfunders.com (the “Platform”) operated by FlashFunders, Inc. (collectively, with its subsidiaries and affiliates, “FlashFunders”), where this Offering Circular will be posted. FlashFunders, through its wholly owned subsidiary, FinTech Clearing, LLC, a FINRA member has been further engaged to provide certain technology and clearing services, including Offering Deposit Account services, in connection with this Offering (FlashFunders Clearing Services). The fee for FlashFunders Clearing Services equal to 0.25% of the gross offering proceeds will be paid by the Underwriter and is included in the reimbursement to Underwriter of non-accountable expenses incurred in connection with this Offering. Further, the Company will pay FlashFunders (i) a technology fee equal to 0.25% of the gross Offering proceeds; (ii) applicable fees for fund transfers and accounting, including: funds transfer fees – $0.50 per ACH transfer; $12.00 per incoming wire transfer; $30.00 per outgoing domestic wire transfer; $40.00 per outgoing foreign wire transfer; $10.00 per check; and other banking and vendor fees as appropriate for funds processing; (iii) $2.00 processing fee for each AML; (iv) $8.00 fee for funds transfer exception, if any; and (v) a $10,000 listing fee. The Offering is also marketed through our own website.

 

ERISA Considerations

 

Special considerations apply when contemplating the purchase of Shares of our common stock on behalf of employee benefit plans that are subject to Title I of the Employee Retirement Income Security Act of 1974, as amended (“ERISA”), plans, individual retirement accounts (“IRAs”) and other arrangements that are subject to Section 4975 of the Internal Revenue Code of 1986, as amended (the “Code”), or provisions under any federal, state, local, non-U.S. or other laws or regulations that are similar to such provisions of the Code or ERISA, and entities whose underlying assets are considered to include “plan assets” of any such plan, account or arrangement (each, a “Plan”). A person considering the purchase of the Offered Shares on behalf of a Plan is urged to consult with tax and ERISA counsel regarding the effect of such purchase and, further, to determine that such a purchase will not result in a prohibited transaction under ERISA, the Code or a violation of some other provision of ERISA, the Code or other applicable law. We will rely on such determination made by such persons, although no Shares of our common stock will be sold to any Plans if management believes that such sale will result in a prohibited transaction under ERISA or the Code.

 

Marketability

 

Our Common Stock is currently quoted on the OTCQX tier of the OTC Markets. The OTC Markets is maintained by OTC Market Group, Inc. The securities traded on the OTC Markets are not listed or traded on the floor of an organized national or regional stock exchange. Instead, these securities transactions are conducted through a telephone and computer network connecting dealers in stocks. Over-the-counter stocks are traditionally smaller companies that do not meet the financial and other listing requirements of a regional or national stock exchange.

 

Notwithstanding our Common Stock being quoted on the OTC Markets, a purchaser of the Offered Shares may not be able to resell them. Broker-dealers may be discouraged from effecting transactions in our Common Stock because they will be considered penny stocks and will be subject to the penny stock rules. Rules 15g-1 through 15g-9 promulgated under the Exchange Act impose sales practice and disclosure requirements on FINRA brokers-dealers who make a market in a “penny stock.” A penny stock generally includes any non-NASDAQ equity security that has a market price of less than $5.00 per share. Under the penny stock regulations, a broker-dealer selling penny stock to anyone other than an established customer or “accredited investor” (generally, an individual with net worth in excess of $1,000,000 or an annual income exceeding $200,000, or $300,000 together with his or her spouse) must make a special suitability determination for the purchaser and must receive the purchaser’s written consent to the transaction prior to sale, unless the broker-dealer or the transactions is otherwise exempt. In addition, the penny stock regulations require the broker-dealer to deliver, prior to any transaction involving a penny stock, a disclosure schedule prepared by the Commission relating to the penny stock market, unless the broker-dealer or the transaction is otherwise exempt. A broker-dealer is also required to disclose commissions payable to the broker-dealer and the registered representative and current quotations for the securities. Finally, a broker-dealer is required to send monthly statements disclosing recent price information with respect to the penny stock held in a customer’s account and information with respect to the limited market in penny stocks.

 

   -27-  
 

 

The additional sales practice and disclosure requirements imposed upon brokers-dealers may discourage broker-dealers from effecting transactions in our Common Stock, which could severely limit the market liquidity of the Offered Shares and impede the sale of our Offered Shares in the secondary market, assuming one develops.

 

Foreign Regulatory Restrictions on Purchase of the Offered Shares

 

We have not taken any action to permit a public offering of our Offered Shares outside the United States or to permit the possession or distribution of this prospectus outside the United States. Persons outside the United States who come into possession of this prospectus must inform themselves about and observe any restrictions relating to this offering of Offered Shares and the distribution of the prospectus outside the United States.

 

Investment Amount Limitations

 

Generally, no sale may be made to you in this offering if the aggregate purchase price you pay is more than 10% of the greater of your annual income or net worth. Different rules apply to accredited investors and non-natural persons. Before making any representation that your investment does not exceed applicable thresholds, we encourage you to review Rule 251(d)(2)(i)(C) of Regulation A. For general information on investing, we encourage you to refer to www.investor.gov.

 

As a Tier 2, Regulation A offering, investors must comply with the 10% limitation to investment in the offering. The only investor in this offering exempt from this limitation is an accredited investor, an “Accredited Investor,” as defined under Rule 501 of Regulation D. If you meet one of the following tests you should qualify as an Accredited Investor:

 

 (i) You are a natural person who has had individual income in excess of $200,000 in each of the two most recent years, or joint income with your spouse in excess of $300,000 in each of these years, and have a reasonable expectation of reaching the same income level in the current year;
   
  (ii) You are a natural person and your individual net worth, or joint net worth with your spouse, exceeds $1,000,000 at the time you purchase Offered Shares (please see below on how to calculate your net worth);
   
 (iii) You are an executive officer or general partner of the issuer or a manager or executive officer of the general partner of the issuer;
   
 (iv) You are an organization described in Section 501(c)(3) of the Internal Revenue Code of 1986, as amended, or the Code, a corporation, a Massachusetts or similar business trust or a partnership, not formed for the specific purpose of acquiring the Offered Shares, with total assets in excess of $5,000,000;
   
 (v) You are a bank or a savings and loan association or other institution as defined in the Securities Act, a broker or dealer registered pursuant to Section 15 of the Securities Exchange Act of 1934, as amended, or the Exchange Act, an insurance company as defined by the Securities Act, an investment company registered under the Investment Company Act of 1940, as amended, or the Investment Company Act, or a business development company as defined in that act, any Small Business Investment Company licensed by the Small Business Investment Act of 1958 or a private business development company as defined in the Investment Advisers Act of 1940;

 

   -28-  
 

 

 (vi) You are an entity (including an Individual Retirement Account trust) in which each equity owner is an accredited investor;
   
 (vii) You are a trust with total assets in excess of $5,000,000, your purchase of Offered Shares is directed by a person who either alone or with his purchaser representative(s) (as defined in Regulation D promulgated under the Securities Act) has such knowledge and experience in financial and business matters that he is capable of evaluating the merits and risks of the prospective investment, and you were not formed for the specific purpose of investing in the Offered Shares; or
   
  (viii) You are a plan established and maintained by a state, its political subdivisions, or any agency or instrumentality of a state or its political subdivisions, for the benefit of its employees, if such plan has assets in excess of $5,000,000.

 

Offering Period and Expiration Date

 

This Offering will start on the date this Offering Circular is declared qualified by the SEC. The Offering is expected to expire on the first of: (i) all of the Offered Shares are sold; or (ii) the close of business on ________, 2017, unless sooner terminated or extended up to no more than an additional _______ (____) days by us.

 

Procedures for Subscribing

 

If you decide to subscribe for any Common Stock in this Offering, you should:

 

Go to the Offering page at www.flashfunders.com/virtra, click on the “Invest” button and follow the procedures as described.

 

  1. Electronically receive, review, execute and deliver to us through DocuSign, a Subscription Agreement; and
     
  2. Deliver funds only by ACH, wire transfer or check for the amount set forth in the Subscription Agreement directly to the specified bank account maintained by the Deposit Account Agent.

 

The VirTra website will redirect interested investors via the “Invest Now” button to a site operated by FlashFunders, where investors can receive, review, execute and deliver subscription agreements electronically.

 

Any potential investor will have ample time to review the Subscription Agreement, along with their counsel, prior to making any final investment decision. We shall only deliver such Subscription Documents upon request after a potential investor has had ample opportunity to review this Offering Circular. Further, we will not accept any money until the SEC declares the Offering Statement qualified.

 

Following the initial closing on the minimum offering amount, we anticipate that we may hold one or more additional closings for purchases of the Offered Shares until the offering is fully subscribed or we terminate the Offering. Proceeds will be held with the Deposit Account Agent in an Offering Deposit Account subject to compliance with Exchange Act Rule 15c2-4 until closing occurs. Our Underwriter and/or the participating broker-dealers will submit a subscriber’s form(s) of payment in compliance with Exchange Act Rule 15c2-4, generally by noon of the next business day following receipt of the subscriber’s subscription agreement and form(s) of payment.

 

You will be required to represent and warrant in your subscription agreement that you are an accredited investor as defined under Rule 501 of Regulation D or that your investment in the shares of Common Stock does not exceed 10% of your net worth or annual income, whichever is greater, if you are a natural person, or 10% of your revenues or net assets, whichever is greater, calculated as of your most recent fiscal year if you are a non-natural person. By completing and executing your subscription agreement you will also acknowledge and represent that you have received a copy of this offering circular, you are purchasing the shares of Common Stock for your own account and that your rights and responsibilities regarding your shares of Common Stock will be governed by our chart and bylaws, each filed as an exhibit to the Offering Circular of which this offering circular is a part.

 

   -29-  
 

 

Right to Reject Subscriptions. After we receive your complete, executed subscription agreement and the funds required under the subscription agreement have been transferred to the Deposit Account Agent, we have the right to review and accept or reject your subscription in whole or in part, for any reason or for no reason. We will return all monies from rejected subscriptions immediately to you, without interest or deduction.

 

Acceptance of Subscriptions. Upon our acceptance of a subscription agreement, we will countersign the subscription agreement and issue the shares subscribed at closing. Once you submit the subscription agreement and it is accepted, you may not revoke or change your subscription or request your subscription funds. All accepted subscription agreements are irrevocable.

 

Under Rule 251 of Regulation A, non-accredited, non-natural investors are subject to the investment limitation and may only invest funds which do not exceed 10% of the greater of the purchaser’s revenue or net assets (as of the purchaser’s most recent fiscal year end). A non-accredited, natural person may only invest funds which do not exceed 10% of the greater of the purchaser’s annual income or net worth (please see below on how to calculate your net worth).

 

NOTE: For the purposes of calculating your Net Worth, it is defined as the difference between total assets and total liabilities. This calculation must exclude the value of your primary residence and may exclude any indebtedness secured by your primary residence (up to an amount equal to the value of your primary residence). In the case of fiduciary accounts, net worth and/or income suitability requirements may be satisfied by the beneficiary of the account or by the fiduciary, if the fiduciary directly or indirectly provides funds for the purchase of the Offered Shares.

 

In order to purchase Offered Shares and prior to the acceptance of any funds from an investor, an investor will be required to represent, to our satisfaction, that he is either an accredited investor or is in compliance with the 10% of net worth or annual income limitation on investment in this offering.

 

Non-U.S. investors may participate in this Offering by depositing their funds in the Offering Deposit Account held at Pacific Western Bank. Any such funds that the Deposit Account Agent receives shall be held on deposit until the applicable closing of the Offering or such other time as mutually agreed between the Company and the Underwriter, and then used to complete securities purchases, or returned if this Offering fails to close.

 

DIVIDEND POLICY

 

We have not declared or paid dividends on our Common Stock since our formation, and we do not anticipate paying dividends in the foreseeable future. Declaration or payment of dividends, if any, in the future, will be at the discretion of our Board of Directors and will depend on our then current financial condition, results of operations, capital requirements and other factors deemed relevant by the Board of Directors. There are no contractual restrictions on our ability to declare or pay dividends. Consequently, you will only realize an economic gain on your investment in our Common Stock if the price appreciates. You should not purchase our Common Stock expecting to receive cash dividends. Since we do not anticipate paying dividends, and if we are not successful in establishing an orderly public trading market for our shares, then you may not have any manner to liquidate or receive any payment on your investment. Therefore, our failure to pay dividends may cause you to not see any return on your investment even if we are successful in our business operations. In addition, because we may not pay dividends in the foreseeable future, we may have trouble raising additional funds which could affect our ability to expand our business operations.

 

DESCRIPTION OF BUSINESS

 

Our Corporate History

 

We are a corporation organized and existing under the laws of the State of Nevada. The original business started in 1993 as Ferris Productions, Inc. In September 2001, Ferris Productions, Inc. merged with GameCom, Inc. to ultimately become VirTra Systems, Inc., a Texas Corporation.

 

Effective as of October 1, 2016 (the “Effective Date”), we completed a conversion from a Texas corporation to a Nevada corporation pursuant to a Redomestication Plan of Conversion (the “Plan of Conversion”) that was approved by our Board of Directors on June 23, 2016 and our shareholders on September 16, 2016. On the Effective Date, 15,855,005 shares of common stock of VirTra Systems, Inc., a Texas corporation, were converted into 15,855,005 shares of Common Stock of VirTra, Inc., a Nevada corporation. No shareholders exercised appraisal rights or dissenters’ rights for such shares in accordance with the Texas Business Organization Code.

 

   -30-  
 

 

As part of the Plan of Conversion, we filed Articles of Incorporation in Nevada whereby we changed our name from VirTra Systems, Inc. to VirTra, Inc. and revised our capitalization. Our Articles of Incorporation filed in Nevada authorize us to issue 125,000,000 shares, of which (1) 120,000,000 shares shall be Common Stock, par value $0.0001 per share (the “Common Stock”), of which (a) 100,000,000 shares shall be Common Stock, par value $0.0001, (b) 5,000,000 shares shall be Class A Common Stock, par value $0.0001 per share (the “Class A Common Stock”), and (c) 15,000,000 shares shall be Class B Common Stock, par value $0.0001 per share (the “Class B Common Stock”) and (2) 5,000,000 shares shall be Preferred Stock, par value $0.0001 per share, which may, at the sole discretion of the Board of Directors be issued in one or more series (the “Preferred Stock”). We also adopted new bylaws as part of the Plan of Conversion.

 

Effective October 20, 2016, we affected a 1 for 10 reverse stock split of our issued and outstanding Common Stock (the “Reverse Stock Split”). All references to shares of our common stock in Offering Circular refer to the number of shares of common stock after giving effect to the Reverse Stock Split (unless otherwise indicated).

 

Business Overview

 

We develop, sell and support use of force training and marksmanship firearms training systems and accessories for law enforcement, military, educational or civilian use. Our simulators use software, hardware and content to create uniquely effective and realistic training that does not require live ammunition or less-than-lethal munitions, which can both save money and provide certain training capabilities unavailable to live fire exercises. We have developed a higher standard in simulation training including capabilities such as: multi-screen video based scenarios, unique scenario authoring ability, superior training scenarios, the patented Threat-Fire™ shoot-back system, powerful gas-powered simulated recoil weapons, and more.

 

The VirTra simulator allows marksmanship and realistic scenario based training to take place on a daily basis without the need for a shooting range, protective equipment, role players, safety officers, or a scenario based training site. The simulator also allows students to receive immediate feedback from the instructor without the potential for sustaining injuries by the instructor or the students. The instructor is able to teach and re-mediate critical issues, while placing realistic stress on the students due to the realism and safe training environment created by the VirTra simulator.

 

We also are engaged in licensing our technology to Modern Round Entertainment Corporation (“MREC”), a developer and operator of a combined dining and entertainment concept centered on an indoor shooting experience (the “MREC Concept”).

 

Business Strategy

 

We have four main customer groups, namely, law enforcement, military, educational (includes colleges and police academies) and civilian. These are very different markets and require different sales and marketing programs as well as personnel. Our focus is to expand the market share and scope of our training simulators sales to these identified customer groups by pursuing the following key growth strategies:

 

  Build Our Core Business. Our goal is to profitably grow our market share by continuing to develop, produce and market the most effective simulators possible. Through disciplined growth in our business, we have achieved a solid balance sheet by increasing our working capital and limiting our bank debt. We plan to add staff to our experienced management team as needed to meet the expected increase in demand for our products and services as we increase our marketing and sales activities.
     
  Increase Total Addressable Market. We plan to increase the size of our total addressable market. This effort will focus on new marketing and new product and/or service offerings for the purpose of widening the number of types of customers who might consider our products or services uniquely compelling.

 

   -31-  
 

 

  Broaden Product Offerings. Since formation in 1993, our company has had a proud tradition of innovation in the field of simulation and virtual reality. We plan to release revolutionary new products and services as well as continue incremental improvements to existing product lines. In some cases, the company may enter a new market segment via the introduction of a new type of product or service.
     
  Partners and Acquisitions. We try to spend our time and funds wisely and not tackle tasks that can be done more efficiently with partners. For example, international distribution is often best accomplished through a local distributor or agent. We are also open to the potential of acquiring additional businesses or of being acquired ourselves, based on what is expected to be optimal for our long-term future and our shareholders.

 

Product Offerings

 

Our simulator products include the following:

 

  V-300™ Simulator – a 300° wrap-around screen with video capability is the higher standard for simulation training

 

  o The V-300™ is the higher standard for decision-making simulation and tactical firearms training. Five screens and a 300-degree immersive training environment ensures that time in the simulator translates into real world survival skills. The system reconfigures to support 15 lanes of individual firing lanes.
     
  o A key feature of the V-300™ shows how quickly judgment decisions have to be made, and if they are not made immediately and quickly, the possible loss of lives. This feature, among others, supports our value proposition to our customers that you can’t put a dollar value on being prepared enough for the surprises that could be around every corner and the ability to safely neutralize any life threaten encounters.

 

  V-180™ Simulator – a 180° screen with video capability is for smaller spaces or smaller budgets

 

  o The V-180™ is the higher standard for decision-making simulation and tactical firearms training. Three screens and a 180-degree immersive training environment ensures that time in the simulator translates into real world survival skills. The system reconfigures to support 9 lanes of individual firing lanes.

 

V-100™ Simulator – a single-screen based simulator system

 

o The V-100™ MIL is the higher standard among single-screen firearms training simulators. Firearms training mode supports up to 4 individual firing lanes at one time. The optional Threat-Fire™ device safely simulates enemy return fire with an electric impulse (or vibration version), reinforcing performance under pressure. We offer the industry’s only upgrade path, so a V-100™ MIL firearms training and force options simulator can affordably grow into an advanced multi-screen trainer in upgraded products that we offer customers for future purchase.

 

  The V-100™ MIL is sold to various military commands throughout the world and can support any local language. The system is extremely compact and can even share space with a standard classroom or squeeze into almost any existing facility. If a portable firearms simulator is needed, this model offers the most compact single-screen simulator on the market today – everything organized into one standard case.

 

  o The V-100™ MIL is the higher standard among single-screen small arms training simulators. Military Engagement Skills mode supplies realistic scenario training taken from real world events.

 

  V-ST™ Simulator – a highly-realistic single screen simulated shooting range simulator with the ability to scale to multiple screens

 

o The V-ST PRO™ is a scalable firearms shooting and skills training simulator that offers superior training environments. The systems flexibility supports a combination of marksmanship and use of force training on up to 5 screens from a single operator station. The V-ST PRO™ is also capable of displaying 1 to 30 lanes of marksmanship featuring real world, accurate ballistics.

 

   -32-  
 

 

  Top Subject Matter Expert Content – content supplied with our simulators is approved by top training experts
     
  V-Author™ Software – allows users to create, edit, and train with content specific to agency’s objectives

 

  o V-Author™ software allows users of the VirTra Simulation equipment to create, edit, and train with content specific to agency training objectives and environments. V-Author™ is an easy to use application capable of almost unlimited custom scenarios, skill drills, targeting exercises and firearms course-ware proven to be highly effective for users of VirTra simulation products.

 

  Simulated Recoil – a wide range of highly realistic and reliable simulated recoil kits/weapons
     
  Return Fire Device – the patented Threat-Fire™ device which applies real-world stress on the trainees during simulation training

 

Modern Round

 

On the civilian side, we have a Co-venture agreement with Modern Round, Inc. (formerly, Modern Round, LLC) (“Modern Round”), a wholly owned subsidiary of Modern Round Entertainment Corporation (“MREC”), a developer and operator of a combined dining and entertainment concept centered on an indoor shooting experience. MREC plans to roll out its entertainment concept nationally and currently operates one virtual shooting lounge facility in Peoria, Arizona. Under the terms of the agreement, we granted Modern Round an exclusive, non-transferable royalty-bearing right and license to use our software in virtual shooting lounge facilities provided that certain minimums are met every year. See “Description of Business – Modern Round Co-Venture Agreement.”

 

Operations and Suppliers

 

We produce some of our own products. We also rely on a variety of suppliers. Management does not expect to encounter future delays with suppliers that would have a material impact on us. However, supplier delays would adversely affect us.

 

Competition and Competitive Landscape

 

We compete against a number of established companies that provide similar products and services, some of which have financial, technical, marketing, sales, manufacturing, distribution and other resources significantly greater than ours. There are also companies whose products do not compete directly, but are sometimes closely related to the products we offer. Meggitt Training Systems, Arotech, Inc., Ti Training Corp., Cubic, Inc. and Laser Shot, Inc. are our main competitors in some or all of our markets.

 

We believe that our products and services are superior to those offered by our competitors based on our strength in developing higher quality software solutions and our extensive library of virtual shooting scenario content that would require a substantial investment by a competitor to offer a comparable product.

 

Modern Round Co-Venture Agreement

 

On January 16, 2015 we entered into a Co-Venture Agreement (the “Co-Venture Agreement”) with Modern Round. We agreed to develop interactive games, skills drills, and advanced training simulation content for Modern Round pursuant to the terms of the Co-Venture Agreement, the costs of which were born by Modern Round. We also licensed our software, virtual shooting content and other intellectual property (the “VirTra Technology”) to Modern Round for a portion of its total revenue. We continue to own virtual shooting scenario content that is used in conjunction with the Modern Round platform, whether such content is created by a third-party developer or by Modern Round’s in-house development team. When a virtual shooting scenario content is used in conjunction with the Modern Round’s platform, however, Modern Round has an exclusive, worldwide license to use such content, whether created by a third-party developer or by Modern Round’s in-house development team subject to certain milestones discussed below.

 

   -33-  
 

 

The Co-Venture Agreement provided for (i) the grant to us of 1,365,789 membership units of Modern Round (“Units”), (ii) a right to participate to the extent of five percent of any offering by Modern Round of its Units, (iii) warrants to purchase 1,365,789 Units exercisable 12 months after the opening of Modern Round’s first range facility utilizing the VirTra technology pursuant to the Co-Venture Agreement at a price of $0.25 per share and (iv) Modern Round’s payment of a royalty to us equal to 7% of its gross revenues for each location that uses the VirTra Technology with minimum royalty payments of $280,000, $560,000, and $840,000 (thereafter) for each 12-month period following the opening of the first location in the United States or Canada based on sales in these territories. In addition, on April 14, 2015 Modern Round issued to us an option to purchase 125,000 of its Units. The option fully vested and became exercisable on the date of grant at an exercise price equal to $0.50 per Unit. The April 14, 2015 option terminates on the tenth anniversary of the date of grant, if not earlier pursuant to the terms of the option.

 

The Co-Venture Agreement provides for a 7% royalty payment to us based on gross revenue of the Modern Round facility. The royalty commenced on June 1, 2016 with the opening of Modern Round’s Peoria, Arizona location. The agreement also provides for minimum royalty payments of $280,000, $560,000, and $840,000 (thereafter), for each subsequent 12-month period following the opening of the first location in the United States or Canada, and separate minimum royalty payments, following the opening of the first location outside of the United States and Canada, each based on sales in each of the respective territories.

 

Modern Round’s exclusive license is conditional upon achieving certain milestones. They are required to open a location in the United States or Canada within 24 months, and are required to open an international location within five years of the execution of the Co-Venture Agreement. Additionally, they must meet the minimum royalty payments noted when they become effective. They achieved the United States or Canada milestone with the opening of their Peoria, Arizona location in June 2016. The term of the Co-Venture Agreement continues so long as Modern Round exercises any rights under the agreement with respect to the VirTra Technology. The Co-Venture Agreement may be terminated at any time by either party if the breaching party fails to cure any material breach within 30 days after written notice from the non-breaching party. If we are the breaching party, Modern Round may elect to retain the right to use the VirTra Technology and continue to pay royalties to us as provided for in the Co-Venture Agreement.

 

In addition to our other obligations under the Co-Venture Agreement, we issued to affiliates of MREC warrants to purchase 919,382 shares of our common stock exercisable at $1.36 per share any time subsequent to the earlier of the first anniversary of the opening of Modern Round’s first range facility utilizing the VirTra Technology or after MREC opens its first range facility utilizing VirTra Technology and the payment of all required minimum royalty payments during the first 12-month period. We also granted warrants to affiliates of MREC to purchase 919,382 shares of our common stock exercisable at $1.36 per share any time subsequent to Modern Round’s payment to us of $2,000,000 in royalty fees.

 

On December 31, 2015, Modern Round merged with a subsidiary of MREC pursuant to a Plan of Merger (the “Merger Agreement”) and each unit of Modern Round issued and outstanding as of the effective time of the merger automatically converted into the right to receive approximately 1.2277 shares of MREC common stock. As a result of the Merger Agreement, we held 1,676,748 shares of MREC, options to purchase 153,459 shares of MREC common stock at an exercise price of $.41 per share, and conditional warrants to purchase 1,676,747 shares of MREC common stock at an exercise price of $.20 per share. On October 22, 2016, we exercised the warrant and purchased 1,676,747 shares of MREC common stock for $335,349 resulting in our aggregate holdings of MREC increasing to 3,353,495 common shares representing approximately 8.9% of the issued and outstanding common shares of MREC.

 

On July 28, 2017, the Company received Notices of Exercise for all 919,382 warrants currently exercisable (the “Tranche 1 Warrants”) from all the MREC affiliate holders electing to purchase warrants pursuant to the terms of the net exercise provision set forth in the Warrant Agreement. Mr. Saltz held 778,243 of the Tranche 1 Warrants prior to the assignment of the warrants to MREC on August 11, 2017. Under the net exercise provision, in lieu of exercising the warrant for cash, the holder may elect to receive shares equal to the value of the warrant (or the portion thereof being exercised) by surrender of the warrant and the Company issuing to holder the number of computed shares. Using the July 28, 2017 OTCQX closing price at $2.18 as fair value and the $1.36 warrant exercise price, upon conversion the 919,382 warrants entitle the holders to receive 345,823 shares of the Company’s common stock without payment of any additional consideration pursuant to the net exercise terms of the Tranche 1 Warrants that are currently exercisable.

 

   -34-  
 

 

Effective August 16, 2017, the Company and the MREC affiliate holders entered into an agreement (the “Warrant Buyout Agreement”) whereby the Company acknowledged the assignment of the Tranche 1 Warrants to MREC and agreed to repurchase them at a price of $1.962 per share of common stock issuable by the Company pursuant to the net exercise terms of the Warrants or a total of $678,505.

 

In addition, the Company agreed to repurchase from MREC an additional 919,382 warrants held by MRC that are not currently exercisable (the “Tranche 2 Warrants”). Mr. Saltz held 728,243 of the Tranche 2 Warrants prior to their assignment to MREC on August 11, 2017. The Warrant Buyout Agreement amends the Tranche 2 Warrants to provide for the immediate exercise on a net exercise basis of 48,415 shares of the Company’s common stock. The purchase price for the Tranche 2 Warrants of a total of $94,990 is based on a price of $1.962 per share of common stock issuable on a net exercise basis based on 48,415 shares of the Company’s common stock. The aggregate purchase price of the Tranche 1 Warrants and the Tranche 2 Warrants was $773,495.

 

MREC agreed that proceeds of the warrant redemption, net of applicable taxes, would be used to fund the development of a second stand-alone Modern Round location. In addition, MREC agreed that, after giving effect to their payment to us of $161,573 towards the $240,000 minimum royalty due covering the first 12-month royalty period, the balance due to us in order to maintain exclusivity was $118,427. Further, MREC acknowledged that the second 12-month minimum royalty calculation period provided for in the Co-Venture Agreement began on June 1, 2017 and ends on May 31, 2018. Total minimum royalty payments due during this period required to maintain MREC’s exclusive rights under the Co-Venture Agreement are $560,000 including any shortfalls for prior periods being due no later than June 30, 2018. By fully funding the Minimum Royalty Payment, MREC will retain its exclusive license to use the Company’s shooting scenario content and other intellectual property in MREC’s facilities for a future 12-month period in accordance with the Co-Venture Agreement.

 

In addition, on August 16, 2017, we entered into an amendment to the Co-Venture Agreement to permit MREC to sublicense the VirTra Technology to third party operators of stand-alone location-based entertainment companies. MREC agreed to pay us royalties for any such sublicenses in an amount equal to 10% of the revenue paid to MREC in cases where MREC pays for the cost of the equipment for such location or 14% of the revenue paid to MREC in cases where it does not pay for the cost of the equipment.

 

Intellectual Property

 

We rely on certain proprietary technology and seek to protect our interests through a combination of patents, trademarks, copyrights, know-how, trade secrets and security measures, including confidentiality agreements. Our policy generally is to secure protection for significant innovations to the fullest extent practicable. Further, we seek to expand and improve the technological base and individual features of our products through ongoing research and development programs.

 

Our patent portfolio includes three issued U.S. patents, which expire between 2025 and 2028. We also have three patent applications pending for examination in the U.S. The following is a list of our issued and pending patents:

 

Description  

SERIAL NO./

PATENT NO.

   

FILING DATE/

ISSUE DATE

  STATUS  
System and Method for Simulated Non-Lethal Weapons Training     15/493,056   06/25/2016     Pending  
                     
Simulated Firearms Entertainment System     15/452,689   03/07/2017     Pending  
                     
System and Method for Simulated Firearms Training     14/619,046     09/17/2012     Pending  
                     
System and Method for Mechanically Activated Laser     13/621,836 8,894,412     09/17/2012
11/25/2014
    Issued  
                     
Method of Training Utilizing a Threat Fire Simulation System    

12/643,097

8,016,594

    12/21/2009
09/13/2011
    Issued  
                     
Threat Fire Simulation and Training System    

13/230,834

8,267,691

    09/12/2011
09/18/2012
    Issued  

 

   -35-  
 

 

We own the trademark for “VirTra Systems” and “The Higher Standard in Firearms Training Simulators”. These trademarks are registered in the United States. We have filed applications that are pending for the trademark for “VirTra” and “Threat-Fire”. We consider the protection of our trademarks to be important to our business.

 

We also have copyright protection for the simulator content we produce for use in our products.

 

We rely on the laws of unfair competition and trade secrets to protect our proprietary rights. We attempt to protect our trade secrets and other proprietary information through confidentiality and non-disclosure agreements with customers, suppliers, employees and consultants, and through other security measures. However, we may be unable to detect the unauthorized use of, or take appropriate steps to enforce our intellectual property rights. Effective trade secret protection may not be available in every country in which we offer or intend to offer our products and services to the same extent as in the United States. Failure to adequately protect our intellectual property could harm or even destroy our brands and impair our ability to compete effectively. Further, enforcing our intellectual property rights could result in the expenditure of significant financial and managerial resources and may not prove successful. Although we intend to protect our rights vigorously, there can be no assurance that these measures will be successful.

 

Research and Development

 

During the years ended December 31, 2016 and 2015, our research and product development expenses were approximately $1,100,000 and $1,666,000, respectively.

 

Sources and Availability of Raw Materials/Manufacturing and Assembly

 

We obtain the key components of our products from a variety of sources that we purchase on a purchase order basis from local suppliers at market prices based on our production requirements. We believe alternative sources generally exist for the components used in our products.

 

Our manufacturing, assembly, warehouse and shipping facilities are located in Tempe Arizona. See Business – Property.

 

Employees

 

As of August 25, 2017, we employed 74 full-time employees. We believe that we maintain a satisfactory working relationship with our employees and have not experienced any labor disputes.

 

Legal Proceedings

 

From time to time, we are involved in various claims and legal actions arising in the ordinary course of business. On October 20, 2016 a former employee filed a lawsuit in the U.S. District Court, District of Arizona against us alleging our failure and/or refusal to pay overtime in violation of 29 U.S.C. Sec. 201, et. seq. and a claim for wrongfully withheld wages under A.R.S. Sec. 23-350 et. seq. The complaint seeks certification of class action status, declaratory relief, damages, interest, attorneys’ fees and such other relief the Court deems just and proper. We intend to vigorously defend our company in this case. While acknowledging the uncertainties of litigation with an unfavorable ruling resulting in monetary damages against us, management believes that the ultimate outcome of this matter will not have a material effect on its earnings, cash flows, or financial position.

 

   -36-  
 

 

Property

 

We lease 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. This lease expires in April 2019. In addition, we lease approximately 4,529 rentable square feet of office and industrial space from an unaffiliated third party for our parts manufacturing facility at 2169 East 5th St., Tempe, Arizona 85284. This lease expires in March 2018.

 

Regulatory Matters

 

Our business is heavily regulated in most of our markets. We deal with numerous U.S. government agencies and entities, including, but not limited to, branches of the U.S. military and the Department of Homeland Security. Similar government authorities exist in our international markets. We are also subject to export regulations. For additional information related to export regulations, see Item 1A, entitled “Risk Factors – We may not be able to receive or retain the necessary licenses or authorizations required for us to export or re-export….”

 

Government Contracts

 

The U.S. government, and other governments, may terminate any of our government contracts at their convenience, as well as for default, based on our failure to meet specified performance requirements. If any of our U.S. government contracts were to be terminated for convenience, we generally would be entitled to receive payment for work completed and allowable termination or cancellation costs. If any of our government contracts were to be terminated for default, generally the U.S. government would pay only for the work that has been accepted and can require us to pay the difference between the original contract price and the cost to re-procure the contract items, net of the work accepted from the original contract. The U.S. government can also hold us liable for damages resulting from the default. For additional information related to government contracts, see Item 1A. “Risk Factors – Risks Related to Government Contracts.”

 

Environmental

 

We are subject to various federal, state, local and non-U.S. laws and regulations relating to environmental protection, including the discharge, treatment, storage, disposal and remediation of hazardous substances and wastes. We continually assess our compliance status and management of environmental matters to ensure our operations are in substantial compliance with all applicable environmental laws and regulations. Investigation, remediation, operation and maintenance costs associated with environmental compliance and management of sites are a normal, recurring part of our operations. These costs often are allowable costs under our contracts with the U.S. government. It is reasonably possible that continued environmental compliance could have a material impact on our results of operations, financial condition or cash flows if additional work requirements or more stringent clean-up standards are imposed by regulators, new areas of soil and groundwater contamination are discovered and/or expansions of work scope are prompted by the results of investigations.

 

MANAGEMENT’S DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS

 

The following discussion and analysis should be read in conjunction with (i) our financial statements and related notes thereto, and (ii) the section entitled “Description of Business,” included in this Offering Circular. The discussion contains forward-looking statements that involve risks, uncertainties and assumptions. Our actual results may differ materially from those anticipated in those forward-looking statements as a result of many factors, including, but not limited to, those set forth under “Risk Factors” and elsewhere in this Offering Circular.

 

Overview

 

We develop, sell and support use of force training and marksmanship firearms training systems and accessories for law enforcement, military or civilian use. Our simulators use software, hardware and content to create uniquely effective and realistic training that does not require live ammunition or less-than-lethal munitions, which can both save money and provide certain training capabilities unavailable to live fire exercises. We have developed a higher standard in simulation training including capabilities such as: multi-screen video based scenarios, unique scenario authoring ability, superior training scenarios, the patented Threat-Fire™ shoot-back system, powerful gas-powered simulated recoil weapons, and more.

 

   -37-  
 

 

We also are engaged in licensing our technology to Modern Round Entertainment Corporation (“MREC”), a developer and operator of a combined dining and entertainment concept centered on an indoor shooting experience.

 

Simulator Product Offerings

 

Our simulator products include the following:

 

  V-300™ Simulator – a 300° wrap-around screen with video capability is the higher standard for simulation training
     
  V-180™ Simulator – a 180° screen with video capability is for smaller spaces or smaller budgets
     
  V-100™ Simulator – a single-screen based simulator system
     
  The V-100™ MIL is sold to various military commands throughout the world and can support any local language. The system is extremely compact and can even share space with a standard classroom or squeeze into almost any existing facility. If a portable firearms simulator is needed, this model offers the most compact single-screen simulator on the market today – everything organized into one standard case.
     
  V-ST™ Simulator – a highly-realistic single screen simulated shooting range simulator with the ability to scale to multiple screens
     
  Top Subject Matter Expert Content – content supplied with our simulators is approved by top firearms training experts
     
  V-Author™ Software – allows users to create, edit, and train with content specific to agency’s objectives
     
  Simulated Recoil – a wide range of highly realistic and reliable simulated recoil kits/weapons
     
  Return Fire Device – the patented Threat-Fire™ device which applies real-world stress on the trainees during simulation training

 

Results of operations for the three and six months ended June 30, 2017 and June 30, 2016

 

Revenues. Revenues were $5,251,565 for the three months ended June 30, 2017 compared to $3,385,882 for the same period in 2016. The increase was due to additional sales of simulators, accessories, warranties and other services. Revenues were $9,460,852 for the six months ended June 30, 2017 compared to $9,618,176 for the same period in 2016. The decrease was primarily a result of recognizing $2.7 million in revenue on one single international order during the 2016 period.

 

Cost of Sales. Cost of sales was $1,501,467 for the three months ended June 30, 2017 compared to $1,410,700 for the same period in 2016. The increase was due to additional sales volume partially offset by a reduction in the cost of manufacturing system and product components in our recently acquired machine shop, an increase in sales of mix of higher margin products including training, service and warranty sales, and a reduction in material costs due to higher volume purchases and more favorable pricing of raw materials and systems components in 2017 compared to the same period in 2016. Cost of sales was $3,280,412 for the six months ended June 30, 2017 compared to $3,511,725 for the same period in 2016. The decrease is a result of a reduction in the cost of manufacturing system and product components in our recently acquired machine shop, an increase in sales of mix of higher margin products including training, service and warranty sales and a reduction in material costs due to higher volume purchases and more favorable pricing of raw materials and systems components in 2017 compared to the same period in 2016. These increases were partially offset by increased costs due to higher sales volume.

 

   -38-  
 

 

Gross Profit. Gross profit was $3,750,098 for the three months ended June 30, 2017 compared to $1,975,182 for the same period in 2016. The increase in gross profit margin of 71% compared to 58% for the same period in 2016 was a result of a reduction in the cost of manufacturing system and product components in our recently acquired machine shop, an increase in sales of mix of higher margin products including training, service and warranty sales and a reduction in material costs due to higher volume purchases and more favorable pricing of raw materials and systems components in 2017 compared to the same period in 2016. Gross profit was $6,180,440 for the six months ended June 30, 2017 compared to $6,106,451 for the same period in 2016. The gross profit margin was 65% for the six months ended June 30, 2017 compared to 63% for the same period in 2016. Gross profit increased due to the same factors we discussed above for the three month period as noted above. The Gross Profit increases were also due to sales mix of higher margin products that includes training, service and warranty sales.

 

Operating Expenses. Net operating expense was $2,129,478 for the three months ended June 30, 2017 compared to $1,613,539 for the same period in 2016. Net operating expense was $4,086,166 for the six months ended June 30, 2017 compared to $3,662,900 for the same period in 2016. The three month and six month year over year increases were due to expanding staffing levels, annual increases in payroll and benefits for current staff, sales and marketing expansion, new research and development work, and IT infrastructure upgrades.

 

Net Income. Net income was $1,648,091 for the three months ended June 30, 2017 compared to $322,027 for the same period in 2016. The increase in the net income resulted from increases in revenue and gross profit partially offset by an increase in operating expenses as noted above. Net income was $2,049,979 for the six months ended June 30, 2017 compared to $2,371,212 for the same period in 2016. The decrease in net income resulted from a slight decrease in revenue and an increase in operating expenses as noted in each respective section.

 

Adjusted Earnings Before Interest, Taxes, Depreciation and Amortization (AEBITDA)

 

Explanation and Use of Non-GAAP Financial Measures:

 

Earnings before interest, income taxes, depreciation and amortization and before other non-operating costs and income (“EBITDA”) and adjusted EBITDA are non-GAAP measures. Adjusted EBITDA also includes non-cash stock option expense. Other companies may calculate adjusted EBITDA differently. The Company calculates its adjusted EBITDA to eliminate the impact of certain items it does not consider to be indicative of its performance and its ongoing operations. Adjusted EBITDA is presented herein because management believes the presentation of adjusted EBITDA provides useful information to the Company’s investors regarding the Company’s financial condition and results of operations and because adjusted EBITDA is frequently used by securities analysts, investors and other interested parties in the evaluation of companies in the Company’s industry, several of which present EBITDA and a form of adjusted EBITDA when reporting their results. Adjusted EBITDA has limitations as an analytical tool and should not be considered in isolation or as a substitute for analysis of the Company’s results as reported under U.S. GAAP. Adjusted EBITDA should not be considered as an alternative for net (loss) income, cash flows from operating activities and other consolidated income or cash flows statement data prepared in accordance with U.S. GAAP or as a measure of profitability or liquidity. A reconciliation of net income to adjusted EBITDA is provided in the following table:

 

   -39-  
 

 

RECONCILIATION OF NET INCOME TO ADJUSTED EBITDA

 

    Three Months Ended     Six Months Ended  
    June 30,     June 30,     Increase     %     June 30,     June 30,     Increase     %  
    2017     2016     (Decrease)     Change     2017     2016     (Decrease)     Change  
                                                 
Net Income   $ 1,648,091     $ 322,027     $ 1,326,064       412 %   $ 2,049,979     $ 2,371,212     $ (321,233 )     -14 %
Adjustments:                                                                
Depreciation and amortization     70,572       50,622       19,950       39 %     138,957       96,177       42,781       44 %
Non-cash stock option expense     48,812       30,000       18,812       63 %     117,975       63,990       53,985       84 %
Provision for income taxes     -       31,963       (31,963 )     -100 %     78,000       65,203       12,797       20 %
                                                                 
Adjusted EBITDA   $ 1,767,475     $ 434,612     $ 1,332,863       307 %   $ 2,384,911     $ 2,596,582     $ (211,671 )     -8 %

 

Liquidity and Capital Resources. Liquidity is the ability of an enterprise to generate adequate amounts of cash to meet its needs for cash requirements. The Company had $4,283,216 and $3,703,579 in cash as of June 30, 2017 and December 31, 2016, respectively. The working capital was $7,433,993 and $5,268,654 for the periods ended June 30, 2017 and December 31, 2016, respectively.

 

Net cash provided by operating activities was $749,610 and $1,441,133 for the six months ended June 30, 2017 and 2016, respectively, resulting from a decrease in net income and significant changes in accounts receivables, prepaid expense, other current assets, accounts payable and other accrued expenses.

 

Net cash used in investing activities was $70,923 and $221,374 for the six months ended June 30, 2017 and 2016, respectively, resulting from a reduction in purchases of property and equipment.

 

Net cash used in financing activities was $99,050 and $467,724 for the six months ended June 30, 2017 and 2016, respectively, resulting from the purchase of treasury stock and from the repurchase and cancellation of stock options.

 

Results of Operations for the year ended December 31, 2016 Compared to the year ended December 31, 2015

 

Revenues. Revenues for the year ended December 31, 2016 totaled $15,652,168 compared to $13,342,336 for the year ended December 31, 2015. This represents a 17% increase. Overall product line sales increased in all areas including an increase in simulator sales, accessories sales and extended warranty agreements. During the year ended December 31, 2016, revenues included $90,047 from MREC, a related party, for royalties.

 

Cost of Goods Sold. Cost of Goods Sold for the year ended December 31, 2016 totaled $5,970,058 compared to $5,652,125 for the year ended December 31, 2015. This represents a 6% increase. The increase resulted primarily from increased product sales as noted above, partially offset by an increase in sales of mix of higher margin products including training, service and warranty sales, and a reduction in material costs due to higher volume purchases and more favorable pricing of raw materials and systems components in 2016 compared to the same period in 2015.

 

Gross Profit. Gross Profit for the year ended December 31, 2016 was $9,682,110 which represented a 62% profit margin. Gross Profit for the year ended December 31, 2015 was $7,690,211 which represented a 58% profit margin. The Gross Profit increased by 26% from years ended 2015 to 2016 due to sales mix of higher margin products that includes training, service and warranty sales and a reduction in material costs due to higher volume purchases and more favorable pricing of raw materials and systems components in 2016 compared to the same period in 2015. We do not expect our gross profit margins to change significantly during the remaining periods in fiscal 2017 as our input costs have remained relatively stable.

 

Operating Expenses. Operating expenses for the year ended December 31, 2016 totaled $7,555,784 compared to $6,199,628 for the year ended December 31, 2015. This represents a 22% increase. The operating expenses increase resulted from increases in employee costs, professional services, sales and marketing, plus research and development costs.

 

   -40-  
 

 

Net Income. Net income for the year ended December 31, 2016, totaled $2,050,022 compared to $1,536,983 for the year ended December 31, 2015. This represents a 33% increase. The increase in the net income resulted from increases in revenue and gross profit partially offset by an increase in operating expenses as noted above.

 

Adjusted Earnings Before Interest, Taxes, Depreciation and Amortization (AEBITDA)

 

Explanation and Use of Non-GAAP Financial Measures:

 

Earnings before interest, income taxes, depreciation and amortization and other non-operating costs and income (“EBITDA”) and adjusted EBITDA are non-U.S. GAAP measures. Adjusted EBITDA means net income (i) plus depreciation, (ii) plus non-cash stock option expense, (iii) plus treasury stock canceled, (iv) minus other income – receipt of unclaimed property, and (v) plus provision for income taxes. Other companies may calculate adjusted EBITDA differently. We calculate adjusted EBITDA to eliminate the impact of certain items we do not consider to be indicative of the performance of our ongoing operations. Adjusted EBITDA is presented herein because management believes the presentation of adjusted EBITDA provides useful information to our investors regarding our financial condition and results of operations and because adjusted EBITDA is frequently used by securities analysts, investors and other interested parties in the evaluation of companies in our industry, several of which present EBITDA and a form of adjusted EBITDA when reporting their results. Adjusted EBITDA has limitations as an analytical tool, and should not be considered in isolation, or as a substitute for analysis of our results as reported under U.S. GAAP. Adjusted EBITDA should not be considered as an alternative for net income, cash flows from operating activities and other income or cash flow statement data prepared in accordance with accounting principles generally accepted in the United States or as a measure of profitability or liquidity. A reconciliation of net income to adjusted EBITDA is provided in the following table:

 

RECONCILIATION OF NET INCOME TO ADJUSTED EBITDA

 

    Year Ended December 31  
    2016 (Unaudited)     2015 (Unaudited)      Increase/(Decrease)     % Change  
                         
Net Income   $ 2,050,022     $ 1,536,983     $ 513,039       33 %
Adjustments:                                
Depreciation     192,602       184,846       7,756       4 %
Non-cash stock option expense     181,786       118,328       63,458       54 %
Treasury stock cancelled     2,981       -       2,981       100 %
Other income-receipt of unclaimed property     (17,913 )     -       (17,913 )     -100 %
Provision for income taxes     102,753       89,562       13,191       15 %
                                 
Adjusted EBITDA   $ 2,512,231     $ 1,929,719     $ 582,512       30 %

 

Liquidity and Capital Resources

 

Liquidity is the ability of an enterprise to generate adequate amounts of cash to meet its needs for cash requirements. We had $3,703,579 and $3,317,020 cash and cash equivalents as of December 31, 2016 and December 31, 2015, respectively. The working capital was $5,268,654 and $3,878,996 for the periods ended December 31, 2016 and December 31, 2015, respectively. We had assets at December 31, 2016 of $9,911,989 compared to $7,270,007 at December 31, 2015.

 

   -41-  
 

 

Net cash provided by operating activities was $1,754,880 compared to $1,742,841 for the years ended December 31, 2016 and December 31, 2015. The increase was primarily a result of an increase in net income and non-cash related items, partially offset by an increase in accounts receivables, inventory and prepaid expenses and a reduction in accounts payable.

 

Net cash used in investing activities was $830,334 and $332,953 for the years ended December 31, 2016 and December 31, 2015, respectively. The increase was primarily a result of an investment in MREC, purchases of property and equipment and other assets.

 

Net cashed used in financing activities was $537,987 and $5,597 for the years ended December 31, 2016 and 2015, respectively. The increase was primarily a result of an increase in repurchases of stock-based options, partially offset by proceeds from exercises of common stock options.

 

Our cash and cash equivalents at December 31, 2016 totaled $3,703,579, an increase of $386,559 over our balance at December 31 2015. In addition, we had working capital of $5,268,654, an increase of $1,389,658 over the amount as of December 31, 2015. The amount of cash and cash equivalents and working capital at December 31, 2016 along with expected net cash provided by operating activities is believed sufficient to meet our current operating cash needs over the next twelve months from the filing of this Offering Circular. We do not expect a significant change to our plan of operations or the number of employees.

 

Cash Requirements

 

Our management believes that our current capital resources will be adequate to continue operating our company and maintaining our current business strategy for more than 12 months from the filing of this Offering Circular. We are, however, seeking to raise additional funds to expand our product and services offered, to enhance our sales and marketing efforts and effectiveness, and to aggressively take advantage of market opportunities. There can be no assurance, however, that additional financing will be available to us when needed or, if available, that it can be obtained on commercially reasonable terms. If we are not able to obtain the additional financing on a timely basis, if and when it is needed, we will be forced to scale down our plans for expanded marketing and sales efforts.

 

Critical Accounting Policies

 

We have identified the following policies below as critical to our business and results of operations. Our reported results are impacted by the application of the following accounting policies, certain of which require management to make subjective or complex judgments. These judgments involve making estimates about the effect of matters that are inherently uncertain and may significantly impact quarterly or annual results of operations. For all of these policies, management cautions that future events rarely develop exactly as expected, and the best estimates routinely require adjustment. Specific risks associated with these critical accounting policies are described in the following paragraphs.

 

Basis of Presentation and Use of Estimates

 

Our financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”), unless otherwise noted. The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions 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. Significant accounting estimates in these financial statements include valuation assumptions for share-based payments, allowance for doubtful accounts receivable, inventory reserves, accrual for warranty reserves, the carrying value of long-lived assets, income tax valuation allowances and the carrying value of cost basis investments. Actual results could differ significantly from those estimates.

 

   -42-  
 

 

Fair Value of Financial Instruments

 

The fair value of financial instruments approximates their carrying values at December 31, 2016 and 2015 due to their short maturities. These financial instruments consist of cash and cash equivalents, accounts receivable, investment in MREC, accounts payable, and accrued liabilities.

 

Cash and Cash Equivalents

 

We consider all highly liquid investments with a maturity of 90 days or less at the time of purchase to be cash equivalents.

 

Accounts Receivable and Allowance for Doubtful Accounts

 

We recognize 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 are charged off after all reasonable collection efforts have been taken. As of December 31, 2016 and 2015, we maintained an allowance for doubtful accounts of $20,000 and $59,266, respectively.

 

Inventories

 

Inventories are stated at the lower of cost or market 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 and provides reserves when appropriate to reduce inventory to the lower of cost or market to reflect estimated net realizable value. As of December 31, 2016, management has determined that it was necessary to record a reserve of $17,282. There was no inventory reserve recorded for the year ended December 31, 2015.

 

Investments in Other Companies

 

Minority investments in other companies are accounted for under the cost method of accounting because we do not have the ability to exercise significant influence over the companies’ operations. Under the cost method of accounting, investments in private companies are carried at cost and are only adjusted for other-than-temporary declines in fair value and distribution of earnings.

 

Management regularly evaluates the recoverability of its investment based on the investee company’s performance and financial position. During the years ended December 31, 2016 and 2015, we did not recognize any losses due to other-than-temporary declines of the value of the investments. In addition, 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. 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, which are summarized as follows:

 

Computer equipment 3-5 years
Furniture and office equipment 5-7 years
Leasehold improvements 7 years

 

   -43-  
 

 

Revenue Recognition and Deferred Revenue

 

Net revenues include sales of products and services and are net of discounts. Product sales consist of simulators, upgrade components, scenarios, scenario software, recoil kits, Threat-Fire® and other accessories. Services include installation, training, limited warranties, service agreements and related support. Certain components of our sales include multiple elements comprising of both products and services. Our revenue recognition falls under ASC 605-25, Multiple Element Arrangements, with the delivery of the simulator and installation being two separate deliverables. Our delivery of the simulator and the installation has been assessed to qualify as separate units of accounting:

 

  1. The simulator unit upon shipment or delivery and customer acceptance, depending on the shipping terms.
     
  2. The installation upon completion and customer sign-off.

 

Additionally, we recognize revenue for these products and services when it is realized or realizable and earned. Revenue is considered realized and earned when: (i) persuasive evidence of an arrangement exists; (ii) delivery has occurred and/or services have been rendered; (iii) the price is fixed and determinable; and (iv) collection of the resulting receivable is reasonably assured. Shipping fees charged to customers are recorded as a component of net revenues. All sales and sales contracts, including international sales, have been denominated in US dollars.

 

Products

 

Revenue from the sale of products is recognized when title and risk of loss passes to the customer. Delivery is considered complete when products have been shipped to the customer and title and risk of loss has transferred to the customer. For customers other than United States governmental agencies, we generally require deposits in advance of shipment for customer sales orders. Customer deposits are recorded as a current liability under deferred revenue on the accompanying balance sheet and totaled $51,334 and $658,426 as of December 31, 2016 and 2015, respectively.

 

Services

 

Services include installation of product, separately priced extended limited warranties on parts and labor, and technical support. Revenue is recognized for service contracts as earned, which is generally upon completion of installation or, as it relates to the extended warranties, on a straight-line basis over the term of the contract. The Company does warranty its products from manufacturing defects on a limited basis for a period of one year after purchase, but also sells separately priced extended warranties for periods of up to four years after the expiration of the standard one year warranty. After the one year standard warranty expires and during the term of the extended warranty, if the device fails to operate properly from defects in materials and workmanship, we will fix or replace the defective product. Deferred revenue for separately priced extended warranties longer than one year totaled $2,014,571 and $865,415 as of December 31, 2016 and 2015, respectively. We recorded a gross to net revenue adjustment and accrues on an annual basis the estimated cost of complying with the warranty agreements for the next fiscal year. The accrual for the one-year manufacturer’s warranty liability totaled $122,000 and $77,400 as of December 31, 2016 and 2015, respectively.

 

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. As of December 31, 2016 and 2015, the Company has provided a valuation allowance for all net deferred tax assets.

 

As of December 31, 2016 and 2015, the Company did not recognize any assets or liabilities relative to uncertain tax positions. 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.

 

   -44-  
 

 

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 December 31, 2016 or 2015.

 

The Company is potentially subject to tax audits for its United States federal and Arizona state income tax returns for tax years ended 2014 to 2016 and 2013 to 2016, respectively; 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.

 

Stock Based Compensation

 

The Company calculates the cost of awards of equity instruments based on the grant date fair value of the awards using the Black-Scholes-Merton option pricing valuation model, which incorporates various assumptions including volatility, expected term and risk-free interest rates

 

The expected term of the options is the estimated period of time until exercise and is based on historical experience of similar awards giving consideration to the contractual terms, vesting schedules and expectations of future employee behavior. Expected stock price volatility is based on historical volatility of the Company’s stock. 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 estimated fair value of stock-based compensation awards and other options is amortized on a straight-line basis over the relevant vesting period. As share-based compensation expense is recognized based on awards ultimately expected to vest, it is reduced for estimated forfeitures. Forfeitures are estimated at the time of grant and revised, if necessary, in subsequent periods if actual forfeitures differ from those estimates. The Company’s forfeiture rate was calculated based on its historical experience of awards which ultimately vested.

 

Recent Accounting Pronouncements

 

In May 2014, the Financial Accounting Standards Board (“FASB”) issued guidance for revenue recognition for contracts, superseding the previous revenue recognition requirements, along with most existing industry-specific guidance. The guidance requires an entity to review contracts in five steps: 1) identify the contract, 2) identify performance obligations, 3) determine the transaction price, 4) allocate the transaction price, and 5) recognize revenue. The new standard will result in enhanced disclosures regarding the nature, amount, timing and uncertainty of revenue arising from contracts with customers. In August 2015, the FASB issued guidance approving a one-year deferral, making the standard effective for reporting periods beginning after December 15, 2017, with early adoption permitted only for reporting periods beginning after December 15, 2016. The Company is evaluating the impact of the standard and has not yet determined the effect on its financial position or results of operations.

 

In February 2016, the FASB issued ASU No. 2016-02 – “Leases (Topic 842)”, which requires leases to put most leases on their balance sheets by recognizing lease assets and lease liabilities for those leases classified as operating leases under previous guidance. This ASU will be effective for the Company on January 1, 2019, with early adoption permitted. The Company is currently in the process of assessing the impact of this ASU on its financial statements.

 

We implemented all new accounting standards that are in effect and that may impact our financial statements.

 

Off-Balance Sheet Arrangements

 

As of June 30, 2017, we did not have any off-balance sheet arrangements that have or are reasonably likely to have a current or future effect on our financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources that are material to investors. The term “off-balance sheet arrangement” generally means any transaction, agreement or other contractual arrangement to which an entity unconsolidated with us is a party, under which we have any obligation arising under a guarantee contract, derivative instrument or variable interest or a retained or contingent interest in assets transferred to such entity or similar arrangement that serves as credit, liquidity or market risk support for such assets.

 

   -45-  
 

 

 

MANAGEMENT

 

Board of Directors and Executive Officers

 

The following table sets forth the names, positions and ages of our directors and executive officers as of the date of this Offering Circular. Each director is elected at our annual meeting of shareholders and holds office for one year, or until his successor is elected and qualified. Officers are elected by our board of directors and their terms of office are at the discretion of our board.

 

Name   Age   Position/Title
Robert D. Ferris   45   Chief Executive Officer and Chairman of the Board
Matthew Burlend   43   Chief Operating Officer, Secretary and Director
Judy Henry   56   Chief Financial Officer
Mitchell A. Saltz   64   Director
Jeffrey Brown   54   Director

 

* Ms. Henry was appointed as our Chief Financial Officer on August 24, 2017 to succeed Donna Moore, our former Interim Chief Financial Officer.

 

Biographical information concerning the directors and executive officers listed above is set forth below.

 

Robert D. Ferris. Mr. Ferris has been our Chief Executive Officer and Chairman of the Board of Directors since 2001 when we merged with Ferris Productions, Inc. (“Ferris Productions”). Mr. Ferris founded Ferris Productions in 1993 where he launched the development, marketing and sales of the virtual simulators that now make up our line of products. In addition to his duties at our company, Mr. Ferris has been awarded multiple patents, spoken at various trade shows, and has written or assisted with various ground-breaking articles and studies in the area of virtual reality and simulation technology. Mr. Ferris is considered one of the top experts in the world at applying virtual reality and simulation technology to solve real world problems. Mr. Ferris attended the U.S. Air Force Academy and received a Bachelor’s degree in Systems Engineering from the University of Arizona. We believe Mr. Ferris’ history as a founder, officer and director of our company and his management experience and industry knowledge provide the requisite qualifications, skills, perspectives, and experience that make him well qualified to serve on our Board of Directors.

 

Matthew Burlend. Mr. Burlend has been our Chief Operating Officer and a director since 2001 when we merged with Ferris Productions. In his role with our company, Mr. Burlend has contributed significantly to managing the design, production and support of our simulator products and has achieved a highly successful track record in the daily operations of our core business. Prior to joining Ferris Productions in 1999, Mr. Burlend was a mechanical engineer focused on the design of automated production equipment for Panduit, a global manufacturer of physical infrastructure equipment that support power, communications, computing, control, and security systems. Mr. Burlend received a Bachelor’s Degree in Mechanical Engineering from Olivet Nazarene University. We believe Mr. Burlend’s history as a founder, officer and director of our company and his management experience and industry knowledge provide the requisite qualifications, skills, perspectives, and experience that make him well qualified to serve on our Board of Directors.

 

Judy Henry. Ms. Henry has served as controller since October 2016 and was appointed as our Chief Financial Officer on August 24, 2017. Ms. Henry has over 25 years of experience in finance and accounting, holding positions as Chief Financial Officer, Director of Finance and Controller for public, private and municipal corporations in the technology, accounting, venture capital and real estate sectors. From 2009 to 2015, Ms. Henry was the Chief Financial Officer and Deputy Executive Director for Housing Kitsap, a municipal corporation based in the Pacific Northwest focused on developing and managing affordable housing and assistance programs. Previously, she worked as Director of Finance for Secure Asset Reporting, Inc., a provider of remote asset management solutions, which in 2007 merged with MyCom Group, Inc., an OTC-listed company. Ms. Henry has also provided CFO/Controller consultancy services in the Greater Seattle area for the regional accounting firm Moss Adams. Ms. Henry holds a Masters of Business Administration degree from Pacific Lutheran University and dual Bachelor of Science degrees in Accounting and Finance from Central Washington University.

 

   -46-  
 

 

Mitchell A. Saltz. Mr. Saltz has served as a director of our company since 2016. Mr. Saltz has served as a director of American Outdoor Brands Corporation (formerly, Smith & Wesson Holding Corporation) (“American Outdoor”) (NASDAQ:SWHC) since 1998 and served as its Chairman of the Board and Chief Executive Officer from 1998 through 2003. American Outdoor is a leading manufacturer, designer, and provider of consumer products for the shooting, hunting, and rugged outdoor enthusiast. Mr. Saltz has been since December 2015 Chairman of the Board of Modern Round Entertainment Corporation, a publicly held company formed to create and roll out nationally an entertainment concept centered around a virtual interactive shooting experience utilizing laser technology-based replica firearms and extensive food and beverage offerings, and was a principal of its predecessor, Modern Round LLC, from February 2014 until December 2015. Mr. Saltz has served as the Chairman of Quest Resource Holding Corporation (formerly Infinity Resources Holdings Corp.), an environmental solutions company that serves as a single-service provider of recycling and environment-related programs, services, and information, or its predecessors since 2005 and the Chairman and Managing Partner of Southwest Capital Partners, an investment banking firm, since 2009. Mr. Saltz founded Saf-T-Hammer in 1997, which developed and marketed firearm safety and security products designed to prevent the unauthorized access to firearms, which acquired Smith & Wesson Corp. from Tomkins, PLC in May 2001 and changed its name to Smith & Wesson Holding Corporation. We believe Mr. Saltz’s history as a founder and former officer of American Outdoor, and his financial, investment, and management experience provide the requisite qualifications, skills, perspectives, and experience that make him well qualified to serve on our Board of Directors.

 

Jeffrey Brown. Mr. Brown has served as a director of our company since 2011. Mr. Brown has been a Certified Public Accountant (“CPA”) since 1993 and a financial planning service provider for over 12 years, performing financial services for a wide range companies. From 2002 to 2004, Mr. Brown was the Chief Financial Officer for Gold Canyon Candles, a provider of fragranced candles and accessories during a period of rapid growth in revenues. From 1990 to 1994, Mr. Brown was an auditor at Ernst & Young performing audits for a variety of organizations. Mr. Brown received a Bachelor of Science in Accounting from California State University, San Bernardino and his CPA designation in 1993. We believe Mr. Brown’s history as a financial and accounting services professional and a former auditor and management experience provide the requisite qualifications, skills, perspectives, and experience that make him well qualified to serve on our Board of Directors.

 

There are no family relationships between any of the executive officers and directors.

 

Involvement in Certain Legal Proceedings

 

None of our directors, executive officers, significant employees or control persons has been involved in any legal proceeding listed in Item 401(f) of Regulation S-K in the past 10 years.

 

CORPORATE GOVERNANCE

 

Board Composition

 

Our business and affairs are managed under the direction of our board of directors. The number of directors are fixed by our board of directors, subject to our articles of incorporation and our bylaws.

 

Director Independence

 

Our board of directors has undertaken a review of the independence of each director. Based on information provided by each director concerning his or her background, employment and affiliations, our board of directors has determined that Messrs. Saltz and Brown do not have a material relationship with us that could compromise his or her ability to exercise independent judgment in carrying out his or responsibilities and that each of these directors is “independent” as that term is defined under the listing standards of NASDAQ.

 

In addition, in order to meet the corporate governance requirements of the NASDAQ Listing Rules and to expand the depth of experience of our board of directors, the board has nominated Jim Richardson to stand for election at our annual meeting of stockholders to be held on October 6, 2017. If elected at the annual meeting, it is anticipated that Mr. Richardson will serve on each of the audit committee, compensation committee and corporate governance committee. Information about Mr. Richardson is set forth below.

 

   -47-  
 

 

Mr. Richardson is the co-founder and has been the chief executive officer of NaturalPoint Inc. since 1996. NaturalPoint is a leading company of VR (virtual reality) and tracking products that are ubiquitous throughout the simulation industry from major military simulation projects to consumer virtual reality products. Mr. Richardson has had an integral role at NaturalPoint since its formation and is responsible for devising its high-level strategy and the engineering, marketing and sales efforts. Through Mr. Richardson’s efforts, he led to profitable revenue growth, enabling it to gain significant market share culminating in its sale to Planar Systems, Inc., a developer, manufacturer and marketer of electronic display products and systems for $125 million in cash. Mr. Richardson studied Mechanical Engineering at the University of California at Berkeley. We believe Mr. Richardson’s history as a founder and officer of NaturalPoint, and his technology background and management experience provide the requisite qualifications, skills, perspectives, and experience that make him well qualified to serve on our board of directors.

 

Board Leadership Structure and Board’s Role in Risk Oversight

 

Our board of directors has a Chairman, Mr. Ferris. The Chairman has authority, among other things, to preside over board of director’s meetings and set the agenda for board of director’s meetings. Accordingly, the Chairman has substantial ability to shape the work of our board of directors. Because of the addition of our independent board members, we currently believe that separation of the roles of Chairman and Chief Executive Officer is not necessary to ensure appropriate oversight by the board of directors of our business and affairs. However, no single leadership model is right for all companies and at all times. The board of directors recognizes that depending on the circumstances, other leadership models, such as the appointment of a lead independent director, might be appropriate. Accordingly, the board of directors may periodically review its leadership structure. In addition, following the completion of the offering, the board of directors will hold executive sessions in which only independent directors are present.

 

Our board of directors is generally responsible for the oversight of corporate risk in its review and deliberations relating to our activities. Our principal source of risk falls into two categories, financial and product commercialization. The audit committee will oversee management of financial risks; our board of directors regularly reviews information regarding our cash position, liquidity and operations, as well as the risks associated with each. The board of directors regularly reviews plans, results and potential risks related to our product development and commercialization efforts. Our Compensation Committee is expected to oversee risk management as it relates to our compensation plans, policies and practices for all employees including executives and directors, particularly whether our compensation programs may create incentives for our employees to take excessive or inappropriate risks which could have a material adverse effect on us.

 

Board Committees

 

Our board of directors has established three standing committees —audit, compensation and nominating and corporate governance —each of which operate under a charter that has been approved by our board of directors. We intend to appoint persons to the board of directors and committees of the board of directors as required meeting the corporate governance requirements of the NASDAQ Listing Rules. To this end, our board of directors has nominated Mr. Richardson to stand for election at our annual meeting of stockholders as an additional independent director to our board of directors and committees in order to meet the corporate governance requirements of the NASDAQ Listing Rules.

 

Audit Committee

 

We have appointed three members of our board of directors to the audit committee, Messrs. Burlend, Saltz and Brown, one of whom qualifies as an audit committee financial expert within the meaning of SEC regulations and the NASDAQ Listing Rules. We have nominated Mr. Richardson to stand for election at our annual meeting of stockholders as an additional independent director to be appointed to our audit committee to replace Mr. Burlend in order to meet the corporate governance requirements of the NASDAQ Listing Rules. In making a determination on which member will qualify as a financial expert, our board of directors considered the formal education and nature and scope of such members’ previous experience.

 

   -48-  
 

 

Our audit committee will be responsible for, among other things:

 

  To oversee our accounting and financial reporting and disclosure processes and the audit of our financial statements.
     
  To select and retain an independent registered public accounting firm to act as our independent auditors.
     
  To review with management, the internal audit department and our independent auditors the adequacy and effectiveness of our financial reporting processes, internal control over financial reporting and disclosure controls and procedures, including any significant deficiencies or material weaknesses.
     
  To review and discuss with our independent auditors and management our annual audited financial statements (including the related notes), the form of audit opinion to be issued by the auditors on the financial statements and the disclosure under “Management’s Discussion and Analysis of Financial Condition and Results of Operations” to be included in our annual report on Form 10-K.
     
  To review and approve the functions of our accounting department and approve the hiring or dismissal of the Chief Financial Officer, or such person as may, from time to time, be delegated such internal audit function by the Board.
     
  To review and discuss with management policies and guidelines to govern the process by which management assesses and manages our risks.
     
  To establish and oversee procedures for the receipt, retention and treatment of complaints received by us regarding accounting, internal accounting controls or auditing matters and the confidential, anonymous submission by Company employees of concerns regarding questionable accounting or auditing matters.
     
  To review, approve and oversee any transaction between us and any related person and any other potential conflict of interest situations.
     
  To meet at least four times a year to fulfill its responsibilities.
     
  To review the Audit Committee Charter at least annually and recommend any proposed changes to the Board for approval.

 

Compensation Committee

 

We have appointed three members of our board of directors, Messrs. Burlend, Saltz and Brown, to the compensation committee. We have nominated Mr. Richardson to stand for election at our annual meeting of stockholders as an additional independent director to be appointed to our audit committee to replace Mr. Burlend in order to meet the corporate governance requirements of the NASDAQ Listing Rules. Our compensation committee will assist our board of directors in the discharge of its responsibilities relating to the compensation of our executive officers.

 

Our compensation committee is responsible for, among other things:

 

  To review and approve the compensation of the Chief Executive Officer and to approve the compensation of all other executive officers.
     
  To review, and approve and, when appropriate, recommend to the Board for approval, any employment agreements and any severance arrangements or plans, including any benefits to be provided in connection with a change in control, for the CEO and other executive officers, which includes the ability to adopt, amend and terminate such agreements, arrangements or plans.
     
  To review our incentive compensation arrangements.
     
  To review and recommend to the Board for approval the frequency with which we will conduct Say on Pay Votes.
     
  To review director compensation for service on the Board and Board committees at least once a year and to recommend any changes to the Board.
     
  To meet at least two times a year.
     
  To review the Compensation Committee Charter at least annually and recommend any proposed changes to the Board for approval.

 

   -49-  
 

 

 

Nominating and Corporate Governance Committee

 

We have appointed three members of our board of directors, Messrs. Burlend, Saltz and Brown, to the nominating and corporate governance committee. We have nominated Mr. Richardson to stand for election at our annual meeting of stockholders as an additional independent director to be appointed to our audit committee to replace Mr. Burlend in order to meet the corporate governance requirements of the NASDAQ Listing Rules.

 

Our nominating and corporate governance committee is responsible for, among other things:

 

  To determine the qualifications, qualities, skills, and other expertise required to be a director and to develop, and recommend to the Board for its approval, criteria to be considered in selecting nominees for director.
     
  To select and approve the nominees for director to be submitted to a stockholder vote at the annual meeting of stockholders.
     
  To review the Board’s committee structure and composition and to appoint directors to serve as members of each committee and committee chairmen.
     
  To develop and recommend to the Board for approval standards for determining whether a director has a relationship with us that would impair its independence.
     
  To review and discuss with management the disclosure regarding the operations of the Committee and director independence, and to recommend that this disclosure be, included in our proxy statement or annual report on Form 10-K, as applicable.
     
  To monitor compliance with our Code of Ethics and Business Conduct (the “Code”), to investigate any alleged breach or violation of the Code and to enforce the provisions of the Code.
     
  To meet at least two times a year.
     
  To review the Nominating and Corporate Governance Committee Charter at least annually and recommend any proposed changes to the Board for approval

 

Code of Ethics and Business Conduct and Whistleblower Protection Policy

 

We have adopted a written code of business conduct and ethics, which outlines the principles of legal and ethical business conduct under which we do business. In addition, we have adopted a written Whistleblower Protection Policy to prevent adverse employment action of any kind against any of our employees who lawfully report information about (i) fraudulent activities within our company (including wire fraud, mail fraud and bank fraud), (ii) violations of the Sarbanes-Oxley Act of 2002 pertaining to fraud against stockholders of the Company, (iii) questionable accounting, internal accounting controls or auditing matters of the Company, and (iv) conduct by our executives that violate our Code of Ethics and Business Conduct, or that cause reports and other public disclosures by us that are not full, fair and accurate. To advance this commitment, we have adopted this Whistleblower Protection Policy. The code and the policy is applicable to all of our directors, officers and employees and will be available on our corporate website following the completion of the offering. We intend to disclose any amendments to our code of business conduct and ethics, or waivers of its requirements, on our website or in filings under the Exchange Act to the extent required by applicable rules and exchange requirements.

 

Director Compensation

 

Each quarter, our non-employee directors are awarded options to purchase 5,000 shares of our common stock at an exercise price determined on the date of award as compensation for service on our board of directors. Additionally, we pay non-employee directors a $250 phone meeting fee and $500 board meeting attendance fee and we reimburse our non-employee directors for reasonable travel expenses incurred in attending board and committee meetings. We also may allow our non-employee directors to participate in any equity compensation plans that we adopt in the future. Historically, our directors that are our employees have not received compensation for their service as directors.

 

   -50-  
 

 

EXECUTIVE COMPENSATION

 

The following table summarizes all compensation recorded by us in the past two fiscal years for:

 

  our principal executive officer or other individual serving in a similar capacity,
     
  our two most highly compensated executive officers other than our principal executive officer who were serving as executive officers at December 31, 2016 whose compensation exceed $100,000, and
     
  up to two additional individuals for whom disclosure would have been required but for the fact that the individual was not serving as an executive officer at December 31, 2016.

 

For definitional purposes, these individuals are sometimes referred to as the “named executive officers.”

 

2016 Summary Compensation Table

 

Name and
Principal Position
  Fiscal Year Ended     Salary
($)
    Bonus
($)
    Stock
Awards
($)
    Option
Awards
($)
    All Other
Compensation
($)
    Total
($)
 
Robert D. Ferris,     12/31/2016     $ 219,348     $ 284,964                 $ 67,468           -     $ 571,780  
Chief Executive Officer     12/31/2015     $ 219,024     $ 30,466             $ 41,759       -     $ 291,249  
                                                     
Matthew Burlend,     12/31/2016     $ 196,851     $ 194,017             $ 50,601       -     $ 441,469  
Chief Operating Officer     12/31/2015     $ 196,560     $ 23,638       -     $ 31,320       -     $ 248,074  

 

Executive Employment Agreements

 

On April 2, 2012, we entered into three-year Employment Agreements with Messrs. Ferris and Burlend, the executives, that call for base annual salaries of $195,000 and $175,000, respectively, subject to increases based on the cost of living at a minimum. The agreements automatically extend for additional periods of one year. These contracts have been renewed annually with upward adjustments each year. On January 1, 2017, Messrs. Ferris and Burlend’s annual compensation was increased to $228,122 and $204,725, respectively. The employment agreements entitle the executives to an annual cash bonus determined by our board of directors based on our performance. In addition, the agreements entitle the executives to participate in any stock option or restricted stock plan adopted by our board of directors. The amount of an award under any such plan and the vesting terms shall be as deterred by the board. In addition, we are obligated to provide the executives with family medical, dental, vision, disability and life insurance and participation in pension and retirement plans and other compensation plans discussed above.

 

We may terminate an executive’s employment for cause as defined in the employment agreement and such cause is deemed to exist as determined by our board of directors at a board meeting at which the executive and his counsel are first given the opportunity to address the board with respect to such determination. If Messrs. Ferris and Burlend are terminated by us for any reason other than for cause, or if either of them voluntarily terminate their own respective employment for good reason but not including a change in control, then we shall, subject to the terms of the respective employment agreements, be obligated to pay the executive who terminated his employment an amount equal to the greater of (a) the executive’s annual base salary in effect on the day preceding the date of such termination or (b) the executive’s annual base salary during the twelve full calendar months preceding the date of such termination, times three. If a change of control of our company occurs while the executive is our employee and within 36 months from the date of such change in control we terminate the executive’s employment for any reason (except for the death or disability of the Executive or for Cause) or the executive terminates his employment for any reason, then we shall, subject to certain limitations, pay the executive any earned and accrued but unpaid base salary through the date of termination plus an amount of severance pay equal to the greater of (a) the executive’s annual base salary in effect on the day preceding the date on which the change of control occurred or (b) the executive’s annual base salary during the twelve full calendar months preceding the date on which the change of control occurred, times four. In addition, any stock options awarded to the executives shall immediately vest and become exercisable upon a change of control. If the executive is terminated for any reason other than the executive’s voluntary termination for good reason as defined in the employment agreement, the executive whose employment has been terminated is prohibited for a period of two years from the date of termination of the employment agreement from direct competition with us, and shall not solicit any of our employees or customers. The employment agreements require us to indemnify each of the respective executives to the fullest extent permitted under Nevada law, our articles of incorporation and bylaws, which ever affords the greater protection to the executive.

 

   -51-  
 

 

During the year ended December 31, 2016, the Company redeemed from Messrs. Ferris and Burlend, an aggregate of 375,000 previously awarded stock options that were approaching the expiration date for cash in the amount of $272,688 and $183.000, respectively and paid a profit sharing bonus to each of Messrs. Ferris and Burlend in the amount of $12,276 and $11,017, respectively$455,688. These amounts, in the aggregate, are reflected in the Bonus column in the table above.

 

During the year ended December 31, 2016, the Company awarded Messrs. Ferris and Burlend, an aggregate of 70,000 stock options with a fair value of $118,069 in compensation expense.

 

During the six months ended June 30, 2017, the Company redeemed from Messrs. Ferris and Burlend, an aggregate of 50,000 previously awarded stock options that were approaching the expiration date for cash totaling $85,250.

 

During the six months ended June 30, 2017, the Company awarded Messrs. Ferris and Burlend, an aggregate of 35,000 stock options with a fair value of $75,075 in compensation expense.

 

Employee Benefit and Equity Incentive Plans

 

Stock Options

 

We periodically issue non-qualified incentive stock options to the 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. Each quarter Messrs. Ferris and Burlend are awarded options to purchase 10,000 and 7,500 shares of our common stock at the market value of the shares on the date of the award. As of June 30, 2017, there were 1,120,833 options outstanding and 1,080,833 options exercisable at a weighted exercise price of $0.84 and $0.82, respectively.

 

On March 9, 2016, our board of directors approved a program under which we may repurchase outstanding vested Company stock options on an exception basis. Under the terms of the program, our CEO or COO may cause us to redeem for cash any positive stock options for the net value of the stock option (stock price on the redemption date minus strike price). The cash redemption of stock options held by the CEO or COO must be approved by our independent directors. Any redeemed options are immediately cancelled. We retain the right to reject any redemption request that is not in the best interest of our company

 

Profit Sharing

 

We have a discretionary Profit Sharing program that pays out a percentage of our profits each year as a cash bonus to active and eligible employees. The cash payment is typically split into two equal payments and distributed pro-rata to employees in good standing at time of distribution in April and October of the following year after the completion of the annual financial audit. For the years ending December 31, 2016 and 2015, the amount charged to operations was fifteen percent (15%) of net profit.

 

   -52-  
 

 

2017 Equity Incentive Plan

 

On August 23, 2017, our board approved, subject to shareholder approval at the annual meeting of shareholders 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 2,375,000 shares of our common stock will be initially authorized and reserved for issuance under the Equity Plan. This reserve will automatically increase on January 1, 2018 and 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.

 

Appropriate adjustments will be made in the number of authorized shares and other numerical limits in the Equity Plan and in outstanding awards to prevent dilution or enlargement of participants’ rights in the event of a stock split or other change in our capital structure. Shares subject to awards which expire or are cancelled or forfeited will again become available for issuance under the Equity Plan. The shares available will not be reduced by awards settled in cash or by shares withheld to satisfy tax withholding obligations. Only the net number of shares issued upon the exercise of stock appreciation rights or options exercised by means of a net exercise or by tender of previously owned shares will be deducted from the shares available under the Equity Plan.

 

The Equity Plan will be generally administered by the compensation committee of our board of directors. Subject to the provisions of the Equity Plan, the compensation committee will determine in its discretion the persons to whom and the times at which awards are granted, the sizes of such awards and all of their terms and conditions. However, the compensation committee may delegate to one or more of our officers the authority to grant awards to persons who are not officers or directors, subject to certain limitations contained in the Equity Plan and award guidelines established by the committee. The compensation committee will have the authority to construe and interpret the terms of the Equity Plan and awards granted under it. The Equity Plan provides, subject to certain limitations, for indemnification by us of any director, officer or employee against all reasonable expenses, including attorneys’ fees, incurred in connection with any legal action arising from such person’s action or failure to act in administering the Equity Plan.

 

The Equity Plan will authorize the compensation committee, without further stockholder approval, to provide for the cancellation of stock options or stock appreciation rights with exercise prices in excess of the fair market value of the underlying shares of common stock in exchange for new options or other equity awards with exercise prices equal to the fair market value of the underlying common stock or a cash payment.

 

The Equity Plan limits the grant date fair value of all equity awards and the amount of cash compensation that may be provided to a non-employee director in any fiscal year to an aggregate of $300,000.

 

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. We may grant nonstatutory stock options or incentive stock options (as described in Section 422 of the Internal Revenue Code), each of which gives its holder the right, during a specified term (not exceeding 10 years) and subject to any specified vesting or other conditions, to purchase a number of shares of our common stock at an exercise price per share determined by the administrator, which may not be less than the fair market value of a share of our common stock on the date of grant.
     
  Stock appreciation rights. A stock appreciation right gives its holder the right, during a specified term (not exceeding 10 years) and subject to any specified vesting or other conditions, to receive the appreciation in the fair market value of our common stock between the date of grant of the award and the date of its exercise. We may pay the appreciation in shares of our common stock or in cash.
     
  Restricted stock. The administrator may grant restricted stock awards either as a bonus or as a purchase right at such price as the administrator determines. Shares of restricted stock remain subject to forfeiture until vested, based on such terms and conditions as the administrator specifies. Holders of restricted stock will have the right to vote the shares and to receive any dividends paid, except that the dividends will be subject to the same vesting conditions as the related shares.

 

   -53-  
 

 

  Restricted stock units. Restricted stock units represent rights to receive shares of our common stock (or their value in cash) at a future date without payment of a purchase price, subject to vesting or other conditions specified by the administrator. Holders of restricted stock units have no voting rights or rights to receive cash dividends unless and until shares of common stock are issued in settlement of such awards. However, the administrator may grant restricted stock units that entitle their holders to dividend equivalent rights subject to the same vesting conditions as the related units.
     
  Performance shares and performance units. Performance shares and performance units are awards that will result in a payment to their holder only if specified performance goals are achieved during a specified performance period. Performance share awards are rights denominated in shares of our common stock, while performance unit awards are rights denominated in dollars. The administrator establishes the applicable performance goals based on one or more measures of business performance enumerated in the Equity Plan, such as revenue, gross margin, net income or total stockholder return. To the extent earned, performance share and unit awards may be settled in cash or in shares of our common stock. Holders of performance shares or performance units have no voting rights or rights to receive cash dividends unless and until shares of common stock are issued in settlement of such awards. However, the administrator may grant performance shares that entitle their holders to dividend equivalent rights subject to the same vesting conditions as the related units.
     
  Cash-based awards and other stock-based awards. The administrator may grant cash-based awards that specify a monetary payment or range of payments or other stock-based awards that specify a number or range of shares or units that, in either case, are subject to vesting or other conditions specified by the administrator. Settlement of these awards may be in cash or shares of our common stock, as determined by the administrator. Their holder will have no voting rights or right to receive cash dividends unless and until shares of our common stock are issued pursuant to the award. The administrator may grant dividend equivalent rights with respect to other stock-based awards.

 

In the event of a change in control as described in the Equity Plan, the acquiring or successor entity may assume or continue all or any awards outstanding under the Equity Plan or substitute substantially equivalent awards. Any awards which are not assumed or continued in connection with a change in control or are not exercised or settled prior to the change in control will terminate effective as of the time of the change in control. The compensation committee may provide for the acceleration of vesting of any or all outstanding awards upon such terms and to such extent as it determines, except that the vesting of all awards held by members of the board of directors who are not employees will automatically be accelerated in full. The Equity Plan will also authorize the compensation committee, in its discretion and without the consent of any participant, to cancel each or any outstanding award denominated in shares upon a change in control in exchange for a payment to the participant with respect to each share subject to the cancelled award of an amount equal to the excess of the consideration to be paid per share of common stock in the change in control transaction over the exercise price per share, if any, under the award.

 

The Equity Plan will continue in effect until it is terminated by the administrator, provided, however, that all awards will be granted, if at all, within 10 years of its effective date. The administrator may amend, suspend or terminate the Equity Plan at any time, provided that without stockholder approval, the plan cannot be amended to increase the number of shares authorized, change the class of persons eligible to receive incentive stock options, or effect any other change that would require stockholder approval under any applicable law or listing rule.

 

   -54-  
 

 

Outstanding Equity Awards at 2016 Fiscal Year-End

 

The following table provides information concerning unexercised options, stock that has not vested and equity incentive plan awards for each named executive officer outstanding as of December 31, 2016:

 

OPTION AWARDS
Name   Grant
Date
  Number of Securities Underlying Unexercised Options (#) Exercisable     Number of Securities Underlying Unexercised Options (#) Unexercisable     Equity Incentive Plan Awards: Number of Securities Underlying Unexercised Unearned Options (#)     Option Exercise Price
($)
    Option Expiration Date
Robert D. Ferris   1/1/2010     15,000            -           -     $ 0.70     1/1/2017
    4/1/2010     15,000       -       -     $ 0.68     4/1/2017
    7/1/2010     15,000       -       -     $ 0.52     7/1/2017
    10/1/2010     15,000       -       -     $ 0.60     10/1/2017
    1/3/2011     15,000       -       -     $ 0.75     1/3/2018
    4/1/2011     15,000       -       -     $ 0.70     4/1/2018
    7/1/2011     15,000       -       -     $ 0.94     7/1/2018
    10/1/2011     15,000       -       -     $ 0.65     10/1/2018
    1/1/2012     15,000       -       -     $ 0.70     1/1/2019
    4/1/2012     10,000       -       -     $ 0.70     4/1/2019
    7/2/2012     10,000       -       -     $ 0.57     7/2/2019
    10/1/2012     10,000       -       -     $ 0.66     10/1/2019
    1/2/2013     10,000       -       -     $ 0.49     1/2/2020
    4/1/2013     10,000       -       -     $ 0.42     4/1/2020
    7/1/2013     10,000       -       -     $ 0.46     7/1/2020
    10/1/2013     10,000       -       -     $ 0.45     10/1/2020
    1/2/2014     10,000       -       -     $ 0.68     1/2/2021
    4/1/2014     10,000       -       -     $ 0.72     4/1/2021
    7/1/2014     10,000       -       -     $ 0.49     7/1/2021
    10/1/2014     10,000       -       -     $ 1.05     10/1/2021
    1/2/2015     10,000       -       -     $ 1.44     1/2/2022
    4/1/2015     10,000       -       -     $ 1.60     4/1/2022
    7/1/2015     10,000       -       -     $ 0.95     7/1/2022
    10/1/2015     10,000       -       -     $ 0.85     10/1/2022
    1/4/2016     10,000       -       -     $ 1.40     1/4/2023
    4/1/2016     10,000       -       -     $ 1.12     4/1/2023
    7/1/2016     10,000       -       -     $ 2.10     7/1/2023
    10/1/2016     10,000       -       -     $ 2.94     10/1/2023
Total         325,000                              

 

   -55-  
 

 

OPTION AWARDS
Name   Grant Date   Number of Securities Underlying Unexercised Options (#) Exercisable     Number of Securities Underlying Unexercised Options (#) Unexercisable     Equity Incentive Plan Awards: Number of Securities Underlying Unexercised Unearned Options (#)     Option Exercise Price
($)
    Option Expiration Date
Matthew Burlend   1/1/2010     10,000           -           -     $ 0.70     1/1/2017
    4/1/2010     10,000       -       -     $ 0.68     4/1/2017
    7/1/2010     10,000       -       -     $ 0.52     7/1/2017
    10/1/2010     10,000       -       -     $ 0.60     10/1/2017
    1/3/2011     10,000       -       -     $ 0.75     1/3/2018
    4/1/2011     10,000       -       -     $ 0.70     4/1/2018
    7/1/2011     10,000       -       -     $ 0.94     7/1/2018
    10/1/2011     10,000       -       -     $ 0.65     10/1/2018
    1/1/2012     10,000       -       -     $ 0.70     1/1/2019
    4/1/2012     7,500       -       -     $ 0.70     4/1/2019
    7/2/2012     7,500       -       -     $ 0.57     7/2/2019
    10/1/2012     7,500       -       -     $ 0.66     10/1/2019
    1/2/2013     7,500       -       -     $ 0.49     1/2/2020
    4/1/2013     7,500       -       -     $ 0.42     4/1/2020
    7/1/2013     7,500       -       -     $ 0.46     7/1/2020
    10/1/2013     7,500       -       -     $ 0.45     10/1/2020
    1/2/2014     7,500       -       -     $ 0.68     1/2/2021
    4/1/2014     7,500       -       -     $ 0.72     4/1/2021
    7/1/2014     7,500       -       -     $ 0.49     7/1/2021
    10/1/2014     7,500       -       -     $ 1.05     10/1/2021
    1/2/2015     7,500       -       -     $ 1.44     1/2/2022
    4/1/2015     7,500       -       -     $ 1.60     4/1/2022
    7/1/2015     7,500       -       -     $ 0.95     7/1/2022
    10/1/2015     7,500       -       -     $ 0.85     10/1/2022
    1/4/2016     7,500       -       -     $ 1.40     1/4/2023
    4/1/2016     7,500       -       -     $ 1.12     4/1/2023
    7/1/2016     7,500       -       -     $ 2.10     7/1/2023
    10/1/2016     7,500       -       -     $ 2.94     10/1/2023
Subtotal         232,500                          

 

   -56-  
 

 

Securities Authorized for Issuance under Equity Compensation Plans

 

The following table sets forth securities authorized for issuance under any equity compensation plans approved by our shareholders as well as any equity compensation plans not approved by our shareholders as of December 31, 2016.

 

    Number of securities to be issued upon exercise of outstanding options, warrants and rights (a)     Weighted average exercise price of outstanding options, warrants and rights (b)     Number of securities remaining available for future issuance under equity compensation plans (excluding securities reflected in column (a) (c)  
Plan category(1)                  
Plans approved by our shareholders:                  
None.     -     $           -              -  
                         
Plans not approved by shareholders:                        
Stock Option Plan(1)     1,115,833     $ 0.80       -  

 

(1) We periodically issue non-qualified incentive 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.

 

SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

 

The following table sets forth information about the beneficial ownership of our Common Stock at August 17, 2017 and as adjusted to reflect the sale of the shares of Common Stock in this offering, for:

 

  each person known to us to be the beneficial owner of more than 5% of our Common Stock;
     
  each named executive officer;
     
  each of our directors; and
     
  all of our executive officers and directors as a group.

 

Unless otherwise noted below, the address for each beneficial owner listed on the table is in care of VirTra, Inc., 7970 S. Kyrene Road, Tempe, AZ 85284. We have determined beneficial ownership in accordance with the rules of the SEC. Except as indicated by the footnotes below, we believe, based on the information furnished to us, that the persons and entities named in the tables below have sole voting and investment power with respect to all shares of Common Stock that they beneficially own, subject to applicable community property laws. We have based our calculation of the percentage of beneficial ownership on 15,855,291 shares of our Common Stock outstanding as of August 17, 2017.

 

   -57-  
 

 

In computing the number of shares of Common Stock beneficially owned by a person and the percentage ownership of that person, we deemed outstanding shares of Common Stock subject to options or issuable upon conversion of preferred stock held by that person that are currently exercisable or exercisable within 60 days of August 17, 2017. We did not deem these shares outstanding, however, for the purpose of computing the percentage ownership of any other person.

 

Common Stock

 

    Shares Beneficially Owned     Percentage of Shares
Beneficially Owned
 
          Before Offering     After Offering  
Name of Beneficial Owner                        
5% Stockholders:                        
Robert D. Ferris(1)     989,435       6.1 %       %
                         
Directors and Named Executive Officers:                        
Robert D. Ferris(1)     989,435       6.1 %       %
Jeffrey Brown(2)     120,900       0.8 %       %
Mitchell A. Saltz(3)     58,333       0.4 %        
Matthew Burlend(4)     225,000       1.4 %        
Donna Moore(5)     -       -       -  
All named executive officers and directors as a group (five persons)     1,393,668       8.4 %     ________ %

 

* Represents less than 1%

 

  (1) The number of shares beneficially owned by Mr. Ferris includes: 679,435 shares of our common stock presently outstanding, options to purchase 310,000 shares of our common stock at prices ranging from $0.42 to $2.94 and excludes 500,000 shares of our common stock held by a custodian for the benefit of his children. Mr. Ferris disclaims beneficial ownership of the 500,000 shares held for the benefit of his children.
     
  (2) The number of shares beneficially owned by Mr. Brown includes: 900 shares of our common stock presently outstanding and options to purchase 120,000 shares of our common stock at prices ranging from $0.40 to $2.70.
     
  (3) The number of shares beneficially owned by Mr. Saltz includes: 40,000 shares of our common stock presently outstanding and options to purchase 18,333 shares of our common stock at per share prices ranging from $1.88 to $2.69.
     
  (4) The number of shares beneficially owned by Mr. Burlend includes: options to purchase 225,000 shares of our common stock at prices ranging from $0.42 to $2.94.
     
  (5)  Ms. Moore resigned as our Interim Chief Financial Officer on August 24, 2017 and Judy Henry was appointed to succeed her on the same day

 

CERTAIN RELATIONSHIPS AND RELATED PARTY TRANSACTIONS

 

In addition to the compensation arrangements, including employment, termination of employment and change in control arrangements and indemnification arrangements, discussed in the sections titled “Management” and “Executive Compensation,” the following is a description of each transaction since January 1, 2015 and each currently proposed transaction in which:

 

  We have been or will be a participant;
     
  the amount involved exceeds the lesser of $120,000 or one percent of the average of our total assets at year end for the last two completed fiscal years; and
     
  any of our directors, executive officers or beneficial owners of more than 5% of our capital stock, or any immediate family member of, or person sharing the household with, any of these individuals, had or will have a direct or indirect material interest.

 

   -58-  
 

 

On January 16, 2015, we entered into a Co-Venture Agreement with Modern Round and in connection with this agreement we agreed to develop interactive games, skills drills, and advanced training simulation content for Modern Round and license VirTra Technology to Modern Round for a portion of its total revenue, acquired rights to purchase MREC common stock and issued to affiliates of MREC that included Mr. Saltz, warrants to purchase an aggregate of 1,838,764 shares of our common stock at a price of $1.36 per share. Pursuant to our rights to acquire shares of MREC common stock we obtained pursuant to this agreement, we acquired 3,353,495 shares of MREC common stock representing approximately 8.9% of its issued and outstanding common stock. See “Business - Modern Round Co-Venture Agreement.”

 

On July 1, 2016, we issued 50,000 shares of our Series A Preferred stock to Mr. Ferris and he paid $2,500 for these shares. Effective on September 16, 2016, these 50,000 shares of the Series A Preferred shares were automatically redeemed from Mr. Ferris by us for $2,500 and cancelled.

 

During the fiscal year ending 2016, we received $ 90,047 in revenues from MREC.

 

Mr. Mitch Saltz, a member of the Company’s Board of Directors, is also Chairman of the Board of Directors and a majority stockholder of MREC. Through the terms of the Co-Venture Agreement, the Company acquired 3,353,495 shares of MREC common stock representing approximately 8.9% of the issued and outstanding shares of MREC common stock. In addition, MREC paid the Company $160,417 and $9,915 for license fees (royalties) for the three months ended June 30, 2017 and 2016, respectively pursuant to the terms of the Co-Venture Agreement and $204,229 and $9,915 for the six months ended June 30, 2017 and 2016, respectively.

 

Effective August 16, 2017, the Company agreed to repurchase warrants held by Mr. Saltz and other affiliates of MREC for an aggregate of purchase price of $773,495. The warrants were assigned to MREC and the proceeds are intended to be used by MREC to fund the development of a second stand-alone Modern Round location under the Co-Venture Agreement. In addition, effective August 16, 2017, the Company and MREC amended the Co-Venture agreement to permit MREC to sublicense certain of our technology to third party operators of stand-alone location-based entertainment companies and revise the royalties for any such sublicenses. See “Business - Modern Round Co-Venture Agreement.”

 

Indemnification of Directors and Officers

 

Our bylaws provide that we will indemnify each of our directors and officers to the fullest extent permitted by NRS. Further, employment agreements with our Chief Executive Officer and Chief Operating Officer, both of whom are directors, require us, among other things, to indemnify these individuals for certain expenses (including attorneys’ fees), judgments, fines and settlement amounts reasonably incurred by such person in any action or proceeding, including any action by or in our right, on account of any services undertaken by such person on behalf of our company or that person’s status as an officer or a member of our Board of Directors to the maximum extent allowed under Nevada law. We also maintain directors’ and officers’ liability insurance.

 

Policies and Procedures for Related Person Transactions

 

All future transactions, if any, between us and our officers, directors and principal stockholders and their affiliates, as well as any transactions between us and any entity with which our officers, directors or principal stockholders are affiliated will be reviewed and approved or ratified in accordance with policies and procedures that our board of directors intends to adopt effective upon the completion of this offering. Such policies and procedures will require that related person transactions be approved by the audit committee or our board of directors or otherwise in accordance with the then applicable SEC and rules and regulations governing the approval of such transactions. The audit committee and the board of directors have adopted policies and procedures for review of, and standards for approval of related party transactions. These policies and procedures have not been and will not be applied to the related party transactions described above.

 

   -59-  
 

 

All future affiliated transactions will be made or entered into on terms that are no less favorable to us than those that can be obtained from any unaffiliated third party. A majority of the independent, disinterested members of our board of directors will approve future affiliated transactions, and we will maintain at least two independent directors on our board of directors to review all material transactions with affiliates.

 

DESCRIPTION OF CAPITAL STOCK

 

We are offering a minimum of [__] shares of Common Stock and maximum of [__] shares of Common Stock (the “Offered Shares”), par value of $0.0001 per share (the “Common Stock”), on a “best efforts” basis, pursuant to this Offering Circular. The following description of our capital stock is based upon our articles of incorporation, our bylaws, and applicable provisions of law, in each case as currently in effect. This discussion does not purport to be complete and is qualified in its entirety by reference to our articles of incorporation and our bylaws, copies of which are filed with the SEC as exhibits to this Offering Circular.

 

Pursuant to our articles of incorporation filed with the Nevada Secretary of State on September 22, 2016, our authorized capital stock consists of 125,000,000 shares of capital stock with a par value of $0.0001 per share, consisting of 100,000,000 shares of Common Stock, par value of $0.0001 per share, 5,000,000 shares of Class A Common Stock, par value of $0.0001 per share, 15,000,000 shares of Class B Common Stock, par value of $0.0001 per share, and 5,000,000 shares of preferred stock, par value of $0.0001 per share, which may, at the sole discretion of the Board of Directors be issued in one or more series (the “Preferred Stock”).

 

The Board may from time to time authorize by resolution the issuance of any or all shares of the Common Stock, Class A Common Stock, Class B Common Stock, and the Preferred Stock authorized in accordance with the terms and conditions set forth in the articles of incorporation for such purposes, in such amounts, to such persons, corporations, or entities, for such consideration and in the case of the Preferred Stock, in one or more series, all as the Board in its discretion may determine and without any vote or other action by the stockholders, except as otherwise required by law.

 

Common Stock

 

Holders of our Common Stock are entitled to one vote for each share on all matters submitted to a stockholder vote, holders of our Class A Common Stock are entitled to 10 votes for each share on all matters submitted to a stockholder vote voting together with the Common Stock together as a single class and Holders of our Class B Common Stock are not 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. Holders of Common Stock and Class A Common Stock do not have cumulative voting rights. Therefore, holders of a majority of the votes of holders of the Common Stock and Class A Common Stock voting for the election of directors can elect all of the directors. Holders of our Common Stock and Class A Common Stock representing a one-third of the voting power of our capital stock issued, outstanding and entitled to vote, represented in person or by proxy, are necessary to constitute a quorum at any meeting of stockholders.

 

Holders of our Common Stock, Class A Common Stock and Class B Common Stock are entitled to share in all dividends that our Board of Directors, in its discretion, declares from legally available funds. In the event of a liquidation, dissolution or winding up, each outstanding share entitles its holder to participate pro rata in all assets that remain after payment of liabilities and after providing for each class of stock, if any, having preference over the Common Stock, Class A Common Stock and Class B Common Stock. Our Common Stock, Class A Common Stock and Class B Common Stock have no pre-emptive rights, no conversion rights and there are no redemption provisions applicable to our capital stock.

 

Preferred Stock

 

The Board of Directors is authorized at any time, and from time to time, to provide the 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. For each series, the Board of directors shall determine, by resolution or resolutions adopted prior to the issuance of any shares thereof, the designations, preferences, limitations and relative or other rights thereof. The issuance of preferred stock may have the effect of delaying, deferring or preventing a change in control of our company without further action by stockholders and could adversely affect the rights and powers, including voting rights, of the holders of common stock.

 

   -60-  
 

 

Warrants

 

At June 30, 2017, we had outstanding warrants to purchase an aggregate of 1,838,764 shares of Common Stock, exercisable at a price of $1.36 per share that were issued in connection with the Co-Venture Agreement we entered into with MREC on January 16, 2015 (the “MREC Warrants”). The MREC warrants expire on January 16, 2020. The MREC Warrants are exercisable as follows: (i) 919,382 warrants may be exercised commencing at the earlier of the first anniversary of MREC’s opening its first range facility utilizing VirTra Technology or after MREC opening its first range facility utilizing VirTra Technology and the payment of all required US/Canada Minimum Royalty Payments during the first 12 month period has been made to VirTra and (ii) 919,382 warrants may be exercised any time subsequent to MREC’s payment of $2,000,000 in royalty fees to us.

 

Effective August 16, 2017, the Company agreed to repurchase the MREC Warrants for an aggregate of purchase price of $773,495. The warrants were assigned to MREC and the proceeds are intended to be used by MREC to fund the development of a second stand-alone Modern Round location under the Co-Venture Agreement. In addition, effective August 16, 2017, the Company and MREC amended the Co-Venture agreement to permit MREC to sublicense certain of our technology to third party operators of stand-alone location-based entertainment companies and revise the royalties for any such sublicenses. See “Business - Modern Round Co-Venture Agreement.”

 

Anti-Takeover Effects of Various Provisions of Nevada Law and our Articles of Incorporation

 

Provisions of the NRS and our Articles of Incorporation and Bylaws could make it more difficult to acquire us by means of a tender offer, a proxy contest or otherwise, or to remove incumbent officers and directors. These provisions, summarized below, would be expected to discourage certain types of coercive takeover practices and takeover bids our board of directors may consider inadequate and to encourage persons seeking to acquire control of us to first negotiate with us. We believe that the benefits of increased protection of our ability to negotiate with the proponent of an unfriendly or unsolicited proposal to acquire or restructure us will outweigh the disadvantages of discouraging takeover or acquisition proposals because, among other things, negotiation of these proposals could result in an improvement of their terms.

 

Effects of authorized but unissued common stock and blank check preferred stock. One of the effects of the existence of authorized but unissued common stock and undesignated preferred stock may be to enable our board of directors to make more difficult or to discourage an attempt to obtain control of our company by means of a merger, tender offer, proxy contest or otherwise, and thereby to protect the continuity of management. If, in the due exercise of its fiduciary obligations, the board of directors were to determine that a takeover proposal was not in our best interest, such shares could be issued by the board of directors without stockholder approval in one or more transactions that might prevent or render more difficult or costly the completion of the takeover transaction by diluting the voting or other rights of the proposed acquirer or insurgent stockholder group, by putting a substantial voting bloc in institutional or other hands that might undertake to support the position of the incumbent board of directors, by effecting an acquisition that might complicate or preclude the takeover, or otherwise.

 

In addition, our certificate of incorporation grants our board of directors broad power to establish the rights and preferences of authorized and unissued shares of preferred stock. The issuance of shares of preferred stock could decrease the amount of earnings and assets available for distribution to holders of shares of common stock. The issuance also may adversely affect the rights and powers, including voting rights, of those holders and may have the effect of delaying, deterring or preventing a change in control of our company.

 

Prohibition on Cumulative Voting. Our Articles of Incorporation prohibit cumulative voting in the election of directors.

 

   -61-  
 

 

Removal of Directors. Our Bylaws provide that a director may only be removed from office for cause by a vote of the majority of shares entitled to vote at a meeting of the shareholders held for the purpose of removing a director.

 

Authorized but Unissued Shares. Our authorized but unissued shares of Common Stock and Preferred Stock are available for future issuance without shareholder approval. The existence of authorized but unissued shares of Common Stock and Preferred Stock could render more difficult or discourage an attempt to obtain control of us by means of a proxy contest, tender offer, merger or otherwise.

 

Interested Stockholder Statute. We are subject to Nevada’s Combination with Interested Stockholders Statute (Nevada Revised Statutes (“NRS”) Sections 78.411 through 78.444) which prohibits an “interested stockholder” from entering into a “combination” with us, unless certain conditions are met. An “interested stockholder” is a person who, together with affiliates and associates, beneficially owns (or within the prior two years, did beneficially own) 10% or more of our capital stock entitled to vote. We have, however, elected in our Articles of Incorporation to not be governed by the provisions of NRS Sections 78.411 through 78.444.

 

Limitations on Liability and Indemnification of Officers and Directors. NRS limits or eliminates the personal liability of directors to corporations and their stockholders for monetary damages for breaches of directors’ fiduciary duties as directors. Our Articles of Incorporation include provisions that require us to indemnify, to the fullest extent allowable under the NRS, our directors or officers against monetary damages for actions taken as a director or officer of our company, or for serving at our request as a director or officer or another position at another corporation or enterprise, as the case may be. Our Articles of Incorporation also provide that we must indemnify and advance reasonable expenses to our directors and officers, subject to our receipt of an undertaking from the indemnified party as may be required under the NRS. We are also expressly authorized to carry directors’ and officers’ insurance to protect our company, our directors, officers and certain employees for some liabilities.

 

The limitation of liability and indemnification provisions under the NRS and in our Articles of Incorporation and Bylaws may discourage stockholders from bringing a lawsuit against directors for breach of their fiduciary duties. These provisions may also have the effect of reducing the likelihood of derivative litigation against directors and officers, even though such an action, if successful, might otherwise benefit us and our stockholders. However, these provisions do not limit or eliminate our rights, or those of any stockholder, to seek non-monetary relief such as injunction or rescission in the event of a breach of a director’s fiduciary duties. Moreover, the provisions do not alter the liability of directors under the federal securities laws.

 

Transfer Agent

 

The transfer agent for our Common Stock is Continental Stock & Transfer & Trust Company located at 17 Battery Place, New York, NY 10004 and its telephone number is (212) 509-4000.

 

SHARES ELIGIBLE FOR FUTURE SALE

 

Shares Eligible for Future Sale

 

Prior to this offering, our shares of common stock have been quoted on the OTCQX tier of the OTC Markets. Although there has been a public market for our common stock, we cannot predict the effect, if any, that market sales of shares of our common stock or the availability of shares of our common stock for sale will have on the market price of our common stock prevailing from time to time. Nevertheless, sales of substantial amounts of our common stock, including shares issued upon exercise of outstanding options or warrants, or the perception that these sales could occur in the public market after this offering could adversely affect market prices prevailing from time to time and could impair our ability to raise capital through the sale of our equity securities.

 

Upon completion of this offering, assuming the maximum amount of shares of Common Stock offered in this offering are sold, there will be approximately 15,126,811 shares of our Common Stock outstanding. This number excludes any issuance of additional shares of Common Stock that could occur in connection with:

 

  any exercise of stock options outstanding as of the date of this Offering Circular.

 

   -62-  
 

 

These 15,126,811 shares of our Common Stock will be freely tradable in the public market, except to the extent they are held by or acquired by an “affiliate” of ours, as such term is defined in Rule 405 under the Securities Act. Under Rule 405, an affiliate of a specified person is a person that directly, or indirectly through one or more intermediaries, controls or is controlled by, or is under common control with, the specified person. Any affiliate of ours that acquires our shares can only further transact in such shares in compliance with Rule 144 under the Securities Act, which imposes sales volume limitations and other restrictions on such further transactions. See “— Rule 144,” below. In addition to the foregoing, 663,038 shares of our Common Stock not sold in this offering will be restricted securities written the meaning of Rule 144, and would be tradable only if they are sold pursuant to a registration statement under the Securities Act or if they qualify for an exemption from registration, including under Rule 144. See “— Rule 144,” below.

 

Rule 144

 

In general, under Rule 144 as currently in effect, any person who is or has been an affiliate of ours during the 90 days immediately preceding the sale and who has beneficially owned shares for at least six months is entitled to sell, within any three-month period commencing 90 days after the date of this Offering Circular, a number of shares that does not exceed the greater of:

 

  1% of the then-outstanding shares of common stock, which will equal approximately 159,000 shares immediately after this offering; and
     
  the average weekly trading volume during the four calendar weeks preceding the sale, subject to the filing of a Form 144 with respect to the sale.

 

Sales under Rule 144 by our affiliates are also subject to certain manner of sale provisions and notice requirements and to the availability of current public information about us.

 

A person who is not deemed to have been an affiliate of ours at any time during the 90 days immediately preceding the sale and who has beneficially owned his or her shares for at least six months is entitled to sell his or her shares under Rule 144 without regard to the limitations described above, subject only to the availability of current public information about us during the six months after the initial six-month holding period is met. After a non-affiliate has beneficially owned his or her shares for one year or more, he or she may freely sell his or her shares under Rule 144 without complying with any Rule 144 requirements.

 

We are unable to estimate the number of shares that will be sold under Rule 144, since this will depend on the market price for our common stock, the personal circumstances of the sellers and other factors. Prior to the offering, there has been no public market for the common stock, and there can be no assurance that a significant public market for the common stock will develop or be sustained after the offering. Any future sale of substantial amounts of the common stock in the open market may adversely affect the market price of the common stock offered by this Offering Circular.

 

Rule 701

 

In general, under Rule 701 under the Securities Act, any of our employees, directors, consultants or advisors who purchased shares from us in connection with a qualified compensatory stock or option plan or other written agreement and in compliance with Rule 701, is eligible to resell those shares 90 days after the effective date of this offering in reliance on Rule 144, but without compliance with the various restrictions, including the holding period, contained in Rule 144.

 

Lock-Up Agreements

 

Mr. Robert Ferris has agreed, or will agree, with the Underwriter, subject to certain exceptions, that, without the prior written consent of the Underwriter, we and he will not, directly or indirectly, during the period ending 365 days after the date of the Offering Circular.

 

   -63-  
 

 

● offer, pledge, sell, contract to sell, sell any option or contract to purchase, purchase any option or contract to sell, grant any option, right or warrant for the sale of, or otherwise dispose of or transfer any shares of the Common Stock or any securities convertible into or exchangeable or exercisable for the Common Stock, whether now owned or hereafter acquired by the undersigned or with respect to which the undersigned has or hereafter acquires the power of disposition; or

 

● enter into any swap or any other agreement or any transaction that transfers, in whole or in part, the economic consequence of ownership of the Common Stock, whether any such swap or transaction is to be settled by delivery of the Common Stock or other securities, in cash or otherwise.

 

This agreement does not apply, in our case, to securities issued pursuant to existing employee benefit plans or securities issued upon exercise of options, and other exceptions, and in the case of our officers, directors and other holders of our securities, exercise of stock options issued pursuant to a stock option or similar plans, and other exceptions.

 

CERTAIN UNITED STATES FEDERAL INCOME TAX CONSEQUENCES TO NON-U.S. HOLDERS

 

The following is a summary of certain United States federal income tax consequences generally applicable to the ownership and disposition of our common stock by a non-U.S. holder (as defined below) that purchases our common stock pursuant to this offering and holds such common stock as a “capital asset” within the meaning of the Code. This discussion is based on currently existing provisions of the Code, applicable United States Treasury regulations promulgated thereunder, judicial decisions, and rulings and pronouncements of the United States Internal Revenue Service (the “IRS”) all as in effect on the date hereof and all of which are subject to change, possibly with retroactive effect, or subject to different interpretation. This discussion does not address all the tax consequences that may be relevant to specific holders in light of their particular circumstances or to holders subject to special treatment under United States federal income tax laws (such as financial institutions, insurance companies, tax-exempt organizations, controlled foreign corporations, passive foreign investment companies, retirement plans, partnerships and their partners, dealers in securities, brokers, United States expatriates, persons who have acquired our common stock as compensation or otherwise in connection with the performance of services, or persons who have acquired our common stock as part of a straddle, hedge, conversion transaction or other integrated investment). This discussion does not address the state, local, or foreign tax or United States federal estate or alternative minimum tax consequences relating to the ownership and disposition of our common stock. Prospective investors should consult their tax advisors regarding the United States federal tax consequences of owning and disposing of our common stock, as well as the applicability and effect of any state, local or foreign tax laws.

 

As used in this discussion, the term “non-U.S. holder” refers to a beneficial owner of our common stock that is not, for United States federal income tax purposes, any of the following:

 

  an individual who is a citizen or resident of the United States;
     
  a corporation (or other entity or arrangement taxable as a corporation for United States federal income tax purposes) created or organized in or under the laws of the United States or any state thereof, including the District of Columbia;
     
  any entity or arrangement treated as a partnership for United States federal income tax purposes;
     
  an estate the income of which is subject to United States federal income tax regardless of its source; or
     
  a trust (i) if a court within the United States is able to exercise primary supervision over its administration and one or more United States persons have the authority to control all of its substantial decisions, or (ii) that has in effect a valid election under applicable Treasury regulations to be treated as a United States person.

 

If a partnership or other entity or arrangement treated as a partnership for United States federal income tax purposes holds our common stock, the tax treatment of a partner will generally depend upon the status of the partner and the activities of the partnership. A partnership that holds our common stock and any partner who owns an interest in such a partnership should consult their tax advisors regarding the United States federal income tax consequences of an investment in our common stock.

 

   -64-  
 

 

You should consult your tax advisors concerning the particular United States federal income tax consequences to you of the purchase, ownership, and disposition of our common stock as well as the consequences to you arising under the laws of any other applicable taxing jurisdiction in light of your particular circumstances.

 

Distributions on Common Stock

 

As discussed under “Dividend Policy” above, we do not currently expect to make distributions on our stock. If we do make a distribution of cash or other property (other than certain distributions of our stock or rights to acquire our stock) in respect of our common stock, the distribution generally will be treated as a dividend to the extent of our current or accumulated earnings and profits as determined under United States federal income tax principles. Any portion of a distribution that exceeds our current and accumulated earnings and profits will generally be treated first as a tax-free return of capital, on a share-by-share basis, to the extent of the non-U.S. holder’s tax basis in our common stock, and, to the extent such portion exceeds the non-U.S. holder’s tax basis in our common stock, the excess will be treated as gain from the disposition of the common stock, the tax treatment of which is discussed below under “—Sale, Exchange or Other Taxable Disposition.”

 

The gross amount of dividends paid to a non-U.S. holder with respect to our common stock generally will be subject to United States federal withholding tax at a rate of 30%, unless (i) an applicable income tax treaty reduces or eliminates such tax, and the non-U.S. holder certifies that it is eligible for the benefits of such treaty in the manner described below, or (ii) the dividends are effectively connected with the non-U.S. holder’s conduct of a trade or business in the United States (and, if required by an applicable income tax treaty, are attributable to a permanent establishment maintained by the non-U.S. holder in the United States) and the non-U.S. holder satisfies certain certification and disclosure requirements. In the latter case, generally, a non-U.S. holder will be subject to United States federal income tax with respect to such dividends on a net income basis at regular graduated United States federal income tax rates in the same manner as a United States person (as defined under the Code). Additionally, a non-U.S. holder that is a corporation may be subject to a branch profits tax equal to 30% (or such lower rate as may be specified by an applicable income tax treaty) of its effectively connected earnings and profits for the taxable year, as adjusted for certain items.

 

A non-U.S. holder that wishes to claim the benefit of an applicable income tax treaty with respect to dividends on our common stock will be required to provide the applicable withholding agent with a valid IRS Form W-8BEN or W-8BEN-E (or other applicable form) and certify under penalties of perjury that such holder (i) is not a United States person (as defined under the Code) and (ii) is eligible for the benefits of such treaty, and the withholding agent must not have actual knowledge or reason to know that the certification is incorrect. This certification must be provided to the applicable withholding agent prior to the payment of dividends and may be required to be updated periodically. If our common stock is held through a non-United States partnership or non-United States intermediary, such partnership or intermediary will also be required to comply with additional certification requirements under applicable Treasury regulations. A non-U.S. holder eligible for a reduced rate of United States federal withholding tax pursuant to an income tax treaty may obtain a refund of any excess amounts withheld by timely filing an appropriate claim for refund with the IRS.

 

Prospective investors, and in particular prospective investors engaged in a United States trade or business, are urged to consult their tax advisors regarding the United States federal income tax consequences of owning our common stock.

 

Sale, Exchange, or Other Taxable Disposition

 

Generally, a non-U.S. holder will not be subject to United States federal income tax on gain realized upon the sale, exchange, or other taxable disposition of our common stock unless (i) the gain is effectively connected with such non-U.S. holder’s conduct of a trade or business in the United States (and, if required by an applicable income tax treaty, is attributable to a permanent establishment maintained by the non-U.S. holder in the United States), (ii) such non-U.S. holder is an individual present in the United States for 183 days or more in the taxable year of the sale, exchange, or other taxable disposition and certain other conditions are satisfied, or (iii) we are or become a “United States real property holding corporation” (as defined in Section 897(c) of the Code) at any time during the shorter of the five-year period ending on the date of disposition or the non-U.S. holder’s holding period for our common stock and either (a) our common stock has ceased to be traded on an established securities market prior to the beginning of the calendar year in which the sale, exchange or other taxable disposition occurs, or (b) the non-U.S. holder owns (actually or constructively) more than five percent of our common stock at some time during the shorter of the five-year period ending on the date of disposition or such holder’s holding period for our common stock. Although there can be no assurances in this regard, we believe that we are not a United States real property holding corporation, and we do not expect to become a United States real property holding corporation.

 

   -65-  
 

 

Generally, gain described in clause (i) of the immediately preceding paragraph will be subject to tax on a net income basis at regular graduated United States federal income tax rates in the same manner as if the non-U.S. holder were a United States person (as defined under the Code). A non-U.S. holder that is a corporation may also be subject to a branch profits tax equal to 30% (or such lower rate as may be specified by an applicable income tax treaty) of its effectively connected earnings and profits for the taxable year, as adjusted for certain items. An individual non-U.S. holder described in clause (ii) of the immediately preceding paragraph will be required to pay (subject to applicable income tax treaties) a flat 30% tax on the gain derived from the sale, exchange, or other taxable disposition, which may be offset by certain United States source capital losses, even though the individual is not considered a resident of the United States.

 

Foreign Account Tax Compliance Act

 

Withholding at a rate of 30% is required on dividends in respect of our common stock, and, after December 31, 2016 will be required on gross proceeds from the sale or other disposition of our common stock, in each case, held by or through certain foreign financial institutions (including investment funds), unless such institution enters into an agreement with the United States Treasury Department to report, on an annual basis, information with respect to interests in, and accounts maintained by, the institution that are owned by certain United States persons and by certain non-United States entities that are wholly or partially owned by United States persons and to withhold on certain payments. An intergovernmental agreement between the United States and an applicable foreign country, or future Treasury regulations, may modify these requirements. Accordingly, the entity through which our common stock is held will affect the determination of whether such withholding is required. Similarly, dividends in respect of, and gross proceeds from the sale or other disposition of, our common stock held by an investor that is a non-financial non-United States entity that does not qualify under certain exemptions will be subject to withholding at a rate of 30%, unless such entity either (i) certifies that such entity does not have any substantial United States owners or (ii) provides certain information regarding the entity’s substantial United States owners. Prospective investors should consult their tax advisors regarding the possible implications of these rules on their investment in our common stock.

 

LEGAL MATTERS

 

The validity of the securities offered by this Offering Circular will be passed upon for us by Legal & Compliance, LLC, 330 Clematis Street, Suite 217, West Palm Beach, Florida 33401.

 

EXPERTS

 

The financial statements as of December 31, 2016 and for the year then ended included in this Offering Circular have been audited by Friedman LLP, an independent registered public accounting firm, as stated in their report appearing herein. Such financial statements have been so included in reliance upon the report of such firm given on their authority as experts in accounting and auditing.

 

The financial statements as of December 31, 2015 and for the year then ended included in this Offering Circular have been audited by Semple, Marchal & Cooper, LLP, an independent registered public accounting firm, as stated in their report appearing herein. Such financial statements have been so included in reliance upon the report of such firm given on their authority as experts in accounting and auditing.

 

   -66-  
 

 

WHERE YOU CAN FIND MORE INFORMATION

 

We have filed an Offering Circular on Form 1-A with the Commission under Regulation A of the Securities Act with respect to the Common Stock offered by this Offering Circular. This Offering Circular, which constitutes a part of the Offering Circular, does not contain all of the information set forth in the Offering Circular or the exhibits and schedules filed therewith. For further information with respect to us and our Common Stock, please see the Offering Circular and the exhibits and schedules filed with the Offering Circular. Statements contained in this Offering Circular regarding the contents of any contract or any other document that is filed as an exhibit to the Offering Circular are not necessarily complete, and each such statement is qualified in all respects by reference to the full text of such contract or other document filed as an exhibit to the Offering Circular. The Offering Circular, including its exhibits and schedules, may be inspected without charge at the public reference room maintained by the Commission, located at 100 F Street, N.E., Room 1580, Washington, D.C. 20549, and copies of all or any part of the Offering Circular may be obtained from such offices upon the payment of the fees prescribed by the Commission. Please call the Commission at 1-800-SEC-0330 for further information about the public reference room. The Commission also maintains an Internet website that contains reports, proxy and information statements and other information regarding registrants that file electronically with the Commission. The address of the site is www.sec.gov.

 

We also maintain a website at www.virtra.com. After the completion of this offering, you may access these materials at our website free of charge as soon as reasonably practicable after they are electronically filed with, or furnished to, the Commission. Information contained on our website is not a part of this Offering Circular and the inclusion of our website address in this Offering Circular is an inactive textual reference only.

 

After the completion of this Tier II, Regulation A offering, we intend to become subject to the information and periodic reporting requirements of the Exchange Act. If we become subject to the reporting requirements of the Exchange Act, we will file periodic reports, proxy statements and other information with the Commission. Such periodic reports, proxy statements and other information will be available for inspection and copying at the public reference room and on the Commission’s website referred to above. Once we become subject to the reporting requirements of the Exchange Act, we will furnish the following reports, statements, and tax information to each stockholder:

 

  1. Reporting Requirements under Tier II of Regulation A. Following this Tier II, Regulation A offering, we will be required to comply with certain ongoing disclosure requirements under Rule 257 of Regulation A. We will be required to file: an annual report with the SEC on Form 1-K; a semi-annual report with the SEC on Form 1-SA; current reports with the SEC on Form 1-U; and a notice under cover of Form 1-Z. The necessity to file current reports will be triggered by certain corporate events, similar to the ongoing reporting obligation faced by issuers under the Exchange Act, however the requirement to file a Form 1-U is expected to be triggered by significantly fewer corporate events than that of the Form 8-K. Such reports and other information will be available for inspection and copying at the public reference room and on the Commission’s website referred to above. Parts I & II of Form 1-Z will be filed by us if and when we decide to and are no longer obligated to file and provide annual reports pursuant to the requirements of Regulation A.
     
  2. Annual Reports. As soon as practicable, but in no event later than one hundred twenty (120) days after the close of our fiscal year, ending on the last Sunday of a calendar year, our board of directors will cause to be mailed or made available, by any reasonable means, to each Stockholder as of a date selected by the board of directors, an annual report containing our financial statements for such fiscal year, presented in accordance with GAAP, including a balance sheet and statements of operations, company equity and cash flows, with such statements having been audited by an accountant selected by the board of directors. The board of directors shall be deemed to have made a report available to each stockholder as required if it has either (i) filed such report with the SEC via its Electronic Data Gathering, Analysis and Retrieval, or EDGAR, system and such report is publicly available on such system or (ii) made such report available on any website maintained by us and available for viewing by the stockholders.
     
  3. Tax Information. On or before January 31st of the year immediately following our fiscal year, which is currently January 1st through December 31st, we will send to each stockholder such tax information as shall be reasonably required for federal and state income tax reporting purposes.

 

   -67-  
 

 

INDEX TO FINANCIAL STATEMENTS

 

Unaudited financial statements for the six months ended June 30, 2017 and 2016  
Condensed Balance Sheets as of June 30, 2017 and December 31, 2016 F-2
Condensed Statements of Operations for the three and six months ended June 31, 2017 and 2016 F-3
Condensed Statements of Stockholder’s Equity for the period ended June 30, 2017 F-4
Condensed Statements of Cash Flows for the six months ended June 30, 2017 F-5
Notes to Condensed Financial Statements for the period ended June 30, 2017 F-6

 

 

Audited financial statements for the years ended December 31, 2016 and 2015  
Reports of Independent Registered Public Accounting Firms F-19
Balance Sheets as of December 31, 2016 and 2015 F-20
Statements of Operations for the years ended December 31, 2016 and 2015 F-21
Statement of Stockholders’ Equity for the years ended December 31, 2016 and 2015 F-22
Statements of Cash Flows for the years ended December 31, 2016 and 2015 F-23
Notes to Financial Statements for the years ended December 31, 2016 and 2015 F-24

 

   F-1  
 

 

VIRTRA, INC.

CONDENSED BALANCE SHEETS

(Unaudited)

 

    June 30, 2017     December 31, 2016  
ASSETS                
CURRENT ASSETS                
Cash and cash equivalents   $ 4,283,216     $ 3,703,579  
Accounts receivable, net     3,725,431       3,244,852  
Inventory     1,333,692       1,319,944  
Unbilled revenue     2,367,405       107,297  
Prepaid expenses and other current assets     305,532       250,066  
                 
Total current assets     12,015,276       8,625,738  
                 
Property and equipment, net     746,289       814,323  
Investment in MREC     1,988,174       471,928  
                 
TOTAL ASSETS   $ 14,749,739     $ 9,911,989  
                 
LIABILITIES AND STOCKHOLDERS' EQUITY                
                 
CURRENT LIABILITIES                
Accounts payable   $ 604,598     $ 467,679  
Accrued compensation and related costs     816,339       617,582  
Accrued expenses and other current liabilities     298,551       194,668  
Notes payable, current     11,250       11,250  
Deferred revenue     2,850,545       2,065,905  
                 
Total current liabilities     4,581,283       3,357,084  
                 
Long-term liabilities:                
Deferred rent liability     100,277       122,126  
Notes payable, long-term     22,500       22,500  
                 
Total long-term liabilities     122,777       144,626  
                 
Total liabilities     4,704,060       3,501,710  
                 
Commitments and contingencies                
STOCKHOLDERS' EQUITY                
Preferred stock $0.0001 par value; 5,000,000 authorized; no shares issued or outstanding     -       -  
Common stock $0.0001 par value; 100,000,000 shares authorized; 15,855,005 issued and 15,848,105 outstanding as of June 30, 2017 and 15,855,005 issued and outstanding as of December 31, 2016.     1,586       1,586  
Class A common stock $0.0001 par value; 5,000,000 shares authorized; no shares issued or outstanding     -       -  
Class B common stock $0.0001 par value; 15,000,000 shares authorized; no shares issued or outstanding     -       -  
Treasury stock at cost; 6,900 shares and no shares outstanding as of June 30, 2017 and December 31, 2016, respectively     (13,800 )     -  
Additional paid-in capital     15,727,265       14,128,044  
Accumulated deficit     (5,669,372 )     (7,719,351 )
                 
Total stockholders' equity     10,045,679       6,410,279  
                 
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY   $ 14,749,739     $ 9,911,989  

 

The accompanying notes are an integral part of these condensed financial statements

 

   F-2  
 

 

VIRTRA, INC.

CONDENSED STATEMENTS OF OPERATIONS

(Unaudited)

 

    Three Months Ended     Six Months Ended  
    June 30, 2017     June 30, 2016     June 30, 2017     June 30, 2016  
REVENUES                                
Net sales   $ 5,091,148     $ 3,375,967     $ 9,256,623     $ 9,608,261  
Royalties/licensing fees     160,417       9,915       204,229       9,915  
Total revenue     5,251,565       3,385,882       9,460,852       9,618,176  
                                 
Cost of sales     1,501,467       1,410,700       3,280,412       3,511,725  
                                 
Gross profit     3,750,098       1,975,182       6,180,440       6,106,451  
                                 
OPERATING EXPENSES                                
General and administrative     1,850,561       1,444,156       3,465,060       3,230,544  
Research and development     278,917       169,383       621,106       432,356  
                                 
Net operating expense     2,129,478       1,613,539       4,086,166       3,662,900  
                                 
Income from operations     1,620,620       361,643       2,094,274       2,443,551  
                                 
OTHER INCOME (EXPENSE)                                
Other income     35,254       2,118       41,488       2,635  
Other expense     (7,783 )     (9,771 )     (7,783 )     (9,771 )
                                 
Net other income     27,471       (7,653 )     33,705       (7,136 )
                                 
Income before income taxes     1,648,091       353,990       2,127,979       2,436,415  
                                 
Provision for income taxes     -       31,963       78,000       65,203  
                                 
NET INCOME   $ 1,648,091     $ 322,027     $ 2,049,979     $ 2,371,212  
                                 
Earnings per common share                                
Basic   $ 0.10     $ 0.02     $ 0.13     $ 0.15  
Diluted   $ 0.10     $ 0.02     $ 0.12     $ 0.14  
                                 
Weighted average shares outstanding                                
Basic     15,854,677       15,825,005       15,854,841       15,825,005  
Diluted     16,869,000       16,578,939       16,914,284       16,421,419  

 

The accompanying notes are an integral part of these condensed financial statements

 

   F-3  
 

 

VIRTRA, INC.

CONDENSED STATEMENT OF STOCKHOLDERS' EQUITY

(Unaudited)

 

    Preferred stock     Common stock     Additional     Treasury     Accumulated        
    Shares     Amount     Shares     Amount     paid-in capital     Stock     Deficit     Total  
                                                 
Balance at December 31, 2016     -     $ -       15,855,005     $ 1,586     $ 14,128,044     $ -     $ (7,719,351 )   $ 6,410,279  
                                                                 
Stock based compensation     -       -       -       -       117,975       -       -       117,975  
                                                                 
Stock warrants vested-MREC investment     -       -       -       -       1,516,246       -       -       1,516,246  
                                                                 
Stock options repurchased     -       -       -       -       (35,000 )     -       -       (35,000 )
                                                                 
Treasury stock     -       -       -       -       -       (13,800 )     -       (13,800 )
                                                                 
Net income     -       -       -       -       -       -       2,049,979       2,049,979  
                                                                 
Balance at June 30, 2017     -     $ -       15,855,005     $ 1,586     $ 15,727,265     $ (13,800 )   $ (5,669,372 )   $ 10,045,679  

 

The accompanying notes are an integral part of these condensed financial statements

 

   F-4  
 

 

VIRTRA, INC.

CONDENSED STATEMENTS OF CASH FLOWS

(Unaudited)

 

    Six Months Ended  
    June 30, 2017     June 30, 2016  
             
Cash flows from operating activities:                
Net income   $ 2,049,979     $ 2,371,212  
Adjustments to reconcile net income to net cash provided (used) in operating activities                
Depreciation and amortization     117,108       78,719  
Stock compensation     117,975       63,990  
Cash settlement of stock options     50,250       290,224  
Changes in operating assets and liabilities:                
Accounts receivable     (480,579 )     (1,117,809 )
Inventory     (13,749 )     (70,485 )
Unbilled revenue     (2,260,108 )     (107,297 )
Prepaid expenses and other current assets     (55,466 )     (105,237 )
Accounts payable and other accrued expenses     439,559       13,859  
Deferred revenue     784,641       23,957  
                 
Net cash provided by operating activities     749,610       1,441,133  
                 
Cash flows from investing activities:                
Purchase of property and equipment     (70,923 )     (221,374 )
                 
Net cash used in investing activities     (70,923 )     (221,374 )
                 
Cash flows from financing activities:                
                 
Treasury stock     (13,800 )     -  
Repurchase of stock options     (85,250 )     (467,724 )
                 
Net cash used in financing activities     (99,050 )     (467,724 )
                 
Net increase in cash     579,637       752,035  
Cash, beginning of period     3,703,579       3,317,020  
                 
Cash, end of period   $ 4,283,216     $ 4,069,055  
                 
Supplemental disclosure of cash flow information:                
Cash paid:                
Taxes   $ 78,000     $ 142,413  

 

The accompanying notes are an integral part of these condensed financial statements

 

   F-5  
 

 

Notes to Condensed Financial Statements

(Unaudited)

 

Note 1. Significant Accounting Policies

 

Organization and Business Operations

 

VirTra, Inc. (the “Company” or “VirTra”) is engaged in the sale and development of judgmental use of force training simulators and firearms training simulators for law enforcement, military and commercial uses. The Company sells simulators and related 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 Systems, Inc., a Texas Corporation.

 

Effective as of October 1, 2016 (the “Effective Date”), the Company completed a conversion from a Texas corporation to a Nevada corporation pursuant to a Redomestication Plan of Conversion (the “Plan of Conversion”) that was approved by the Company’s Board of Directors on June 23, 2016 and its shareholders on September 16, 2016. On the Effective Date, 15,855,005 shares of common stock of VirTra Systems, Inc., a Texas corporation, were converted into 15,855,005 shares of common stock of VirTra, Inc., a Nevada corporation. No shareholders exercised appraisal rights or dissenters’ rights for such shares in accordance with the Texas Business Organization Code.

 

As part of the Plan of Conversion, the Company filed Articles of Incorporation in Nevada whereby it changed its name from VirTra Systems, Inc. to VirTra, Inc. and revised its capitalization. The Company’s Articles of Incorporation filed in Nevada authorized the Company to issue 125,000,000 shares, of which (1) 120,000,000 shares shall be common stock, par value $0.0001 per share (the “common stock”), of which (a) 100,000,000 shares shall be common stock, par value $0.0001, (b) 5,000,000 shares shall be Class A common stock, par value $0.0001 per share (the “Class A common stock”), and (c) 15,000,000 shares shall be Class B common stock, par value $0.0001 per share (the “Class B common stock”) and (2) 5,000,000 shares shall be Preferred Stock, par value $0.0001 per share, which may, at the sole discretion of the Board of Directors be issued in one or more series (the “Preferred Stock”). The Company also adopted new bylaws as part of the Plan of Conversion.

 

Effective October 20, 2016, the Company affected a 1 for 10 reverse stock split of the Company’s issued and outstanding common stock (the “Reverse Stock Split”). All references to shares of its common stock in this report refer to the number of shares of common stock after giving effect to the Reverse Stock Split (unless otherwise indicated).

 

The Company corporate office is located in Tempe, Arizona. All transactions in the financial statements and accompanying notes are presented in US Dollars.

 

Basis of Presentation

 

The accompanying unaudited condensed financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”) for interim financial information. Certain information and note disclosures normally included in complete annual financial statements prepared in accordance with GAAP have been condensed or omitted. However, the Company believes that the disclosures included in these unaudited condensed financial statements are adequate to make the information presented not misleading. In the opinion of management, the accompanying unaudited condensed financial statements reflect all adjustments, which include normal recurring adjustments, considered necessary for a fair presentation of such interim results. The results for the three and six months ended June 30, 2017 are not necessarily indicative of the results for any subsequent period. These unaudited condensed financial statements should be read in conjunction with the audited financial statements and notes for the year ended December 31, 2016 included in the Company’s Annual Report.

 

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 at the date of the financial statements and reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.

 

   F-6  
 

 

Fair Value of Financial Instruments

 

The fair value of financial instruments approximates their carrying values at June 30, 2017 and December 31, 2016 due to their short maturities. These financial instruments consist of cash and cash equivalents, accounts receivable, accounts payable and accrued liabilities.

 

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.

 

Accounts 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 are charged off after all reasonable collection efforts have been taken. As of June 30, 2017 and December 31, 2016, the Company recorded an allowance for doubtful accounts of $0 and $20,000, respectively.

 

Inventories

 

Inventories are 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 and provides reserves when appropriate to reduce inventory to the lower of cost or net realizable value. As of June 30, 2017 and December 31, 2016, the Company recorded reserves of $28,000 and $17,000, respectively.

 

Investments in Other Companies

 

Minority investments in other companies are accounted for under the cost method of accounting because the Company does not have the ability to exercise significant influence over the other companies’ operations. Under the cost method of accounting, investments in private companies are carried at cost and are only adjusted for other-than-temporary declines in fair value and distribution of earnings. Management regularly evaluates the recoverability and classification of its investment. During the periods ended June 30, 2017 and December 31, 2016, the Company did not recognize any losses due to other-than-temporary declines of the value of the 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 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. Depreciation is calculated using the straight-line method over the estimated economic lives of the fixed assets or over the shorter of the estimated useful life or the remaining lease term, which are summarized as follows:

 

Computer equipment 3-5 years
Furniture and office equipment 5-7 years
Leasehold improvements 7 years

 

   F-7  
 

 

Revenue Recognition and Deferred Revenue

 

Net revenues include sales of products and services, net of discounts. Product sales consist of simulators; upgrade components, scenarios, scenario software, recoil kits, Threat-FireTM and other accessories. Services include installation, training, limited warranties, service agreements and related support. Certain components of the Company’s sales include multiple elements comprising both products and services. The Company’s revenue recognition qualifies under ASC 605-25, Multiple Element Arrangements with the delivery of the simulator and installation being two separate deliverables and as such, qualifies as separate units of accounting:

 

  1. The simulator unit upon shipment or delivery and customer acceptance, depending on the shipping terms.
     
  2. The installation upon completion and customer sign-off.

 

Additionally, the Company recognizes revenue for these products and services when it is earned which is when: (i) persuasive evidence of an arrangement exists; (ii) delivery has occurred and/or services have been rendered; (iii) the price is fixed and determinable; and (iv) collection of the resulting receivable is reasonably assured. Shipping fees charged to customers are recorded as a component of net revenues. All sales and sales contracts, including international sales, are recorded in US Dollars.

 

Products

 

Revenue from the sale of products is recognized when products have been shipped to the customer and title and risk of loss passes to the customer. For customers other than United States government agencies, the Company generally requires advance deposits prior to shipment. Customer deposits are recorded as a current liability under deferred revenue and totaled $953,041 and $51,334 as of June 30, 2017 and December 31, 2016, respectively.

 

Services

 

Services include installation of product, separately priced extended limited warranties on parts and labor and technical support. Revenue is recognized for service contracts as earned which is generally upon completion of installation or, if extended warranties, on a straight-line basis over the term of the contract. The Company offers a standard warranty on its products from manufacturing defects on a limited basis for a period of one year after purchase and also offers separately priced extended warranties for periods of up to four years beginning after the expiration of the standard one-year warranty. After the standard warranty expires but during the term of the extended warranty, if the device fails to operate properly from defects in materials and workmanship, the Company will repair or replace the defective product at no additional charge. The Company records a gross to net revenue adjustment for the one year standard warranty and accrues annually the estimated cost of complying with the warranty agreements for all extended warranty years. Deferred revenue for separately priced extended warranties longer than one year totaled $1,897,504 and $2,014,571 as of June 30, 2017 and December 31, 2016, respectively.

 

Cost of Sales

 

Cost of sales represents manufacturing costs consisting of materials, labor and overhead related to finished goods and components. Shipping costs incurred related to product delivery are included in cost of sales.

 

Advertising Costs

 

Advertising costs relating to domestic and international tradeshows, website and sales promotional materials are expensed as incurred. Advertising expense was $173,595 and $101,415 for the three months ended June 30, 2017 and 2016, respectively and $307,123 and $160,662 for the six months ended June 30, 2017 and 2016, respectively.

 

Research and Development Costs

 

Research and development costs include labor and expenses directly related to research and development support and are expensed as incurred. Research and development costs were $278,917 and $169,383 for the three months ended June 30, 2017 and 2016, respectively and $621,106 and $432,342 for the six months ended June 30, 2017 and 2016, respectively.

 

   F-8  
 

 

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 and accounts receivable. The Company’s cash and cash equivalents are maintained with financial institutions having high credit ratings. 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 and per ownership category. The Company had uninsured cash and cash equivalents of $3,832,091and $2,986,694 as of June 30, 2017 and December 31, 2016, respectively.

 

The Company sells its products internationally primarily to governmental entities and in the United States primarily to federal and state agencies. One federal agency comprised 17% and one state agency comprised 27% of the total net sales for the three months ending June 30, 2017, and two international customers comprised 45% and one state agency comprised 11% of the total net sales for the three months ending June 30, 2016. One federal agency comprised 14% and one state agency comprised 20% of the total net sales for the six months ending June 30, 2017, and one international customer comprised 28% and one federal agency comprised 11% of the total net sales for the six months ending June 30, 2016.

 

One federal agency represented 48%, and one international customer represented 16% of the total accounts receivable balance as of June 30, 2017, respectively. Two federal agencies represented 43%, one international customer represented 21%, and one commercial customer represented 13% of the total accounts receivable balance as of December 31, 2016, respectively.

 

The Company generally requires significant advance deposits prior to shipments domestically and full prepayment prior to shipments internationally unless credit terms have been established. For customers with established credit terms, and for sales made to domestic government agencies. The Company does not require collateral. Management performs ongoing credit evaluations of its customers’ financial condition. Historically, the Company has experienced minimal charges relative to doubtful accounts.

 

The Company currently purchases small machined parts, custom assemblies and electronic components from suppliers located in the United States. Although the Company obtains many of these components from single-source suppliers, the Company could seek to have the parts, custom assemblies and electronic components manufactured elsewhere. Additionally, the Company has purchased and operates a machine shop to custom manufacture parts and assemblies to mitigate supplier risks, although some risk remains.

 

Income Taxes

 

Deferred income tax assets and liabilities are determined based upon differences between the financial reporting and tax basis of assets and liabilities and are measured using the enacted tax rates and laws that will be in effect when the differences are expected to reverse. Accounting standards require the consideration of a valuation allowance for deferred tax assets if it is “more likely than not” that some component or all the benefits of deferred tax assets will not be realized. The Company currently maintains a full valuation allowance on all of its net deferred tax assets.

 

Impairment of Long-lived Assets

 

Long lived assets, such as equipment, 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 in 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. As of June 30, 2017 and December 31, 2016, the Company concluded that there was no indication of impairment to the carrying value of its long-lived assets so no impairment was recorded.

 

Stock Based Compensation

 

The Company calculates the cost of awards of equity instruments based on the grant date fair value of the awards using the Black-Scholes-Merton option pricing valuation model, which incorporates various assumptions including volatility, expected term and risk-free interest rates

 

   F-9  
 

 

The expected term of the options is the estimated period of time until exercise and is based on historical experience of similar awards giving consideration to the contractual terms, vesting schedules and expectations of future employee behavior. Expected stock price volatility is based on historical volatility of the Company’s stock. 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 estimated fair value of stock-based compensation awards and other options is amortized on a straight-line basis over the relevant vesting period. As share-based compensation expense is recognized based on awards ultimately expected to vest, it is reduced for estimated forfeitures. Forfeitures are estimated at the time of grant and revised, if necessary, in subsequent periods if actual forfeitures differ from those estimates. The Company’s forfeiture rate was calculated based on its historical experience of awards which ultimately vested.

 

Treasury Stock

 

The Company utilizes the cost method to account for the reacquisition cost of shares repurchased until the shares are either reissued or retired. It is the intention of the Board of Directors to approve the retirement of treasury shares after their purchase, resulting in the cancellation of the treasury stock and a reduction in the number of shares of issued stock.

 

Net income 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 that would occur if outstanding stock options were exercised. Weighted average common shares outstanding and dilutive shares consisted of the following as of June 30, 2017 and 2016, respectively:

 

    Three Months Ending June 30,     Six Months Ending June 30,  
    2017     2016     2017     2016  
Net income   $ 1,648,091     $ 322,027     $ 2,049,979     $ 2,371,212  
                                 
Weighted average common stock outstanding     15,854,677       15,825,005       15,854,841       15,825,005  
Incremental shares from stock options     683,875       588,256       706,491       537,678  
Incremental shares from warrants     330,448       165,678       352,952       58,736  
                                 
Weighted average common stock outstanding - diluted     16,869,000       16,578,939       16,914,284       16,421,419  
                                 
Net income per common share and common equivalent shares                                
Basic   $ 0.10     $ 0.02     $ 0.13     $ 0.15  
Diluted   $ 0.10     $ 0.02     $ 0.12     $ 0.14  

 

For the three months ended June 30, 2017 and 2016, 80,833 and 103,333 shares, respectively, of common stock underlying stock options were excluded from the dilutive stock calculations because their exercise prices were greater than the average fair value of our common stock for the period.

 

For the six months ended June 30, 2017 and 2016, 53,333 and 125,833 shares, respectively, of common stock underlying stock options were excluded from the dilutive stock calculations because their exercise prices were greater than the average fair value of our common stock for the period.

 

Recent Accounting Pronouncements

 

In May 2014, the Financial Accounting Standards Board (“FASB”) issued guidance for revenue recognition for contracts, superseding the previous revenue recognition requirements, along with most existing industry-specific guidance. The guidance requires an entity to review contracts in five steps: 1) identify the contract, 2) identify performance obligations, 3) determine the transaction price, 4) allocate the transaction price, and 5) recognize revenue. The new standard will result in enhanced disclosures regarding the nature, amount, timing and uncertainty of revenue arising from contracts with customers. In August 2015, the FASB issued guidance approving a one-year deferral, making the standard effective for reporting periods beginning after December 15, 2017, with early adoption permitted only for reporting periods beginning after December 15, 2016. The Company is evaluating the impact of the standard and has not yet determined the effect on its financial position or results of operations.

 

In July 2015, the FASB issued Accounting Standards Update (“ASU”) No. 2015-11 – “Inventory (Topic 330): Simplifying the Measurement of Inventory”. The amendment’s purpose is to simplify the measurement, reduce costs and increase comparability for inventory measured using first-in, first-out (FIFO) or average cost methods. An entity should measure inventory within the scope of this Update at the lower of cost and net realizable value, which is the estimated selling prices in the ordinary course of business, less reasonably predictable costs of completion, disposal and transportation. This accounting guidance is effective for fiscal years beginning after December 15, 2016, including interim periods within those fiscal years. This standard was adopted on January 1, 2017 and its adoption did not to have a material significant impact on the Company’s financial statement position and results of operations.

 

   F-10  
 

 

In November 2015, the FASB issued ASU No. 2015-17 – “Income Taxes (Topic 740): Balance Sheet Classification of Deferred Taxes”. The amendment’s purpose is to require deferred tax liabilities and assets be classified as noncurrent in a classified statement of financial position (Balance Sheet). This accounting guidance will become effective beginning in the first quarter of 2017. Early application is permitted. The Company adopted this pronouncement and such adoption did not have a material impact on the Company’s financial statements and related disclosures.

 

In February 2016, the FASB issued ASU No. 2016-02 – “Leases (Topic 842)”, which requires leases to put most leases on their balance sheets by recognizing lease assets and lease liabilities for those leases classified as operating leases under previous guidance. This ASU will be effective for the Company on January 1, 2019, with early adoption permitted. The Company is currently in the process of assessing the impact of this ASU on its financial statements.

 

In March 2016, the FASB issued ASU No. 2016-09 – “Stock Compensation (Topic 718)”, which includes provisions intended to simplify various aspects related to how share-based payments are accounted for and presented in the financial statements. The standard is effective for annual periods beginning after December 15, 2016, with early adoption permitted. The adoption of this standard did not have a significant impact on the Company’s financial position and results of operations.

 

In July 2017, the FASB issued ASU No. 2017-11 – “Earnings Per Share (Topic 260); Distinguishing Liabilities from Equity (Topic 480); Derivatives and Hedging (Topic 815)” I. Accounting for Certain Financial Instruments with Down Round Features and II. Replacement of the Indefinite Deferral for Mandatorily Redeemable Financial Instruments of Certain Nonpublic Entities and Certain Mandatorily Redeemable Noncontrolling Interests with a Scope Exception. Part I applies to entities that issue financial instruments such as warrants, convertible debt or convertible preferred stock that contain down round features. Part II simply replaces the indefinite deferral for certain mandatorily redeemable noncontrolling interests and mandatorily redeemable financial instruments of nonpublic entities contained within Accounting Standards Codification (ASC) Topic 480 with a scope exception and does not impact the accounting for these mandatorily redeemable instruments. This ASU is effective for public companies for the annual reporting periods beginning after December 15, 2018, and interim periods within those annual periods. Early adoption is permitted. The Company is currently evaluating the impact that the adoption of the standard may have on its consolidated financial statements.

 

Note 2. Inventory

 

Inventory consisted of the following as of:

 

    June 30, 2017     December 31, 2016  
             
Raw materials   $ 1,361,878     $ 1,085,519  
Finished goods     -       251,707  
Reserve     (28,185 )     (17,282 )
                 
Total inventory   $ 1,333,693     $ 1,319,944  

 

   F-11  
 

 

Note 3. Property and Equipment

 

Property and equipment consisted of the following as of:

 

    June 30, 2017     December 31, 2016  
             
Computer equipment   $ 808,397     $ 753,987  
Furniture and office equipment     193,209       182,969  
Machinery and equipment     925,495       925,495  
Leasehold improvements     324,591       318,318  
                 
Total property and equipment     2,251,691       2,180,768  
Less:  Accumulated depreciation     (1,505,402 )     (1,366,445 )
                 
Property and equipment, net   $ 746,289     $ 814,323  

 

Depreciation expense was $58,901 and $41,168 for the three months ended June 30, 2017 and 2016, respectively. Depreciation expense was $117,108 and $78,719 for the six months ended June 30, 2017 and 2016, respectively.

 

Note 4. Accrued Expenses

 

Accrued compensation and related costs consisted of the following as of:

 

    June 30, 2017     December 31, 2016  
             
Salaries and wages payable   $ 96,098     $ 93,832  
401(k) contributions payable     28,943       25,729  
Leave payable     247,813       190,518  
Profit sharing payable     443,484       307,503  
                 
Total accrued compensation and related costs   $ 816,339     $ 617,582  

 

Accrued expenses and other current liabilities consisted of the following as of:

 

    June 30, 2017     December 31, 2016  
             
Manufacturer's warranties   $ 122,000     $ 122,000  
Taxes payable     136,551       32,668  
Other     40,000       40,000  
                 
Total accrued expenses and other current liabilities   $ 298,551     $ 194,668  

 

   F-12  
 

 

Profit Sharing

 

As part of the benefit package maintained by the Company, the Profit Sharing program pays a percentage of Company annual profits as a cash bonus to active and eligible employees. The cash payment is typically split into two equal payments and distributed pro-rata to employees in April and October of the following year. For the six months ending June 30, 2017 and 2016, the percentage of annual net profit used for calculations was fifteen percent (15%). Profit sharing expense was $224,450 and $21,688 for the three months ended June 30, 2017 and 2016, respectively. Profit sharing expense was $289,733 and $329,057 for the six months ended June 30, 2017 and 2016, respectively.

 

Note 5. Collaboration Agreement

 

On January 16, 2015, the Company entered into a Co-Venture Agreement (the “Co-Venture Agreement”) with Modern Round, LLC (“Modern Round”), a wholly owned subsidiary of Modern Round Entertainment Corporation (“MREC”), a related party. MREC is a restaurant and entertainment concept centered on its indoor virtual reality shooting experience. The Co-Venture Agreement provides Modern Round access to certain software and equipment relating to the Company’s products in exchange for royalties.

 

The Company received 1,365,789 units, representing a 5% ownership interest in Modern Round on the date of the Co-Venture Agreement. The Company recorded the investment at the estimated fair value of the units and which were valued at $0.10 per unit based on Modern Round’s other membership unit sales. . The Co-Venture Agreement also provides the Company with conditional warrants to purchase an additional 5% of Modern Round as of the date of that agreement, at an exercise price of $0.25.

 

On April 14, 2015 Modern Round issued the Company an option to purchase 125,000 units of Modern Round. The option fully vested and became exercisable on the date of grant at an exercise price equal to $0.50 per unit and terminates on the tenth anniversary of the date of grant, if not earlier pursuant to the terms of the option.

 

On December 31, 2015, Modern Round merged with a subsidiary of MREC pursuant to a Plan of Merger (the “Merger Agreement”) and each unit of Modern Round issued and outstanding as of the effective time of the merger automatically converted into the right to receive approximately 1.2277 shares of MREC common stock. As a result of the Merger Agreement, the Company held 1,676,748 shares of MREC common stock, options to purchase 153,459 shares of MREC common stock at an exercise price of $.41 per share, and conditional warrants to purchase 1,676,747 shares of MREC common stock at an exercise price of $.20 per share.

 

On October 25, 2016, the Company exercised the conditional warrant and purchased 1,676,747 shares of MREC common stock for $335,349 resulting in the Company’s aggregate holdings of MREC increasing to 3,353,495 common shares representing approximately 8.9% of the issued and outstanding common shares of MREC. The MREC equity securities have been recorded as a cost method investment as the Company does not have the ability to exercise significant influence over MREC.

 

As part of the Co-Venture Agreement, the Company granted 919,382 conditional warrants to affiliates of MREC to purchase 5% of the Company’s capital stock on a fully diluted basis as of the date of the Co-Venture Agreement. The conditional warrants are exercisable commencing at the earlier of the first anniversary of MREC opening its first range facility utilizing VirTra technology or after MREC opening its first range facility utilizing VirTra technology and the payment to the Company of all required US/Canada minimum royalty payments during the first 12-month period. MREC opened its first location on June 1, 2016. On June 1, 2017, the options vested and became exercisable at an exercise price equal to $1.36 per unit and terminate on the fifth anniversary of the date of vesting, if not earlier pursuant to the terms of the option. On June 1, 2017, these warrants vested and were recorded at the Black-Scholes Merton fair value using annual volatility of 91.5%, an annual risk free rate of 1.76%, expected term of five years and a fair value of $2.14 a share for a fair value of $1,516,246 as an additional investment in MREC. See Note 9. Subsequent Events

 

The Company also granted 919,382 of additional conditional warrants to affiliates of MREC to purchase another 5% of the Company’s capital stock on a fully diluted basis as of the Co-Venture Agreement date. These conditional warrants are exercisable any time subsequent to MREC’s payment of $2.0 million in cumulative license fees (royalty). Cumulative license fees (royalty) earned and paid to the Company amounted to $204,229 and $90,047 as of June 30, 2017 and December 31, 2016, respectively. These conditional warrant issuances are for a period of five years with an exercise price of $1.36. These conditional warrants are considered contingent consideration for the equity investment as they do not meet the definition of a derivative under ASC 815, the contingent consideration is not included in the cost of the equity investment until the contingency is resolved and the warrant becomes exercisable.

 

   F-13  
 

 

The Co-Venture Agreement grants MREC an exclusive non-transferrable license to use the Company’s technology solely for use at locations to operate the concept, as defined in the Co-Venture Agreement. The license would become non-exclusive if the first U.S. location is not opened within 24 months of the effective date and at least one location is opened outside the U.S. and Canada within five years of the Co-Venture Agreement date, the respective milestone dates. Throughout the duration of the Co-Venture Agreement, MREC will pay the Company a royalty based on gross revenue, as defined and subject to certain minimum royalties commencing with the first twelve-month period subsequent to the respective milestone date of June 1, 2017. 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, MREC may pay to VirTra the difference between the amount of total royalty payments and the minimum specified in the agreement to maintain exclusivity. The Company recognized $204,229 and $9,915 for license fees (royalties) for the six months ended June 30, 2017 and 2016, respectively.

 

Note 6. Related Party Transactions

 

During the three months ended June 30, 2017 and 2016, the Company issued 27,500 and 22,500 stock options to the CEO, COO and members of the Board of Directors to purchase shares of common stock at a weighted average purchase price of $2.15 and $1.12, respectively. During the six months ended June 30, 2017 and 2016, the Company issued 55,000 and 45,000 stock options to the CEO, COO and members of the Board of Directors to purchase shares of common stock at a weighted average purchase price of $2.38 and $1.26, respectively. All options are exercisable within seven years of grant date.

 

During the three and six months ended June 30, 2017 and 2016, the Company redeemed stock options from the CEO and COO that had previously been awarded. As a result, the Company recorded additional compensation expense as follows:

 

    Three Months Ending June 30,     Six Months Ending June 30,  
    2017     2016     2017     2016  
Number of stock options redeemed     25,000       450,000       50,000       450,000  
Redemption value   $ 36,750     $ 465,588     $ 82,250     $ 465,588  
Amount previously expensed (2010 and 2009)     (17,500 )     (177,500 )     (35,000 )     (177,500 )
                                 
Additional compensation expense   $ 19,250     $ 288,088     $ 47,250     $ 288,088  

 

Mr. Mitch Saltz, a member of the Company’s Board of Directors, is also Chairman of the Board of Directors and a majority stockholder of MREC. The Company entered into the Co-Venture Agreement with MREC as disclosed in Note 5. Through the terms of that agreement, the Company owns 3,353,495 shares of MREC common stock representing approximately 8.9% of the issued and outstanding shares of MREC common stock. In addition, MREC paid the Company $160,417 and $9,915 for license fees (royalties) for the three months ended June 30, 2017 and 2016, respectively pursuant to the terms of the Co-Venture Agreement and $204,229 and $9,915 for the six months ended June 30, 2017 and 2016, respectively.

 

Note 7. Commitments and Contingencies

 

The Company’s operating lease obligations relate to the leasing of the Company’s corporate office space located at 7970 South Kyrene Road, Tempe, Arizona 85284, which expires in April, 2019, unless renewed and the leasing of the machine shop building located at 2169 East Fifth St., Tempe, Arizona 85284, which expired in March, 2018, unless renewed.

 

Future minimum lease payments under non-cancelable operating leases are as follows:

 

Building Lease Schedule
       
2017   $ 175,303  
2018     324,353  
2019     105,542  
Total $ 605,198  

 

   F-14  
 

 

The Company has a deferred rent liability of $100,277 and $122,126 as of June 30, 2017 and December 31, 2016, respectively, relative to the increasing future minimum lease payments. Rent expense was $92,891 and $86,544 for the three months ended June 30, 2017 and 2016, respectively. Rent expense was $190,282 and $179,355 for the six months ended June 30, 2017 and 2016, respectively.

 

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’s policy is to not disclose the specifics of any claim or threatened lawsuit until such complaint is actually served on the Company. On October 20, 2016, a former employee filed a lawsuit in the U.S. District Court, District of Arizona alleging the Company’s failure and/or refusal to pay overtime in violation of 29 U.S.C. Sec. 201, et. seq. and a claim for wrongfully withheld wages under A.R.S. Sec. 23-350 et. seq. The complaint seeks certification of class action status, declaratory relief, damages, interest, attorneys’ fees and such other relief the Court deems just and proper. The Company intends to vigorously defend itself. While acknowledging the uncertainties of litigation with an unfavorable ruling resulting in monetary damages against us, management believes that the ultimate outcome of this matter will not have a material effect on its earnings, cash flows, or financial position.

 

Note 8. Stockholders’ Equity

 

Stock Repurchase

 

On October 25, 2016, the Company’s Board of Directors authorized the repurchase of up to $1,000,000 of its common stock through December 31, 2017. 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 Rule 10b-18 of the Securities and Exchange Commission. The timing, manner, price and amount of any repurchases will be determined by the Company at its discretion and will be subject to economic and market conditions, stock price, applicable legal requirements and other factors. During the six months ended June 30, 2017, the Company repurchased 6,900 shares at a cost of $13,800. The Company plans to retire any shares purchased through this program before the end of the current year.

 

Stock Options

 

The Company periodically issues non-qualified incentive stock options to key employees, officers and directors under a Stock Option Compensation plan approved by the Board of Directors in 2009. Terms of the option grants are at the discretion of the Board of Directors but historically have been seven years. During the three months ended June 30, 2017 and 2016, the Company issued 27,500 and 22,500 stock options, with a weighted average exercise price of $2.15 and $1.12 per share. During the six months ended June 30, 2017 and 2016, the Company issued 55,000 and 45,000 stock options, with a weighted average exercise price of $2.38 and $1.26 per share.

 

The assumptions used for the periods ended June 30, 2017 and 2016, and the resulting estimates of weighted-average fair value per share of options granted during those periods, are as follows:

 

    Three Months June 30,     Six Months June 30,  
    2017     2016     2017     2016  
                         
Volatility     98% to 100%       104% to 106%       98% to 101%       104% to 107%  
Risk-free interest rate     2%     1-2%       2%     1-2%  
Expected term     7 years       7 years       7 years       7 years  

 

   F-15  
 

 

The following table summarizes all compensation plan stock options as of June 30:

 

    June 30, 2017     June 30, 2016  
    Number of     Weighted     Number of     Weighted  
    Stock Options     Exercise Price     Stock Options     Exercise Price  
Options outstanding, beginning of year     1,115,833     $ 0.80       1,667,934     $ 0.60  
Granted     55,000       2.38       45,000       1.26  
Redeemed     (50,000 )     1.71       (450,000 )     0.40  
Exercised     -       -       -       -  
Expired / terminated     -       -       (7,434 )     0.40  
Options outstanding, end of quarter     1,120,833     $ 0.84       1,255,500     $ 0.70  
Options exercisable, end of quarter     1,080,833     $ 0.82       1,215,500     $ 0.68  

 

Stock compensation expense was $48,812 and $30,000 for the three months ended June 30, 2017 and 2016, respectively. Stock compensation expense was $117,975 and $63,990 for the six months ended June 30, 2017 and 2016, respectively. There are 40,000 non-vested stock options as of June 30, 2017. Of that amount, 20,000 options will vest equally in October 2017 and October 2018.

 

Warrants

 

As part of the Co-Venture Agreement, the Company granted 919,382 conditional warrants to affiliates of Modern Round Entertainment Company (“MREC”), a related party, to purchase 5% of the Company’s capital stock on a fully diluted basis. The conditional warrants are exercisable commencing at the earlier of the first anniversary of MREC opening its first range facility utilizing the Company’s Technology and the payment of all required minimum royalty/licensing fee payments during the first 12- month period. The Company also granted 919,382 conditional warrants to affiliates of MREC to purchase 5% of the Company’s capital stock on a fully diluted basis, which are exercisable any time subsequent to MREC’s payment of $2.0 million in royalty fees. The conditional warrants have a contractual term of five years and an exercise price of $1.36. On June 1, 2017, the one-year anniversary of MREC opening its first range facility, 919,382 warrants vested and were recorded at a Black-Scholes Merton fair value using annual volatility of 91.5%, an annual risk free rate of 1.76%, expected term of five years and a fair value of $2.14 a share for a fair value of $1,516,246 as additional investment in MREC.

 

Note 9. Subsequent Events

 

On July 1, 2017, the Company granted to members of its Board of Directors options to purchase 27,500 shares of the Company’s common stock at an exercise price of $1.88 and a term of seven years.

 

On July 1, 2017, the Company redeemed from the CEO and COO, 25,000 previously awarded stock options for cash totaling $34,000 of which $12,500 had been previously expensed in 2010 with the balance of $21,500 being recognized as additional compensation cost in July, 2017.

 

Warrant Redemptions and Co-Venture Agreement Amendment

 

On July 28, 2017, the Company received Notices of Exercise for all 919,382 warrants currently exercisable (the “Tranche 1 Warrants”) from all the MREC affiliate holders electing to purchase warrants pursuant to the terms of the net exercise provision set forth in the Warrant Agreement. Mr. Saltz, a director of the Company and a substantial shareholder of MREC held 778,243 of the Tranche 1 Warrants prior to the assignment of the warrants to MREC on August 11, 2017. Under the net exercise provision, in lieu of exercising the warrant for cash, the holder may elect to receive shares equal to the value of the warrant (or the portion thereof being exercised) by surrender of the warrant and the Company issuing to holder the number of computed shares. Using the July 28, 2017 OTCQX closing price at $2.18 as fair value and the $1.36 warrant exercise price, upon conversion the 919,382 warrants entitle the holders to receive 345,823 shares of the Company’s common stock without payment of any additional consideration pursuant to the net exercise terms of the Tranche 1 Warrants that are currently exercisable.

 

Effective August 16, 2017, the Company and the MREC affiliate holders entered into an agreement (the “Warrant Buyout Agreement”) whereby the Company acknowledged the assignment of the Tranche 1 Warrants to MREC and agreed to repurchase them at a price of $1.962 per share of common stock issuable by the Company pursuant to the net exercise terms of the Warrants or a total of $678,505.

 

   F-16  
 

 

In addition, the Company agreed to repurchase from MREC an additional 919,382 warrants held by MRC that are not currently exercisable (the “Tranche 2 Warrants”). Mr. Saltz held 728,243 of the Tranche 2 Warrants prior to their assignment to MREC on August 11, 2017. The Warrant Buyout Agreement amends the Tranche 2 Warrants to provide for the immediate exercise on a net exercise basis of 48,415 shares of the Company’s common stock. The purchase price for the Tranche 2 Warrants of a total of $94,990 is based on a price of $1.962 per share of common stock issuable on a net exercise basis based on 48,415 shares of the Company’s common stock. The aggregate purchase price of the Tranche 1 Warrants and the Tranche 2 Warrants was $773,495.

 

MREC agreed that proceeds of the warrant redemption, net of applicable taxes, would be used to fund the development of a second stand-alone Modern Round location. In addition, MREC agreed that the minimum royalty due to us during the first 12-month royalty period in order to maintain exclusivity is $118,427. Further, MREC acknowledged that the second 12-month minimum royalty calculation period provided for in the Co-Venture Agreement began on June 1, 2017 and ends on May 31, 2018. Total minimum royalty payments due during this period required to maintain MREC’s exclusive rights under the Co-Venture Agreement are $560,000 including any shortfalls for prior periods being due no later than June 30, 2018. By fully funding the Minimum Royalty Payment, MREC will retain its exclusive license to use the Company’s shooting scenario content and other intellectual property in MREC’s facilities for a future 12-month period in accordance with the Co-Venture Agreement.

 

In addition, on August 16, 2017, we entered into an amendment to the Co-Venture Agreement to permit MREC to sublicense the VirTra Technology to third party operators of stand-alone location-based entertainment companies. MREC agreed to pay us royalties for any such sublicenses in an amount equal to 10% of the revenue paid to MREC in cases where MREC pays for the cost of the equipment for such location or 14% of the revenue paid to MREC in cases where it does not pay for the cost of the equipment.

 

2017 Equity Incentive Plan

 

On August 23, 2017, our board approved, subject to shareholder approval at the annual meeting of shareholders 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 2,375,000 shares of our common stock will be initially authorized and reserved for issuance under the Equity Plan. This reserve will automatically increase on January 1, 2018 and 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.

 

   F-17  
 

 

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

 

To the Board of Directors and Stockholders of Virtra, Inc.

 

We have audited the accompanying balance sheet of Virtra, Inc. (the “Company”) as of December 31, 2016 and the related statements of operations, changes in stockholders’ equity, and cash flows for the year then ended. The Company’s management is responsible for these financial statements. Our responsibility is to express an opinion on these financial statements based on our audit.

 

We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. The company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. Our audit included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the company’s internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion.

 

In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Virtra, Inc. as of December 31, 2016 and the results of its operations and its cash flows for the year then ended, in conformity with accounting principles generally accepted in the United States of America.

 

/s/ Friedman LLP  

East Hanover, New Jersey

March 30, 2017

 

 

   F-18  
 

 

Report of Independent Registered Public Accounting Firm

 

Board of Directors and Stockholders VirTra Systems, Inc.

 

We have audited the accompanying balance sheet of VirTra, Inc. as of December 31, 2015 and the related statements of operations, stockholders’ equity, and cash flows for the year then ended. These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audit.

 

We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. Our audit included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion.

 

In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of VirTra, Inc. at December 31, 2015, and the results of its operations and its cash flows for the year then ended, in conformity with accounting principles generally accepted in the United States of America.

 

 
Certified Public Accountants  
   
Phoenix, Arizona  
March 31, 2016  

 

   F-19  
 

 

VIRTRA, INC.

BALANCE SHEETS

 

    December 31, 2016     December 31, 2015  
ASSETS                
CURRENT ASSETS                
Cash and cash equivalents   $ 3,703,579     $ 3,317,020  
Accounts receivable, net     3,244,852       2,346,141  
Inventory     1,319,944       902,642  
Prepaid expenses and other current assets     357,363       51,620  
                 
Total current assets     8,625,738       6,617,423  
                 
Property and equipment, net     814,323       516,005  
Investment in MREC     471,928       136,579  
                 
TOTAL ASSETS   $ 9,911,989     $ 7,270,007  
                 
LIABILITIES AND STOCKHOLDERS’ EQUITY                
                 
CURRENT LIABILITIES                
Accounts payable   $ 467,679     $ 508,358  
Accrued compensation and related costs     617,582       467,881  
Accrued expenses and other current liabilities     194,668       238,347  
Notes payable, current     11,250       -  
Deferred revenue     2,065,905       1,523,841  
                 
Total current liabilities     3,357,084       2,738,427  
                 
Long-term liabilities:                
Accrued rent liability     122,126       159,941  
Notes payable, long-term     22,500       -  
                 
Total long-term liabilities     144,626       159,941  
                 
Total liabilities     3,501,710       2,898,368  
                 
Commitments and contingencies                
                 
STOCKHOLDERS’ EQUITY                
Preferred stock $0.0001 par value; 5,000,000 authorized; no shares issued or outstanding as of December 31, 2016 and 2015  
 
 
 
 
-
 
 
 
 
 
 
 
-
 
 
Common stock $0.0001 par value; 100,000,000 shares authorized; 15,855,005 issued and outstanding as of December 31, 2016 and 15,829,325 issued and 15,825,005 outstanding as of December 31, 2015     1,586       1,583  
Class A common stock $0.0001 par value; 5,000,000 shares authorized; no shares issued or outstanding as of December 31, 2016 and 2015     -       -  
Class B common stock $0.0001 par value; 15,000,000 shares authorized; no shares issued or outstanding as of December 31, 2016 and 2015     -       -  
Additional paid-in capital     14,128,044       14,142,410  
Treasury stock at cost; no shares and 4,320 common shares outstanding as of December 31, 2016 and December 31, 2015, respectively.
 

 
-
 

 

 

(2,981

)
Accumulated deficit     (7,719,351 )     (9,769,373 )
                 
Total stockholders’ equity     6,410,279       4,371,639  
                 
TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY   $ 9,911,989     $ 7,270,007  

 

The accompanying notes are an integral part of these financial statements

 

   F-20  
 

 

VIRTRA, INC.

STATEMENTS OF OPERATIONS

For Years Ended December 31, 2016 and 2015

 

    December 31, 2016     December 31, 2015  
             
REVENUES                
Net sales   $ 15,562,121     $ 13,342,336  
Royalties     90,047       -  
                 
Total revenue   $ 15,652,168     $ 13,342,336  
Cost of sales     5,970,058       5,652,125  
                 
Gross profit     9,682,110       7,690,211  
                 
OPERATING EXPENSES                
General and administrative expenses     6,455,784       4,533,628  
Research and development expense     1,100,000       1,666,000  
                 
Net operating expense     7,555,784       6,199,628  
                 
Income from operations     2,126,326       1,490,583  
                 
OTHER INCOME (EXPENSE)                
Other income     29,429       138,026  
Other expense     (2,981 )     (2,064 )
                 
Net other income     26,448       135,962  
                 
Income before income taxes     2,152,774       1,626,545  
                 
Provision for income taxes     102,752       89,562  
                 
NET INCOME   $ 2,050,022     $ 1,536,983  
                 
Earnings per common share                
Basic   $ 0.13     $ 0.10  
Diluted   $ 0.12     $ 0.09  
                 
Weighted average shares outstanding                
Basic     15,834,046       15,825,880  
Diluted     16,606,737       16,688,107  

 

The accompanying notes are an integral part of these financial statements

 

   F-21  
 

 

VIRTRA, INC.

STATEMENT OF STOCKHOLDERS’ EQUITY

 

    Preferred stock     Common stock     Additional paid-in     Treasury     Accumulated        
    Shares     Amount     Shares     Amount     capital     Stock     Deficit     Total  
                                                 
                                                 
Balance at January 1, 2015     -     $ -       15,828,505     $ 1,583     $ 14,029,679     $ (2,981 )   $ (11,306,356 )   $ 2,721,925  
                                                                 
Stock based compensation     -       -       -       -       118,328       -       -       118,328  
                                                                 
Issued shares purchased and canceled     -       -       (3,500 )     -       (5,597 )     -       -       (5,597 )
                                                                 
Net income     -       -       -       -       -       -       1,536,983       1,536,983  
                                                                 
Balance at December 31, 2015     -       -       15,825,005       1,583       14,142,410       (2,981 )     (9,769,373 )     4,371,639  
                                                                 
Stock based compensation     -       -       -       -       181,787       -       -       181,787  
                                                                 
Stock options repurchased     -       -       -       -       (212,500 )     -       -       (212,500 )
                                                                 
Preferred stock issued     50,000       5       -       -       2,495       -       -       2,500  
                                                                 
Preferred stock repurchased     (50,000 )     (5 )     -       -       (2,495 )     -       -       (2,500 )
                                                                 
Treasury stock retirement     -       -       -       -       -       2,981       -       2,981  
                                                                 
Stock issued for options exercised     -       -       30,000       3       16,347       -       -       16,350  
                                                                 
Net income     -       -       -       -       -       -       2,050,022       2,050,022  
                                                                 
Balance at December 31, 2016     -     $ -       15,855,005     $ 1,586     $ 14,128,044     $ -     $ (7,719,351 )   $ 6,410,279  

 

The accompanying notes are an integral part of these financial statements

 

   F-22  
 

 

VIRTRA, INC.

STATEMENTS OF CASH FLOWS

 

    December 31, 2016     December 31, 2015  
             
Cash flows from operating activities:                
Net income   $ 2,050,022     $ 1,536,983  
Adjustments to reconcile net income to net cash provided (used) in operating activities                
Depreciation and amortization     192,602       184,846  
Stock-based compensation     181,786       118,328  
Cash settlement of stock options     341,838       -  
Treasury stock cancelled     2,981       -  
Other income received in Modern Round equity     -       (136,579 )
Changes in operating assets and liabilities:                
Accounts receivable     (898,711 )     (735,760 )
Inventory     (417,302 )     (199,813 )
Prepaid expenses and other current assets     (305,743 )     6,504  
Accounts payable and other accrued expenses     65,343       396,955  
Deferred revenue     542,064       571,377  
                 
Net cash provided by operating activities     1,754,880       1,742,841  
                 
Cash flows from investing activities:                
Investment in MREC     (335,349 )     -  
Asset purchase - Profiles Tools, net of shop supplies     (185,450 )     -  
Purchase of property and equipment     (309,535 )     (332,953 )
                 
Net cash used in investing activities     (830,334 )     (332,953 )
                 
Cash flows from financing activities:                
Repurchase of stock-based options     (554,338 )     -  
Common stock shares cancelled     -       (5,597 )
Proceeds from common stock issued for options exercised     16,351       -  
                 
Net cash used in financing activities     (537,987 )     (5,597 )
                 
Net increase in cash     386,559       1,404,291  
Cash, beginning of period     3,317,020       1,912,729  
                 
Cash, end of period   $ 3,703,579     $ 3,317,020  
                 
Supplemental disclosure of cash flow information:                
Cash paid during period for income taxes   $ 102,752     $ 19,562  
Non-cash investing and financing activities:                
Assumption of note - Profiles Tools   $ 33,750     $ -  
Receipt of Modern Round equity   $ -     $ 136,579  

 

The accompanying notes are an integral part of these financial statements

 

   F-23  
 

 

Note 1. Significant Accounting Policies

 

Organization and Business Operations

 

VirTra, Inc. (the “Company” or “VirTra”) is engaged in the sale and development of judgmental use of force training simulators and firearms training simulators for law enforcement, military and commercial uses. The Company sells simulators and related 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 Systems, Inc., a Texas Corporation.

 

Effective as of October 1, 2016 (the “Effective Date”), the Company completed a conversion from a Texas corporation to a Nevada corporation pursuant to a Redomestication Plan of Conversion (the “Plan of Conversion”) that was approved by the Company’s Board of Directors on June 23, 2016 and its shareholders on September 16, 2016. On the Effective Date, 15,855,005 shares of common stock of VirTra Systems, Inc., a Texas corporation, were converted into 15,855,005 shares of Common Stock of VirTra, Inc., a Nevada corporation. No shareholders exercised appraisal rights or dissenters’ rights for such shares in accordance with the Texas Business Organization Code.

 

As part of the Plan of Conversion, the Company filed Articles of Incorporation in Nevada whereby it changed its name from VirTra Systems, Inc. to VirTra, Inc. and revised its capitalization. The Company’s Articles of Incorporation filed in Nevada authorized the Company to issue 125,000,000 shares, of which (1) 120,000,000 shares shall be Common Stock, par value $0.0001 per share (the “Common Stock”), of which (a) 100,000,000 shares shall be Common Stock, par value $0.0001, (b) 5,000,000 shares shall be Class A Common Stock, par value $0.0001 per share (the “Class A Common Stock”), and (c) 15,000,000 shares shall be Class B Common Stock, par value $0.0001 per share (the “Class B Common Stock”) and (2) 5,000,000 shares shall be Preferred Stock, par value $0.0001 per share, which may, at the sole discretion of the Board of Directors be issued in one or more series (the “Preferred Stock”). The Company also adopted new bylaws as part of the Plan of Conversion.

 

Effective October 20, 2016, we affected a 1 for 10 reverse stock split of our issued and outstanding Common Stock (the “Reverse Stock Split”). All references to shares of our common stock in this report refer to the number of shares of common stock after giving effect to the Reverse Stock Split (unless otherwise indicated). After giving effect to the reverse split, there are 15,855,005 shares of Common Stock outstanding.

 

The corporate office is located in Tempe, Arizona. All transactions are denominated in US dollars.

 

Basis of Presentation and Use of Estimates

 

The Company’s financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”), unless otherwise noted. The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions 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. Significant accounting estimates in these financial statements include valuation assumptions for share-based payments, allowance for doubtful accounts receivable, inventory reserves, accrual for warranty reserves, the carrying value of long-lived assets, income tax valuation allowances and the carrying value of cost basis investments. Actual results could differ significantly from those estimates.

 

Fair Value of Financial Instruments

 

The fair value of financial instruments approximates their carrying values at December 31, 2016 and 2015 due to their short maturities. These financial instruments consist of cash and cash equivalents, accounts receivable, investment in MREC, accounts payable, and accrued liabilities.

 

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.

 

   F-24  
 

 

Accounts 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 are charged off after all reasonable collection efforts have been taken. As of December 31, 2016 and 2015, the Company maintained an allowance for doubtful accounts of $20,000 and $59,266, respectively.

 

Inventories

 

Inventories are stated at the lower of cost or market 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 and provides reserves when appropriate to reduce inventory to the lower of cost or market to reflect estimated net realizable value. As of December 31, 2016, management has determined that it was necessary to record a reserve of $17,282. There was no inventory reserve recorded for the year ended December 31, 2015.

 

Investments in Other Companies

 

Minority investments in other companies are accounted for under the cost method of accounting because the Company does not have the ability to exercise significant influence over the companies’ operations. Under the cost method of accounting, investments in private companies are carried at cost and are only adjusted for other-than- temporary declines in fair value and distribution of earnings. For investments in public companies that have readily determinable fair values, the Company classifies its investments as available-for-sale, and accordingly records these investments at their fair values with unrealized gains and losses included as a separate component of stockholders’ equity and in total comprehensive income (loss). Upon sale or liquidation, realized gains and losses are included in the statements of operations.

 

Management regularly evaluates the recoverability of its investment based on the investee company’s performance and financial position. During the years ended December 31, 2016 and 2015, the Company did not recognize any losses due to other-than-temporary declines of the value of the investments. In addition, 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. 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, which are summarized as follows:

 

Computer equipment     3-5 years  
Furniture and office equipment     5-7 years  
Leasehold improvements     7 years  

 

Revenue Recognition and Deferred Revenue

 

Net revenues include sales of products and services and are net of discounts. Product sales consist of simulators, upgrade components, scenarios, scenario software, recoil kits, Threat-FireTM and other accessories. Services include installation, training, limited warranties, service agreements and related support. Certain components of the Company’s sales include multiple elements comprising of both products and services. The Company’s revenue recognition falls under ASC 605-25, Multiple Element Arrangements, with the delivery of the simulator and installation being two separate deliverables. The Company’s delivery of the simulator and the installation has been assessed to qualify as separate units of accounting:

 

1. The simulator unit upon shipment or delivery and customer acceptance, depending on the shipping terms

 

2. The installation upon completion and customer sign-off.

 

   F-25  
 

 

Additionally, the Company recognizes revenue for these products and services when it is realized or realizable and earned. Revenue is considered realized and earned when: (i) persuasive evidence of an arrangement exists; (ii) delivery has occurred and/or services have been rendered; (iii) the price is fixed and determinable; and (iv) collection of the resulting receivable is reasonably assured. Shipping fees charged to customers are recorded as a component of net revenues. All sales and sales contracts, including international sales, have been denominated in US dollars.

 

Products

 

Revenue from the sale of products is recognized when title and risk of loss passes to the customer. Delivery is considered complete when products have been shipped to the customer and title and risk of loss has transferred to the customer. For customers other than United States governmental agencies, the Company generally requires deposits in advance of shipment for customer sales orders. Customer deposits are recorded as a current liability under deferred revenue on the accompanying balance sheet and totaled $51,334 and $658,426 as of December 31, 2016 and 2015, respectively.

 

Services

 

Services include installation of product, separately priced extended limited warranties on parts and labor, and technical support. Revenue is recognized for service contracts as earned, which is generally upon completion of installation or, as it relates to the extended warranties, on a straight-line basis over the term of the contract. The Company does warranty its products from manufacturing defects on a limited basis for a period of one year after purchase, but also sells separately priced extended warranties for periods of up to four years after the expiration of the standard one year warranty. After the one year standard warranty expires and during the term of the extended 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 longer than one year totaled $2,014,571 and $865,415 as of December 31, 2016 and 2015, respectively. The Company records a gross to net revenue adjustment and accrues on an annual basis the estimated cost of complying with the warranty agreements for the next fiscal year. The accrual for the one-year manufacturer’s warranty liability totaled $122,000 and $77,400 as of December 31, 2016 and 2015, respectively.

 

Cost of Products Sold

 

Cost of products sold represents manufacturing costs, consisting of materials, labor and overhead related to finished goods and components. 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 $448,948 and $365,920 for the years ended December 31, 2016 and 2015, 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 $1,100,000 and $1,666,000 for 2016 and 2015, respectively.

 

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 and accounts receivable. The Company’s cash and cash equivalents are maintained with financial institutions with high credit standings. 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 $2,986,694 and $3,141,304 as of December 31, 2016 and 2015, respectively.

 

   F-26  
 

 

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.

 

Historically, the Company primarily sells its products to United States federal and state agencies. No single federal or state customer comprised more than 10% of total net sales in the year ended December 31, 2016. One federal agency comprised 36.9% of total net sales in the year ended December 31, 2015. One international customer comprised 17.9% and 0.0% of total net sales in the years ended December 31, 2016 and 2015, respectively. Overall, just one single customer exceeded 10% of net sales for 2016 and one single customer exceeded 10% of net sales for 2015. The Company’s accounts receivable balances were with twenty-four customers and fifteen customers as of December 31, 2016 and 2015, respectively.

 

The Company currently purchases small machined parts, custom assemblies and electronic components from suppliers located in the United States. Although the Company currently obtains many of these components from single source suppliers, the Company could seek to have the parts, custom assemblies and electronic components manufactured elsewhere. On August 16, 2016, the Company entered into an Asset Purchase Agreement and acquired a machine shop where the Company can manufacture many of the components needed. This transaction will mitigate the risk associated with single source suppliers. The Company acquires its components on a purchase order basis and does not have long-term contracts with suppliers.

 

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. As of December 31, 2016 and 2015, the Company has provided a valuation allowance for all net deferred tax assets.

 

As of December 31, 2016 and 2015, the Company did not recognize any assets or liabilities relative to uncertain tax positions. 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 December 31, 2016 or 2015.

 

The Company is potentially subject to tax audits for its United States federal and Arizona state income tax returns for tax years ended 2014 to 2016 and 2013 to 2016, respectively; 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

 

Long lived assets, such as equipment, 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 December 31, 2016 and 2015, 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.

 

   F-27  
 

 

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. The assumptions used for the years ended December 31, 2016 and 2015, and the resulting estimates of weighted-average fair value per share of options granted during those periods, are as follows:

 

      December 31, 2016       December 31, 2015  
                 
Volatility     95% to 150%       106% to 113%  
Risk-free interest rate     1% to 2%       1% to 2%  
Expected term     7 years       5 - 7 years  

 

The expected term of the options represents the estimated period of time until exercise and is based on historical experience of similar awards, giving consideration to the contractual terms, vesting schedules and expectations of future employee behavior. Expected stock price volatility is based on historical volatility of the Company’s stock. 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. As share-based compensation expense recognized is based on awards ultimately expected to vest, it is reduced for estimated forfeitures. Forfeitures are estimated at the time of grant and revised, if necessary, in subsequent periods if actual forfeitures differ from those estimates. The Company’s forfeiture rate was calculated based on its historical experience of awards which ultimately vested.

 

Net income 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 that would occur if outstanding stock options were exercised. Weighted average common shares outstanding and dilutive shares consisted of the following as of December 31:

 

    2016     2015  
Net income   $ 2,050,022     $ 1,536,983  
Weighted average common stock outstanding     15,834,046       15,825,880  
Incremental shares from stock options     470,210       862,227  
Incremental shares from warrants     302,481       0  
Weighted average common stock outstanding - diluted     16,606,737       16,688,107  
Net income per common share and common equivalent shares Basic   $ 0.13     $ 0.10  
Diluted   $ 0.12     $ 0.09  

 

New Accounting Pronouncements

 

In May 2014, the Financial Accounting Standards Board (“FASB”) issued guidance for revenue recognition for contracts, superseding the previous revenue recognition requirements, along with most existing industry-specific guidance. The guidance requires an entity to review contracts in five steps: 1) identify the contract, 2) identify performance obligations, 3) determine the transaction price, 4) allocate the transaction price, and 5) recognize revenue. The new standard will result in enhanced disclosures regarding the nature, amount, timing and uncertainty of revenue arising from contracts with customers. In August 2015, the FASB issued guidance approving a one-year deferral, making the standard effective for reporting periods beginning after December 15, 2017, with early adoption permitted only for reporting periods beginning after December 15, 2016. The FASB continues to release guidance clarifying certain aspects of the revenue guidance. The Company is evaluating the impact of the standard and has not yet determined the effect on its financial position or results of operations.

 

   F-28  
 

 

In November 2015, the Financial Accounting Standards Board issued Accounting Standards Update 2015-17 – “Income Taxes (Topic 740): Balance Sheet Classification of Deferred Taxes”. The amendment’s purpose is to require deferred tax liabilities and assets be classified as noncurrent in a classified statement of financial position (Balance Sheet). This accounting guidance will become effective beginning in the first quarter of 2017. Early application is permitted. The Company does not expect a material impact on the financial statements and related disclosures from the adoption of this updated standard.

 

In February 2016, the FASB issued ASU No. 2016-02, Leases (Topic 842), which requires lessees to put most leases on their balance sheets by recognizing lease assets and lease liabilities for those leases classified as operating leases under previous guidance. This ASU will be effective for us on January 1, 2019, with early adoption permitted. We are currently in the process of assessing the impact of this ASU on our consolidated financial statements.

 

In March 2016, the FASB issued ASU No. 2016-09, Stock Compensation (Topic 718), which includes provisions intended to simplify various aspects related to how share-based payments are accounted for and presented in the financial statements. The standard is effective for annual periods beginning after December 15, 2016, with early adoption permitted. We do not expect the adoption of this standard to have a significant impact on our financial position and results of operations.

 

In June 2016, the FASB issued ASU No. 2016-13, Financial Instruments – Credit Losses (“ASU 2016-13”) that introduces a new methodology for accounting for credit losses on financial instruments, including available-for- sale debt securities. The guidance establishes a new “expected loss model” that requires entities to estimate current expected credit losses on financial instruments by using all practical and relevant information. Any expected credit losses are to be reflected as allowances rather than reductions in the amortized cost of available-for-sale debt securities. Early adoption is permitted for annual periods beginning after December 31, 2018, and interim periods therein. The Company is currently evaluating the potential impact that ASU 2016-13 may have on its financial position and results of operations.

 

Note 2. Inventory

 

Inventory consisted of the following as of:

 

    December 31, 2016     December 31, 2015  
Raw materials   $ 1,085,519     $ 902,642  
Finished goods     251,707       -  
Reserve     (17,282 )     -  
Total inventory   $ 1,319,944     $ 902,642  

 

   F-29  
 

 

Note 3. Property and Equipment

 

Property and equipment consisted of the following as of December 31:

 

    December 31, 2016     December 31, 2015  
             
Computer equipment   $ 753,986     $ 559,158  
Furniture and office equipment     182,969       171,732  
Machinery and equipment     925,495       608,876  
Leasehold improvements     318,318       312,267  
Total property and equipment     2,180,768       1,652,033  
Less: Accumulated depreciation     (1,366,445 )     (1,136,028 )
Property and equipment, net   $ 814,323     $ 516,005  

 

Depreciation expense was $192,602 and $184,846 for the years ended December 31, 2016 and 2015, respectively.

 

Note 4. Accrued Expenses and Other Current Liabilities

 

Accrued expenses and other current liabilities consisted of the following at December 31:

 

    December 31, 2016     December 31, 2015  
Manufacturer’s warranties   $ 122,000     $ 77,400  
Taxes payable     32,668       145,947  
Other     40,000       15,000  
Total accrued expenses and other current liabilities   $ 194,668     $ 238,347  

 

Note 5. Collaboration Agreement

 

On January 16, 2015, the Company entered into a Co-Venture Agreement (“Agreement”) with Modern Round, LLC (“Modern Round”), a related party. Modern Round is in the business of developing and operating a combined dining and entertainment concept centered on an indoor shooting experience. The Agreement provides Modern Round access to certain software and related technology relating to firearm simulation training. The Company received 1,365,789 units, representing a 5% ownership interest in Modern Round on the date of the Agreement. The Company recorded the investment at the estimated fair value of the units received which were valued at $0.10 per unit based on Modern Round’s other membership unit sales . As a result, the Company recognized a gain of $136,579, which is recorded in other income on the statement of operations. The Modern Round equity securities are accounted for as a cost method investment as the Company does not have the ability to exercise significant influence over Modern Round.

 

The Agreement also provides the Company conditional warrants to purchase 1,365,789 units, representing an additional 5% of Modern Round as at the date of the Agreement, at an exercise price of $0.25. Such warrants are exercisable on the first anniversary of the opening of Modern Round’s first facility and ending five years from the date of grant. In addition, on April 14, 2015 Modern Round issued the Company an option to purchase 125,000 units. The option fully vested and became exercisable on the date of grant at an exercise price equal to $0.50 per unit. The April 14, 2015 option terminates on the tenth anniversary of the date of grant, if not earlier pursuant to the terms of the option.

 

The Agreement further provided VirTra with certain anti-dilution rights, including the right to acquire units to assure the Company’s ownership of 1% of the outstanding units on a fully diluted basis, as well as the right to purchase up to 5% of any unit offering. These anti-dilution rights terminated on December 31, 2015 upon the completion of a Plan of Merger between Modern Round, LLC and Nuvola Merger SubCo., a subsidiary of Nuvola Inc. (“NMS”), (the “Merger Agreement”), the result of which was that NMS was merged with and into Modern Round with Modern Round continuing as the surviving entity and a wholly owned subsidiary of Nuvola Inc. (the “Modern Round Merger”). Pursuant to the terms of the Merger Agreement each unit of Modern Round issued and outstanding as of the effective time, automatically converted into the right to receive approximately 1.2277 shares of Nuvola, Inc. (the “Conversion Ratio”). On December 31, 2015, Modern Round completed the Modern Round Merger discussed above. On February 11, 2016 Nuvola, Inc. filed Amended and Restated Articles of Incorporation that had the effect of, among other matters, changing the name of the company to Modern Round Entertainment Corporation (“MREC”).

 

   F-30  
 

 

As a result of the Modern Round Merger, the Company held 1,676,748 shares of MREC, options to purchase 153,459 shares of MREC at an exercise price of $.41 per share, and conditional warrants to purchase 1,676,747 shares of MREC at an exercise price of $.20 per share. On October 20, 2016, the Company exercised the warrant and purchased 1,676,747 shares of stock for $335,349 resulting in the Company’s aggregate holdings of MREC increasing to 3,353,495 common shares representing approximately 8.9% of the issued and outstanding common shares of MREC.

 

As part of this Co-Venture Agreement, the Company granted 919,382 conditional warrants to affiliates of MREC, a related party, to purchase 5% of the Company’s capital stock on a fully diluted basis as of the date of the Agreement. The conditional warrants are exercisable commencing at the earlier of the first anniversary of MREC opening its first range facility utilizing VirTra Technology or after MREC opening its first range facility utilizing VirTra Technology and the payment of all required US/Canada Minimum Royalty Payments during the first 12 month period has been made to VirTra. MREC subsequently opened its first location on June 1, 2016.

 

The Company also granted 919,382 of additional conditional warrants to affiliates of MREC to purchase another 5% of the Company’s capital stock on a fully diluted basis as of the Agreement date. These conditional warrants are exercisable any time subsequent to MREC’s payment of $2.0 million in cumulative license fees (royalty). Cumulative license fees (royalty) earned and paid to the Company amounted to $90,047 and $0 as of December 31, 2016 and 2015, respectively. Both conditional warrant issuances are for a period of five years with an exercise price of $1.36. These contingent considerations for the equity investment do not meet the definition of a derivative under ASC 815 as of December 31, 2016. As such, the contingent consideration is not included in the cost of the equity investment until the contingency is resolved and the warrant becomes exercisable.

 

The Agreement grants MREC an exclusive non-transferrable license to use the Company’s technology solely for use at locations to operate the Concept, as defined in the Agreement. The license would become non-exclusive to the extent the first U.S. location is not opened within 24 months of the effective date and at least one location is opened outside the U.S. and Canada within five years of the Agreement date, the respective milestone dates. Through the termination of the Agreement, MREC will pay the Company a high single digit royalty on Gross Revenue, as defined and subject to certain minimum royalties commencing with the first twelve month period subsequent to the respective milestone date. The Company earned $90,047 and $0 for license fees (royalties) in 2016 and 2015, respectively.

 

Note 6. Related Party Transactions

 

During the year ended December 31, 2016, the Company issued 22,500 stock options to purchase shares of common stock at a purchase price of $1.40; 22,500 stock options to purchase shares of common stock at a purchase price of $1.12; 22,500 stock options to purchase shares of common stock at a purchase price of $2.095 and 25,833 stock options to purchase shares of common stock are a purchase price of $2.70. All of the options are exercisable within seven years of grant date. These stock options were issued to the CEO, COO and members of the Board of Directors.

 

During the year ended December 31, 2016, related parties redeemed 375,000 previously awarded options reaching expiration. These redemptions resulted in $341,838 in additional compensation expense in 2016, of which $293,188 were related to redemptions by the Company’s CEO and COO.

 

On July 1, 2016, 50,000 shares of the Series A Preferred shares were issued to Robert Ferris, the Company’s Chief Executive Officer and a director and he paid $2,500 for these shares. Effective on September 16, 2016, these same 50,000 shares of the Series A Preferred shares were automatically redeemed from Mr. Ferris by the Company for $2,500 and cancelled.

 

Mr. Saltz who is a member of our Board of Directors is also Chairman of the Board of Directors of Modern Round Entertainment Company, as well as, a majority stockholder of MREC. The Company has entered into a Co-venture Agreement with MREC as disclosed in Note 5. In addition, the Company owns 3,353,495 shares of MREC common stock representing approximately 8.9% of the issued and outstanding shares of MREC common stock.

 

   F-31  
 

 

Note 7. Commitments and Contingencies

 

Operating Lease Obligations

 

The Company’s operating lease obligations primarily relate to a facility lease for the Company’s corporate office space located at 7970 South Kyrene Road, Tempe, Arizona 85284, which expires in April, 2019, unless renewed. As part of the purchase of Profiles Tools & Engineering on August 2, 2016, discussed in Note 7, the Company assumed the lease for the building at 2169 East 5th St., Tempe, Arizona 85284, which expired in March, 2017 but was renewed until March, 2018.

 

Future minimum lease payments under non-cancelable operating leases are as follows:

 

2017   $ 314,921  
2018     313,553  
2019     105,542  
Total   $ 734,016  

 

The Company has a liability of $122,126 and $159,941 as of December 31, 2016 and December 31, 2015, respectively, relative to the increasing future minimum lease payments. Rent expense was $380,522 and $360,562 for the years ended December 31, 2016 and 2015, respectively.

 

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’s policy is to not disclose the specifics of any claim or threatened lawsuit until such complaint is actually served on the Company. On October 20, 2016 a former employee filed a lawsuit in the U.S. District Court, District of Arizona against the Company alleging its failure and/or refusal to pay overtime in violation of 29 U.S.C. Sec. 201, et. seq. and a claim for wrongfully withheld wages under A.R.S. Sec. 23-350 et. seq. The complaint seeks certification of class action status, declaratory relief, damages, interest, attorneys’ fees and such other relief the Court deems just and proper. The Company intends to vigorously defend itself. While acknowledging the uncertainties of litigation with an unfavorable ruling resulting in monetary damages against us, management believes that the ultimate outcome of this matter will not have a material effect on its earnings, cash flows, or financial position.

 

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 with upward adjustments each year. If the Company’s Chief Executive Officer or Chief Operating Officer are terminated by the Company for any reason other than for Cause, or if the Executive voluntarily terminates his own employment for Good Reason but not including a Change in Control, then the Company shall, subject to the terms of the Employment Agreements, be obligated to pay the Executive an amount equal to the greater of (a) the Executive’s annual base salary in effect on the day preceding the date of such termination or (b) the Executive’s annual base salary during the twelve full calendar months preceding the date of such termination, times three. If a Change of Control of the Company occurs while the Executive is an employee of the Company and within 36 months from the date of such Change in Control the Company terminates the Executive’s employment for any reason (except for the death or disability of the Executive or for Cause) or the Executive terminates his employment for any reason, then the Company shall, subject to certain limitations, pay the Executive any earned and accrued but unpaid base salary through the date of termination plus an amount of severance pay equal to the greater of (a) the Executive’s annual base salary in effect on the day preceding the date on which the Change of Control occurred or (b) the Executive’s annual base salary during the twelve full calendar months preceding the date on which the Change of Control occurred, times four. These employment agreements have been automatically extended.

 

   F-32  
 

 

Profit Sharing

 

VirTra provides a discretionary Profit Sharing program that pays out a percentage of company profits each year as a cash bonus to active and eligible employees. The cash payment is typically split into two equal payments and distributed pro-rata to employees in April and October of the following year after the completion of the annual financial audit. For the years ending December 31, 2016 and 2015, the amount charged to operations was fifteen percent (15%) of net profit.

 

Note 8. Asset Purchase Agreement

 

On August 2, 2016, the Company executed an Asset Purchase Agreement (“APA”) with Profiles Tool and Engineering, Inc., an Arizona corporation that operated an engineering and custom machining facility in Mesa, AZ (“Profiles”). The total purchase price, including assumed liabilities, was $286,220 and is considered an asset acquisition as the assets assumed only support the Company’s existing assembly operations. With the purchase of this machine shop the Company is able to build parts directly and more efficiently.

 

Note 9. Income Taxes

 

The Company accounts for its deferred tax assets and liabilities, including excess tax benefits of share-based payments, based on the tax ordering of deductions to be used on its tax returns. The tax effects of temporary differences that give rise to significant portions of deferred tax assets and deferred tax liabilities is as follows:

 

    December 31, 2016     December 31, 2015  
             
Deferred tax assets                
Net operating loss carry forwards   $ 1,739,000     $ 2,062,000  
Deferred revenue     826,000       609,000  
Non-qualified stock option expense     540,000       467,000  
Reserves, accruals and other     133,000       146,000  
Tax intangible assets and accumulated depreciation/amortization     1,187,000       1,566,000  
Total deferred tax assets     4,425,000       4,850,000  
Less: Valuation allowance     (4,425,000 )     (4,850,000 )
 Net deferred tax assets   $ -     $ -  

 

The company maintains a valuation allowance equal to the potential benefit of the net deferred tax assets.

 

Internal Revenue Code Section 382 limits the ability to utilize net operating losses if a 50% change in ownership occurs over a three year period. Such limitation of the net operating losses may have occurred but we have not analyzed it at this time as the deferred tax asset is fully reserved. The Company believes it has approximately $6.1 million of federal net operating loss carry-forwards that are available to offset future taxable income that expire in various years through 2034. The state net operation loss carry-forward was fully utilized in the tax year 2015.

 

Significant components of the (provision) benefit for income tax as follows:

 

    December 31, 2016     December 31, 2015  
                 
Current   $ 103,000     $ 89,000  
Deferred     425,000       539,000  
Change in valuation allowance     (425,000 )     (539,000 )
Provision for income taxes   $ 103,000     $ 89,000  

 

   F-33  
 

 

The Company is subject to federal and state taxes. A reconciliation of the Company’s effective income tax rate to the federal statutory rate is as follows:

 

    December 31, 2016     December 31, 2015  
             
Federal income tax benefit at the statutory rate   $ 697,000     $ 553,000  
State income taxes, net of federal benefit     103,000       89,000  
Permanent differences     (16,000 )     (14,000 )
Tax return true-ups     (256,000 )     -  
Change in valuation allowance     (425,000 )     (539,000 )
Provision for income taxes   $ 103,000     $ 89,000  

 

Note 10. Stockholders’ Equity

 

Authorized Capital

 

Common Stock.

 

Authorized Shares. The Company is authorized to issue 120,000,000 shares of Common Stock, par value $0.0001 per share (the “Common Stock”), of which (a) 100,000,000 shares shall be Common Stock, par value $0.0001, (b) 5,000,000 shares shall be Class A Common Stock, par value $0.0001 per share (the “Class A Common Stock”), and (c) 15,000,000 shares shall be Class B Common Stock, par value $0.0001 per share (the “Class B Common Stock”). No Class A 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 these 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 5,000,000 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.

 

On June 23, 2016 the Company filed a Certificate of Amendment with the Secretary of State of Texas designating 500,000 shares of Series A Preferred Stock, par value $0.005 per share (the “Series A Preferred”). Holders of the Series A Preferred are entitled to 600 votes on all matters submitted to a vote of the stockholders of the Corporation. In the event that such votes do not total at least 66.67% of all votes, then regardless of the provisions of this paragraph, in any such case, the votes cast by the holders of the Series A Preferred shall be equal to 66.67% of all votes cast at any meeting of stockholders, or any issue put to the stockholders for voting and the Corporation may state that any such action was had by majority vote of all stockholders.

 

   F-34  
 

 

On July 1, 2016, 50,000 shares of the Series A Preferred shares were issued to Robert Ferris, the Company’s Chief Executive Officer and a director and he paid $2,500 for these shares. Effective on September 16, 2016, these same 50,000 shares of the Series A Preferred shares were automatically redeemed from Mr. Ferris by the Company for $2,500 and cancelled.

 

Stock Repurchase

 

On October 25, 2016 the Company’s Board of Directors authorized the repurchase of up to $1,000,000 of its common stock through December 31, 2017. 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 Rule 10b-18 of the Securities and Exchange Commission. 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. As of the date of this report no shares were repurchased.

 

Treasury Stock

 

During the year ended December 31, 2016, the Company cancelled 4,320 shares of treasury stock for $2,981. The Company purchased 3,500 shares of treasury stock for $5,597 during the year ended December 31, 2015.

 

Stock Options

 

The Company periodically issues non-qualified incentive 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. The Board of Directors previously approved a quarterly grant of a total of 10,000 stock options to the CEO, 7,500 stock options to the COO/Secretary, and 5,000 stock options to any non-employee board member. During the year ended December 31, 2016, the Company issued 93,333 stock options with a weighted average exercise price of $1.92 per share. The following table summarizes all compensation plan stock options as of December 31, 2016:

 

    2016     2015  
   

Number of

Stock Options

    Weighted
Exercise Price
   

Number of

Stock Options

    Weighted
Exercise Price
 
Options outstanding, beginning of year     1,667,934     $ 0.60       1,612,934     $ 0.50  
Granted     93,333       1.92       90,000       1.20  
Redeemed     (500,000 )     0.42       -       -  
Exercised     (30,000 )     0.42       -       -  
Expired / terminated     (115,434 )     0.52       (35,000 )     0.30  
Options outstanding, end of year     1,115,833       0.80       1,667,934       0.60  
Options exercisable, end of year     1,075,833       0.79       1,559,601       0.60  

 

The following table summarizes the Company’s non-vested stock options as of December 31, 2016:

 

    Number of
Non vested
Stock Options
    Weighted
Exercise Price
 
Non vested at January 1, 2016
    1,083,333     $ 0.400  
Granted     -       -  
Redeemed     -       -  
Forfeited     -       -  
Vested     (1,043,333 )     0.400  
Non vested at December 31, 2016     40,000     $ 0.400  

 

   F-35  
 

 

The following table summarizes information about stock options outstanding and exercisable as of December 31, 2016:

 

Range of
Exercise Price
    Number of Options
Outstanding
   

Weighted

Average
Exercise Price

    Number of Options
Exercisable
    Weighted Average
Exercise Price
 
$.40 - $.99       955,000     $ 0.63       915,000     $ 0.64  
$1.00 - $1.99       112,500     $ 1.32       112,500     $ 1.32  
$2.00 - $2.99       48,333     $ 2.42       48,333     $ 2.42  
$.40 - $2.99       1,115,833     $ 0.77       1,075,833     $ 0.79  

 

The aggregate intrinsic value of options outstanding and options exercisable were $1,997,415 and $1,363,099 as of December 31, 2016 and 2015, 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. The total fair value of shares vested during the years ended December 31, 2016 and 2015 is $181,786 and $133,552, respectively.

 

On March 9, 2016, the Company’s board of directors approved a program under which the Company may repurchase outstanding vested Company stock options on an exception basis. Under the terms of the program, the Company’s CEO or COO may cause the Company to redeem for cash any positive stock options for the net value of the stock option (stock price on the redemption date minus strike price). The cash redemption of stock options held by the CEO or COO must be approved by the Company’s independent directors. Any redeemed options are immediately cancelled. The Company retains the right to reject any redemption request that is not in the best interest of the Company. During the year ended December 31, 2016, the Company redeemed 500,000 stock options for $554,338 of which $212,500 has been previously expensed in 2009 using the Black-Scholes fair value method with the balance of $341,838 being recognized as additional compensation cost during 2016. This amount is included in the accompanying statement of operations in general and administrative expense. Management does not expect to have significant volume of cash redemptions in the future, and has thus determined that equity classification for these awards remains appropriate.

 

Warrants

 

As part of the January 2015 Co-Venture Agreement, the Company granted conditional warrants to affiliates of Modern Round Entertainment Company, a related party, to purchase 5% of the Company’s capital stock on a fully diluted basis. The conditional warrants are exercisable commencing at the earlier of the first anniversary of Modern Round opening its first range facility utilizing VirTra Technology or after Modern Round opening its first range facility utilizing VirTra Technology and the payment of all required US/Canada Minimum Royalty Payments during the first 12 month period has been made to VirTra. The Company also granted 1,838,764 conditional warrants to affiliates of Modern Round to purchase 5% of the Company’s capital stock on a fully diluted basis, which are exercisable any time subsequent to Modern Round’s payment of $2.0 million in royalty fees. The conditional warrants have a contractual term of five years and an exercise price of $1.36.

 

Note 12. Subsequent Events

 

In January, 2017 VirTra executed a lease addendum on its 2169 E Fifth Street location for the renewal period April 1, 2017 to March 31, 2018 at a new monthly lease of $3,600 base rent plus $226 common area maintenance per month.

 

   F-36  
 

 

VIRTRA, INC.

 

Best Efforts Offering of [__] Shares of Common Stock

 

OFFERING CIRCULAR

 

PART III – EXHIBITS

Index to Exhibits

 

Exhibit No.   Exhibit Description
     
1.1*   Form of Underwriting Agreement
     
2.1   Articles of Incorporation of VirTra, Inc. filed September 22, 2016
     
2.2   Certificate of Change of VirTra, Inc. filed on October 7, 2016
     
2.3   Bylaws of VirTra, Inc.
     
3.1   Form of Warrant to Purchase Common Stock dated January 16, 2015 issued by VirTra Systems, Inc.
     
3.2   Form of Stock Option Agreement
     
4.1   Form of Subscription Agreement
     
6.1   Lease Agreement dated July 8, 2010 between VirTra Systems, Inc. and DMC Portfolio, LLC, as amended
     
6.2   Employment Agreement dated April 2, 2012 between VirTra Systems, Inc. and Robert Ferris
     
6.3   Employment Agreement dated April 2, 2012 between VirTra Systems, Inc. and Matt Burlend
     
6.4   Co-Venture Agreement dated January 16, 2015, by and between Modern Round, L.L.C. and VirTra Systems, Inc.
     
6.5   2017 Equity Incentive Plan
     
6.6   Form of Stock Option Agreement for 2017 Equity Incentive Plan
     
6.7   Form of Notice of Grant of Stock Option for 2017 Equity Incentive Plan
     
8.1   Form of Offering Deposit Account Agency Agreement
     
8.2   Form of Issuer Acknowledgement – Regulation A Offering
     
10.1   Power of attorney (included on signature page of Offering Circular)
     
11.1   Consent of Friedman LLP
     
11.2   Consent of Semple, Marchal & Cooper, LLP
     
11.3*   Consent of Legal & Compliance, LLC (included in Exhibit 12. 1)
     
12.1*   Opinion of Legal & Compliance, LLC

 

*To be filed by amendment

 

   -37-  
 

 

SIGNATURES

 

Pursuant to the requirements of Regulation A, the registrant has duly caused this Form 1-A to be signed on its behalf by the undersigned, thereunto duly authorized, in the City of Tempe, State of Arizona, on September 8, 2017.

 

  VIRTRA, INC.
   
  By: /s/ Robert D. Ferris
    Robert D. Ferris,
    Chief Executive Officer

 

KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature appears below constitutes and appoints Robert D. Ferris as his true and lawful attorney-in-fact and agent, with full power of substitution and resubstitution, for him and in his name, place and stead, in any and all capacities, to sign any and all amendments to this Form 1-A Offering Circular and to file the same, with all exhibits thereto and other documents in connection therewith, with the Securities and Exchange Commission, granting unto said attorney-in-fact and agent full power and authority to do and perform each and every act and thing requisite and necessary to be done in connection therewith, as fully to all intents and purposes as he might or could do in person, hereby ratifying and confirming all that each of said attorney-in-fact and agent or his substitutes or substitute, may lawfully do or cause to be done by virtue hereof.

 

Pursuant to the requirements of Regulation A, this Form 1-A has been signed by the following persons in the capacities indicated on September 8, 2017.

 

Name   Title
     
/s/ Robert D. Ferris   Chief Executive Officer, President, Chairman of the Board and Director (Principal Executive Officer)
Robert D. Ferris    
     
/s/ Judy Henry   Chief Financial Officer (Principal Financial Officer)
Judy Henry    
     
/s/ Matthew Burlend   Director, Chief Operating Officer and Secretary
Matthew Burlend    
     
/s/ Mitchell A. Saltz   Director

Mitchell A. Saltz

   
     
/s/ Jeffrey Brown   Director

Jeffrey Brown

   

 

   -38-  
 

 

 

 

 
 

 

 

 
 

 

 

 

 
 

 

 

 

 
 

 

 

 

 
 

 

 

 

 
 

 

 

 

 
 

 

 

 

 
 

 

 

 

 
 

 

 

 

 
 

 

 

 
 

 

 

 
 

 

 

 
 

 

 

 
 

 

 

 

 
 

 

 

 

 
 

 

BY-LAWS

OF

 VIRTRA SYSTEMS, INC.

 

 

ARTICLE I

 

OFFICES

 

Section 1. PRINCIPAL OFFICES. The principal office of VirTra Systems, Inc. (the “Corporation”) shall be in the City of Tempe, Maricopa County, State of Arizona. The registered agent shall be InCorp Services, Inc. located at 3773 Howard Hughes Parkway, South Tower, Suite 500, Las Vegas, NV 89169 or such other place as the Board of Directors of the Corporation (the “Board”) shall from time to time select.

 

Section 2. OTHER OFFICES. The Board may at any time establish branch or subordinate offices at any place or places where the Corporation is qualified to do business.

 

ARTICLE II

 

MEETINGS OF STOCKHOLDERS

 

Section 1. PLACE OF MEETINGS. Meetings of stockholders shall be held at any place within or without the State of Texas designated by resolution of the Board. In the absence of any such designation, stockholders’ meetings shall be held at the principal executive office of the Corporation.

 

Section 2. ANNUAL MEETINGS. The annual meetings of stockholders shall be held at a date and time designated by resolution of the Board.

 

  (a) Nominations of persons for election to the Board and the proposal of business to be considered by Stockholders may be made at an annual meeting of Stockholders: (A) pursuant to the Corporation’s notice of meeting delivered pursuant to Section 4 of this Article II; (B) by or at the direction of the Chairman or (C) by any Stockholder who is entitled to vote at the meeting on the election of directors or such business (as applicable) who complies with the notice procedures set forth in Sections 2(b) and who is a Stockholder of record at the time such notice is delivered to the Secretary. Except as otherwise required by applicable law, the foregoing clause (C) shall be the exclusive means for a Stockholder to make nominations or propose business at an annual meeting of Stockholders.

 

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  (b) For nominations or other business to be properly brought before an annual meeting of Stockholders by a Stockholder pursuant to Section 2(a), (A) the Stockholder must give timely notice thereof in proper written form to the Secretary and (B) in the case of business other than nominations, such other business must otherwise be a proper matter for Stockholder action. To be timely, a Stockholder’s notice must be delivered to the Secretary at the principal executive offices of the Corporation not less than 90 days nor more than 120 days prior to the first anniversary of the preceding year’s annual meeting; provided, however, that in the event that the date of the annual meeting is advanced by more than 30 days, or delayed by more than 90 days, from such anniversary date, or if no annual meeting was held in the preceding year, notice by a Stockholder to be timely must be so delivered not earlier than the 120th day prior to such annual meeting and not later than the close of business on the later of the 90th day prior to such annual meeting and the 10th day following the day on which the Public Announcement of the date of such meeting is first made by the Corporation. In no event shall the Public Announcement of an adjournment or postponement of an annual meeting commence a new time period for the giving of a Stockholder’s notice as described in this Section 2(b).
     
  (c) In order to be in proper written form, such Stockholder’s notice must include the following information and/or documents, as applicable: (A) the name and address of the Stockholder giving the notice, as they appear on the Corporation’s books, and of the beneficial owner of stock of the Corporation, if any, on whose behalf such nomination or proposal of other business is made (such beneficial owner, the “Beneficial Owner”); (B) representations that, as of the date of delivery of such notice, such Stockholder is a holder of record of stock of the Corporation and is entitled to vote at such meeting and intends to appear in person or by proxy at such meeting to propose and vote for such nomination and any such other business; (C) as to each person whom the Stockholder proposes to nominate for election or re-election as a director (a “Stockholder Nominee”): (1) all information relating to such Stockholder Nominee that is required to be disclosed in solicitations of proxies for election of directors in an election contest, or is otherwise required, in each case pursuant to Regulation 14A under the Securities Exchange Act of 1934 (as amended from time to time, the “Exchange Act”) or any successor provision thereto, including such Stockholder Nominee’s written consent to being named in the proxy statement as a nominee and to serving as a director if elected and to being named in the Corporation’s proxy statement and form of proxy if the Corporation so determines, (2) a statement whether such Stockholder Nominee, if elected, intends to tender, promptly following such Stockholder Nominee’s election or re-election, an irrevocable offer of resignation effective upon such Stockholder Nominee’s failure to receive the required vote for re-election at the next meeting at which such Stockholder Nominee would face re-election and upon acceptance of such resignation by the Board in accordance with the Corporation’s Board Practice on Director Elections and (3) such other information as may be reasonably requested by the Corporation; (D) as to any other business that the Stockholder proposes to bring before the meeting: (1) a brief description of such business, (2) the text of the proposal (including the text of any resolutions proposed for consideration and, if such business includes a proposal to amend these By-laws, the text of the proposed amendment) and (3) the reasons for conducting such business at the meeting; and (E) in all cases: (1) the name of each individual, firm, corporation, limited liability company, partnership, trust or other entity (including any successor thereto, a “Person”) with whom the Stockholder, any Beneficial Owner, any Stockholder Nominee and the respective affiliates and associates (as defined under Regulation 12B under the Exchange Act or any successor provision thereto) of such Stockholder, Beneficial Owner and/or Stockholder Nominee (each of the foregoing, including, for the avoidance of doubt, the Stockholder, Beneficial Owner and/or Stockholder Nominee, a “Stockholder Group Member”) either is acting in concert with respect to the Corporation or has any agreement, arrangement or understanding (whether written or oral) for the purpose of acquiring, holding, voting (except pursuant to a revocable proxy given to such Person in response to a public proxy solicitation made generally by such Person to all holders of common stock of the Corporation) or disposing of any capital stock of the Corporation or to cooperate in obtaining, changing or influencing the control of the Corporation (except independent financial, legal and other advisors acting in the ordinary course of their respective businesses) (each Person described in this clause (1), including each Stockholder Group Member, a “Covered Person”), and a description, and, if in writing, a copy, of each such agreement, arrangement or understanding, (2) a list of the class, series and number of shares of capital stock of the Corporation that are beneficially owned or owned of record by each Covered Person, together with documentary evidence of such record or beneficial ownership, (3) a list of all derivative securities (as defined in Rule 16a-1 under the Exchange Act or any successor provision thereto) and other derivatives or similar arrangements to which any Covered Person is a counterparty and relating to any shares of capital stock of the Corporation, a description of all economic terms of all such derivative securities and other derivatives or similar arrangements and copies of all agreements and other documents relating to each of such derivative securities and other derivatives or similar arrangements, (4) a list of all transactions by any Covered Person involving any shares of capital stock of the Corporation or any derivative securities (as defined under Rule 16a-1 under the Exchange Act or any successor provision thereto) or other derivatives or similar arrangements related to any shares of capital stock of the Corporation entered into or consummated within 60 days prior to the date of such notice, (5) details of all other material interests of each Covered Person in such nomination or proposal or shares of capital stock of the Corporation (including any rights to dividends or performance-related fees based on any increase or decrease in the value of such shares of capital stock) and (6) a representation as to whether any Covered Person intends or is part of a group which intends to deliver a proxy statement and/or form of proxy to, in the case of a nomination or nominations, at least the percentage of the Corporation’s outstanding capital stock reasonably believed by the Covered Person to be sufficient to elect the nominee or nominees proposed to be nominated by the Stockholder and, in the case of a proposal, holders of at least the percentage of the Corporation’s outstanding capital stock required to elect any Stockholder Nominee or approve such proposal (such representation, the “Solicitation Representation”). A notice delivered by or on behalf of any Stockholder under this Section 2(a) shall be deemed to be not in compliance with this Section 2(a) and not be effective if: (x) such notice does not include all of the information, documents and representations required under this Section 7(a), (y) after delivery of such notice, any information or document required to be included in such notice changes or is amended, modified or supplemented, as applicable, prior to the date of the relevant meeting and such information and/or document is not delivered to the Corporation by way of a further written notice as promptly as practicable following the event causing such change in information or amendment, modification or supplement, as applicable, and in any case where such event occurs within 45 days of the date of the relevant meeting, within five business days after such event or (z) any Covered Person does not act in accordance with the representation set forth in the Solicitation Representation; provided, however, that the Board shall have the authority to waive any such non-compliance if the Board determines that such action is appropriate in the exercise of its fiduciary duties.

 

  (d) Notwithstanding the second sentence of Section 2 of Article III, in the event that the number of directors to be elected to the Board is increased effective at the next annual meeting and there is no Public Announcement specifying the size of the increased Board made by the Corporation at least 100 days prior to the first anniversary of the preceding year’s annual meeting, a Stockholder’s notice required by this Section 2 shall also be considered timely, but only with respect to nominees for any new positions created by such increase, if it is delivered to the Secretary at the principal executive offices of the Corporation not later than the close of business on the 10th day following the day on which such Public Announcement is first made by the Corporation and such notice otherwise complies with the requirements of this Section 2.

 

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Section 3. SPECIAL MEETINGS.

 

  (a) Subject to the rights of the holders of any series of preferred stock of the Corporation (the “Preferred Stock”) with respect to special meetings of the holders thereof, special meetings of Stockholders may be called at any time only by: (i) the Board, (ii) the Chairman of the Board (the “Chairman”), (iii) the Chief Executive Officer, (iv) the President or (v) Stockholders following receipt by the Secretary of the Corporation (the “Secretary”) of a written request for a special meeting in proper form (a “Special Meeting Request”) from the record holders of shares of common stock of the Corporation representing at least 15% of the outstanding common stock of the Corporation if such Special Meeting Request complies with the requirements set forth in this Section 3. The Board shall determine whether all such requirements have been satisfied and such determination shall be binding on the Corporation and the Stockholders; provided, however, that the Board shall have the authority to waive any such non-compliance if the Board determines that such action is appropriate in the exercise of its fiduciary duties. If a Special Meeting Request complies with this Section 2, the Board shall determine the date and time of a special meeting requested in such Special Meeting Request; provided, however, that: (i) the date of such special meeting shall not be later than 120 days following receipt of the Special Meeting Request and (ii) the Board may (in lieu of calling the special meeting requested in such Special Meeting Request) present an identical or substantially similar item (a “Similar Item”, and the nomination of directors for election shall be deemed a “Similar Item” with respect to all items of business involving the election or removal of directors) for Stockholder approval at any other meeting of Stockholders that is held not more than 120 calendar days after the date the Secretary receives such Special Meeting Request.
     
  (b) For a Special Meeting Request to comply with this Section 3, such Special Meeting Request must be delivered to the Secretary at the principal executive offices of the Corporation in proper written form. In order to be in proper written form, such Special Meeting Request must include all the information and/or documents, as applicable, required pursuant to Section 2(b) and 2(c) of this Article II.
     
  (c) A Special Meeting Request shall not be valid if: (i) the Special Meeting Request relates to an item of business that is not a proper subject for stockholder action under applicable law, (ii) a Similar Item was presented at any meeting of Stockholders held within 120 days prior to receipt by the Corporation of such Special Meeting Request, (iii) a Similar Item is included in the Corporation’s notice as an item of business to be brought before a meeting of Stockholders that has been called but not yet held or (iv) the Special Meeting Request is received by the Corporation during the period commencing 90 days prior to the first anniversary of the preceding year’s annual meeting and ending on the date of that year’s annual meeting of Stockholders.
     
  (d) The Stockholders who submitted a Special Meeting Request may revoke a Special Meeting Request by written revocation delivered to the Secretary at any time prior to the special meeting; provided, however, that the Board shall have the discretion to determine whether or not to proceed with the special meeting. Notwithstanding the foregoing provisions of this Section 3, and except as otherwise required by applicable law, if all of the Stockholders who submitted the Special Meeting Request for a special meeting of Stockholders do not appear or send a representative to present and vote for the nominations or business submitted by the Stockholders for consideration at such special meeting, then the Corporation need not present such nominations or business for a vote at such meeting notwithstanding that proxies in respect of such nomination or business may have been received by the Corporation.

 

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  (e) Only such business shall be conducted at a special meeting of Stockholders as shall be brought before a special meeting: (i) pursuant to the Corporation’s notice of meeting delivered pursuant to Section 4 of this Article II or (ii) by or at the direction of the Chairman. Except as set forth in this Section 2 or otherwise required by applicable law, Stockholders shall have no right to bring business at a special meeting of the Stockholders. At a special meeting of Stockholders at which Directors are to be elected pursuant to the Corporation’s notice of meeting, nominations of persons for election to the Board may be made: (A) by or at the direction of the Board or (B) by any Stockholder who is entitled to vote at the meeting on the election of Directors, who complies with the notice procedures set forth in this Section 2(b) and who is a Stockholder of record at the time such notice is delivered to the Secretary. In the event the Corporation calls a special meeting of Stockholders for the purpose of electing directors to the Board, any Stockholder may nominate such number of persons for election to such position(s) as are specified in the Corporation’s notice of meeting, if the Stockholder’s notice, containing all the information, documents and representations required under Section 2(a)(iii) is delivered to the Secretary at the principal executive offices of the Corporation not earlier than the 120th day prior to such special meeting and not later than the close of business on the later of the 90th day prior to such special meeting and the 10th day following the day on which Public Announcement of the date of the special meeting and of the nominees proposed by the Board to be elected at such meeting is first made by the Corporation. Except as otherwise required by applicable law, the foregoing clause (B) shall be the exclusive means for stockholders to make nominations at special meetings of stockholders. A notice delivered by or on behalf of any Stockholder under this Section 2(b) shall be deemed to be not in compliance with this Section 2b) and not be effective if: (x) such notice does not include all of the information, documents and representations required under this Section 2(b), (y) after delivery of such notice, any information or document required to be included in such notice changes or is amended, modified or supplemented, as applicable, prior to the date of the relevant meeting and such information and/or document is not delivered to the Corporation by way of a further written notice as promptly as practicable following the event causing such change in information or amendment, modification or supplement, as applicable, and in any case where such event occurs within 45 days of the date of the relevant meeting, within five business days after such event or (z) any Covered Person does not act in accordance with the representation set forth in the Solicitation Representation; provided, however, that the Board shall have the authority to waive any such non-compliance if the Board determines that such action is appropriate in the exercise of its fiduciary duties. In no event shall the Public Announcement of an adjournment or postponement of a special meeting commence a new time period for the giving of a Stockholder’s notice as described above.
     
  (f) For purposes of these By-laws, “Public Announcement” shall mean disclosure in a press release reported by the Dow Jones News Service, Associated Press or comparable national news service or in a document publicly filed by the Corporation with the Securities and Exchange Commission pursuant to Section 13, 14 or 15(d) of the Exchange Act or any document delivered to all Stockholders (including any quarterly income statement).

 

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Section 4. NOTICE OF STOCKHOLDERS’ MEETINGS. Except as otherwise provided by applicable law, notice stating: (i) the place of the meeting, if any, (ii) the date and time of the meeting, (iii) the means of remote communications, if any, by which Stockholders and proxyholders may be deemed to be present in person and vote at the meeting, (iv) the record date for determining the Stockholders entitled to vote at the meeting, if such date is different from the record date for determining Stockholders entitled to notice of the meeting and (v) in the case of special meetings, the purpose or purposes for which such special meeting is called, shall be prepared and sent by the Corporation not less than 10 days nor more than 60 days before the date of the meeting to each Stockholder of record entitled to vote at such meeting. Such further notice shall be given as may be required by applicable law.

 

Section 5. MANNER OF GIVING NOTICE; AFFIDAVIT OF NOTICE. Notice of any meeting of stockholders shall be given either personally or by first-class mail or telegraphic or other written communication, charges prepaid, addressed to the stockholder at the address of such stockholder appearing on the books of the Corporation or given by the stockholder to the Corporation for the purpose of notice. With the consent of any shareholder thereto, notice may also be given by any means of electronic delivery as may from time to time be utilized by the Corporation. If no such address appears on the Corporation’s books or is given, notice shall be deemed to have been given if sent by mail or telegram to the Corporation’s principal executive office, or if published at least once in a newspaper of general circulation in the county where this office is located. Personal delivery of any such notice to any Officer of a corporation or association or to any member of a partnership shall constitute delivery of such notice to such corporation, association or partnership. Notice shall be deemed to have been given at the time when delivered personally or deposited in the mail or sent by telegram or other means of written communication. In the event of the transfer of stock after delivery or mailing of the notice of and prior to the holding of the meeting, it shall not be necessary to deliver or mail notice of the meeting to the transferee.

 

If any notice addressed to a stockholder at the address of such stockholder appearing on the books of the Corporation is returned to the Corporation by the United States Postal Service marked to indicate that the United States Postal Service is unable to deliver the notice to the stockholder at such address, all future notices or reports shall be deemed to have been duly given without further mailing if the same shall be available to the stockholder upon written demand of the stockholder at the principal executive office of the Corporation for a period of one year from the date of the giving of such notice.

 

An affidavit of the mailing or other means of giving any notice of any stockholders’ meeting shall be executed by the Secretary, assistant Secretary or any transfer agent of the Corporation giving such notice, and shall be filed and maintained in the minute book of the Corporation.

 

Business transacted at any special meeting of stockholders shall be limited to the purposes stated in the notice.

 

Section 6. QUORUM. Except as otherwise provided by applicable law, the Articles of Incorporation of the Corporation (as amended from time to time, the “Articles”) or these By-laws, the holders of one-third (33 1/3%) of the voting power of the outstanding shares of capital stock of the Corporation entitled to vote generally on the business properly brought before the meeting in accordance with these By-laws (collectively, the “Voting Stock”), represented in person or by proxy, shall constitute a quorum at a meeting of Stockholders; provided, however, that if specified business is to be voted on by a class of the Corporation’s capital stock or a series of the Corporation’s capital stock voting as a class, the holders of one-third (33 1/3%) of the voting power of the shares of such class or series, represented in person or by proxy, shall constitute a quorum for the transaction of such specified business. The Stockholders present at a duly organized meeting may continue to transact any business for which a quorum existed at the commencement of such meeting until adjournment, notwithstanding the withdrawal of enough Stockholders to leave less than a quorum.

 

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Section 7. ADJOURNED MEETING AND NOTICE THEREOF. Any stockholders’ meeting, annual or special, whether or not a quorum is present, may be adjourned from time to time by the vote of the majority of the shares represented at such meeting, either in person or by proxy, but in the absence of a quorum, no other business may be transacted at such meeting.

 

When any meeting of stockholders, either annual or special, is adjourned to another time or place, notice need not be given of the adjourned meeting if the time and place thereof are announced at a meeting at which the adjournment is taken. At any adjourned meeting the Corporation may transact any business which might have been transacted at the original meeting.

 

Section 8. VOTING.

 

  (a) Unless a record date set for voting purposes be fixed as provided in Section 1 of Article VII of these bylaws, only persons in whose names shares entitled to vote stand on the stock records of the Corporation at the close of business on the business day next preceding the day on which notice is given (or, if notice is waived, at the close of business on the business day next preceding the day on which the meeting is held) shall be entitled to vote at such meeting. Any stockholder entitled to vote on any matter other than elections of Directors or Officers, may vote part of the shares in favor of the proposal and refrain from voting the remaining shares or vote them against the proposal, but, if the stockholder fails to specify the number of shares such stockholder is voting affirmatively, it will be conclusively presumed that the stockholder’s approving vote is with respect to all shares such stockholder is entitled to vote. Such vote may be by voice vote or by ballot; provided, however, that all elections for Directors must be by ballot upon demand by a stockholder at any election and before the voting begins.
     
  (b) When a quorum is present or represented at any meeting, the vote of the holders of a majority of the stock having voting power present in person or represented by proxy shall decide any question brought before such meeting, unless the question is one upon which by express provision of the statutes or of the Articles a different vote is required in which case such express provision shall govern and control the decision of such question. Every stockholder of record of the Corporation shall be entitled at each meeting of stockholders to one vote for each share of stock standing in his name on the books of the Corporation.
     
  (c) Except as otherwise required by applicable law, the Articles, these By-laws or any applicable rule of a national securities exchange, all matters submitted to Stockholders at any meeting shall be decided by the affirmative vote of a majority of the voting power of the shares of capital stock of the Corporation present in person or represented by proxy at the meeting and voting thereon, and where a separate vote by class is required, a majority of the voting power of the shares of that class present in person or represented by proxy at the meeting and voting thereon.
     
  (d) The vote on any matter, including the election of Directors, need not be by written ballot. Any written ballot shall be signed by the Stockholder voting, or by such Stockholder’s proxy, and shall state the number of shares voted.

 

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Section 9. WAIVER OF NOTICE OR CONSENT BY ABSENT STOCKHOLDERS. The transactions at any meeting of stockholders, either annual or special, however called and noticed, and wherever held, shall be as valid as though had at a meeting duly held after regular call and notice, if a quorum be present either in person or by proxy, and if, either before or after the meeting, each person entitled to vote, not present in person or by proxy, signs a written waiver of notice or a consent to a holding of the meeting, or an approval of the minutes thereof. The waiver of notice or consent need not specify either the business to be transacted or the purpose of any regular or special meeting of stockholders, except that if action is taken or proposed to be taken for approval of any of those matters specified in the second paragraph of Section 4 of this Article II, the waiver of notice or consent shall state the general nature of such proposal. All such waivers, consents or approvals shall be filed with the corporate records or made a part of the minutes of the meeting.

 

Attendance of a person at a meeting shall also constitute a waiver of notice of such meeting, except when the person objects, at the beginning of the meeting, to the transaction of any business because the meeting is not lawfully called or convened, and except that attendance at a meeting is not a waiver of any right to object to the consideration of matters not included in the notice if such objection is expressly made at the meeting.

 

Section 10. STOCKHOLDER ACTION BY WRITTEN CONSENT WITHOUT A MEETING.

 

  (a) Except as otherwise provided in the Articles, any action required to be taken at any annual or special meeting of stockholders of the Corporation, or any action which may be taken at any annual or special meeting of the stockholders, may be taken without a meeting, without prior notice and without a vote, if a consent or consents in writing, setting forth the action so taken, shall be signed by the holders of outstanding stock having not less than the minimum number of votes that would be necessary to authorize or take such action at a meeting at which all shares entitled to vote thereon were present and voted and shall be delivered to the Corporation by delivery to its registered office in Nevada, its principal place of business, or an Officer or agent of the Corporation having custody of the book in which proceedings of meetings of stockholders are recorded.
     
  (b) Every written consent shall bear the date of signature of each stockholder who signs the consent and no written consent shall be effective to take the corporate action referred to therein unless, within 60 days of the date the earliest dated consent is delivered to the Corporation, a written consent or consents signed by a sufficient number of holders to take action are delivered to the Corporation in the manner prescribed in the paragraph (a), above. An electronic transmission consenting to an action to be taken and transmitted by a stockholder or proxyholder, or by a person or persons authorized to act for a stockholder or proxyholder, shall be deemed to be written, signed and dated for the purposes of this Section 10 to the extent permitted by law. Any such consent shall be delivered in accordance with the NRS. Prompt notice of the taking of the corporate action without a meeting by less than unanimous written consent shall be given to those stockholders who have not consented in writing or electronic transmission and who, if the action had been taken at a meeting, would have been entitled to notice of the meeting if the record date of such meeting had been the date that written consents signed by a sufficient number of stockholders or members to take the action were delivered to the Corporation as provided by law.
     
  (c) Any copy, facsimile or other reliable reproduction of a consent in writing may be substituted or used in lieu of the original writing for any and all purposes for which the original writing could be used, provided that such copy, facsimile or other reproduction shall be a complete reproduction of the entire original writing. Any action which may be taken at any annual or special meeting of stockholders may be taken without a meeting and without prior notice, if a consent in writing, setting forth the action so taken, is signed by the holders of outstanding shares having not less than the minimum number of votes that would be necessary to authorize or take such action at a meeting at which all shares entitled to vote thereon were present and voted. All such consents shall be filed with the Secretary of the Corporation and shall be maintained in the corporate records. Any stockholder giving a written consent, or the stockholder’s proxy holders, or a transferee of the shares of a personal representative of the stockholder of their respective proxy holders, may revoke the consent by a writing received by the Secretary of the Corporation prior to the time that written consents of the number of shares required to authorize the proposed action have been filed with the Secretary.

 

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Section 11. PROXIES. Every person entitled to vote for Directors or on any other matter shall have the right to do so either in person or by one or more agents authorized by a written proxy signed by the person and filed with the Secretary of the Corporation. A proxy shall be deemed signed if the stockholder’s name is placed on the proxy (whether by manual signature, typewriting, telegraphic transmission or otherwise) by the stockholder or the stockholder’s attorney in fact. A validly executed proxy which does not state that it is irrevocable shall continue in full force and effect unless revoked by the person executing it, prior to the vote pursuant thereto, by a writing delivered to the Corporation stating that the proxy is revoked or by a subsequent proxy executed by, or attendance at the meeting and voting in person by the person executing the proxy; provided, however, that no such proxy shall be valid after the expiration of six (6) months from the date of such proxy, unless coupled with an interest, or unless the person executing it specifies therein the length of time for which it is to continue in force, which in no case shall exceed seven (7) years from the date of its execution. Subject to the above and the provisions of NGCL §78.355, any proxy duly executed is not revoked and continues in full force and effect until an instrument revoking it or a duly executed proxy bearing a later date is filed with the Secretary of the Corporation.

 

Section 12. INSPECTORS OF ELECTION. Before any meeting of stockholders, the Board may appoint any persons other than nominees for office to act as inspectors of election at the meeting or its adjournment. If no inspectors of election are appointed, the chairman of the meeting may, and on the request of any stockholder or his proxy shall, appoint inspectors of election at the meeting. The number of inspectors shall be either one (1) or three (3). If inspectors are appointed at a meeting on the request of one or more stockholders or proxies, the holders of a majority of shares or their proxies present at the meeting shall determine whether one (1) or three (3) inspectors are to be appointed. If any person appointed as inspector fails to appear or fails or refuses to act, the vacancy may be filled by appointment by the Board before the meeting, or by the chairman at the meeting.

 

The duties of these inspectors shall be as follows:

 

  (a) Determine the number of shares outstanding and the voting power of each, the shares represented at the meeting, the existence of a quorum, and the authenticity, validity, and effect of proxies;
     
  (b) Receive votes, ballots, or consents;
     
  (c) Hear and determine all challenges and questions in any way arising in connection with the right to vote;
     
  (d) Count and tabulate all votes or consents;
     
  (e) Determine the election result; and
     
  (f) Do any other acts that may be proper to conduct the election or vote with fairness to all stockholders.

 

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ARTICLE III

 

BOARD OF DIRECTORS

 

Section 1. POWERS. The business and affairs of the Corporation shall be managed by or under the direction of the Board, subject to the provisions of the Nevada General Corporation Law (the “NGCL”) and any limitations in the Articles and these bylaws relating to action required to be approved by the stockholders or by the outstanding shares.

 

Without prejudice to such general powers, but subject to the same limitations, it is hereby expressly declared that the Board shall have the power and authority to:

 

  (a) Select and remove all Officers, agents, and employees of the Corporation, prescribe such powers and duties for them as may not be inconsistent with law, with the Articles or these bylaws, fix their compensation, and require from them security for faithful service.
     
  (b) Change the principal executive office or the principal business office from one location to another; cause the Corporation to be qualified to do business in any other state, territory, dependency, or foreign country and conduct business within or without the State; designate any place within or without the State for the holding of any stockholders’ meeting, or meetings, including annual meetings; adopt, make and use a corporate seal, and prescribe the forms of certificates of stock, and alter the form of such seal and of such certificates from time to time as in their judgment they may deem best, provided that such forms shall at all times comply with the provisions of law.
     
  (c) Authorize the issuance of shares of stock of the Corporation from time to time, upon such terms as may be lawful, in consideration of money paid, labor done or services actually rendered, debts or securities cancelled, tangible or intangible property actually received.
     
  (d) Borrow money and incur indebtedness for the purpose of the Corporation, and cause to be executed and delivered therefor, in the corporate name, promissory notes, bonds, debentures, deeds of trust, mortgages, pledges, hypothecations, or other evidences of debt and securities therefor.

 

Section 2. NUMBER OF DIRECTORS. The authorized number of Directors shall be no fewer than one (1) nor more than eleven (11). The exact number of authorized Directors shall be set by resolution of the Board, within the limits specified above. The maximum or minimum number of Directors cannot be changed, nor can a fixed number be substituted for the maximum and minimum numbers, except by a duly adopted amendment to this bylaw duly approved by a majority of the outstanding shares entitled to vote. No decrease in the number of Directors constituting the Board shall shorten the term of any incumbent Director.

 

Section 3. QUALIFICATION, ELECTION AND TERM OF OFFICE OF DIRECTORS. Directors shall be elected at each annual meeting of the stockholders to hold office until the next annual meeting, but if any such annual meeting is not held or the Directors are not elected at any annual meeting, the Directors may be elected at any special meeting of stockholders held for that purpose, or at the next annual meeting of stockholders held thereafter. Each Director, including a Director elected to fill a vacancy, shall hold office until the expiration of the term for which elected and until a successor has been elected and qualified or until his earlier death, resignation, disqualification, removal or his office has been declared vacant in the manner provided in these bylaws. Directors need not be stockholders. Each Director shall be at least 21 years of age.

 

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Section 4. RESIGNATION AND REMOVAL OF DIRECTORS. Any Director may resign effective upon giving written notice to the chairman of the board, the President, the Secretary or the Board of the Corporation, unless the notice specifies a later time for the effectiveness of such resignation, in which case such resignation shall be effective at the time specified. Unless such resignation specifies otherwise, its acceptance by the Corporation shall not be necessary to make it effective. The Board may declare vacant the office of a Director who has been declared of unsound mind by an order of a court or convicted of a felony. Any or all of the Directors may be removed without cause of such removal is approved by the affirmative vote of a majority of the outstanding shares entitled to vote. No reduction of the authorized number of Directors shall have the effect of removing any Director before his term of office expires.

 

Section 5. VACANCIES. Subject to the rights of the holders of any series of Preferred Stock, any vacancies in the Board shall be filled by a majority of the remaining Directors, though less than a quorum, or by a sole remaining Director and not by the stockholders. Each Director so elected shall hold office until the next annual meeting of the stockholders and until a successor has been elected and qualified.

 

A vacancy in the Board exists as to any authorized position of Directors which is not then filled by a duly elected Director, whether caused by death, resignation, disqualification or removal from office.

 

Section 6. PLACE OF MEETINGS. Regular meetings of the Board shall be held at any place within or without the State of Texas that has been designated from time to time by resolution of the Board. In the absence of such designation, regular meetings shall be held at the principal executive office of the Corporation. Special meetings of the Board shall be held at any place within or without the State of Texas that has been designated in the notice of the meeting or, if not stated in the notice or there is not notice, at the principal executive office of the Corporation. Any meeting, regular or special, may be held by conference telephone or similar communication equipment, so long as all Directors participating in such meeting can hear one another, and all such Directors shall be deemed to be present in person at such meeting.

 

Section 7. ANNUAL MEETINGS. Immediately following each annual meeting of stockholders, the Board shall hold a regular meeting for the purpose of transaction of other business. Notice of this meeting shall not be required.

 

Section 8. OTHER REGULAR MEETINGS. Other regular meetings of the Board shall be held without call at such time as shall from time to time be fixed by the Board. Such regular meetings may be held without notice, provided the notice of any change in the time of any such meetings shall be given to all of the Directors. Notice of a change in the determination of the time shall be given to each Director in the same manner as notice for special meetings of the Board.

 

Section 9. SPECIAL MEETINGS. Special meetings of the board of Directors for any purpose or purposes may be called at any time by the chairman of the board or the President or any vice President or the Secretary or any two Directors.

 

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Notice of the time and place of special meetings shall be delivered personally or by telephone to each Director or sent by first-class mail or facsimile, charges prepaid, addressed to each Director at his or her address as it is shown upon the records of the Corporation. In case such notice is mailed, it shall be deposited in the United States mail at least four (4) days prior to the time of the holding of the meeting. In case such notice is delivered personally, or by telephone or facsimile, it shall be delivered personally or by telephone or facsimile at least forty-eight (48) hours prior to the time of the holding of the meeting. Any oral notice given personally or by telephone may be communicated to either the Director or to a person at the office of the Director who the person giving the notice has reason to believe will promptly communicate it to the Director. The notice need not specify the purpose of the meeting nor the place if the meeting is to be held at the principal executive office of the Corporation.

 

Section 10. QUORUM. Except as otherwise provided by applicable law, the Articles or these By-laws, a majority of the authorized number of Directors shall constitute a quorum for the transaction of business, except to adjourn as hereinafter provided. Every act or decision done or made by a majority of the Directors present at a meeting duly held at which a quorum is present shall be regarded as the act of the Board, subject to the provisions of NGCL §78.140 (approval of contracts or transactions in which a Director has a direct or indirect material financial interest), §78.125 (appointment of committees) and §78.751 (indemnification of Directors). A meeting at which a quorum is initially present may continue to transact business notwithstanding the withdrawal of Directors, if any action taken is approved by at least a majority of the required quorum for such meeting.

 

Section 11. WAIVER OF NOTICE. The transactions of any meeting of the Board, however called and noticed or wherever held, shall be as valid as though had at a meeting duly held after regular call and notice if a quorum be present and if, either before or after the meeting, each of the Directors not present signs a written waiver of notice, a consent to holding the meeting or an approval of the minutes thereof. The waiver of notice of consent need not specify the purpose of the meeting. All such waivers, consents and approvals shall be filed with the corporate records or made a part of the minutes of the meeting. Notice of a meeting shall also be deemed given to any Director who attends the meeting without protesting, prior thereto or at its commencement, the lack of notice to such Director.

 

Section 12. ADJOURNMENT. A majority of the Directors present, whether or not constituting a quorum, may adjourn any meeting to another time and place.

 

Section 13. NOTICE OF ADJOURNMENT. Notice of the time and place of holding an adjourned meeting need not be given, unless the meeting is adjourned for more than twenty-four (24) hours, in which case notice of such time and place shall be given prior to the time of the adjourned meeting, in the manner specified in Section 8 of this Article III, to the Directors who were not present at the time of the adjournment.

 

Section 14. ACTION WITHOUT MEETING. Any action required or permitted to be taken at any meeting of the Board or any committee thereof may be taken without a meeting if all of the members of the Board or of any such committee, as the case may be, consent thereto in writing, by electronic transmission or transmissions, or as otherwise permitted by applicable law and, if required by applicable law, the writing or writings or electronic transmission or transmissions are filed with the minutes of proceedings of the Board or of such committee. Such filing shall be in paper form if the minutes are maintained in paper form and shall be in electronic form if the minutes are maintained in electronic form.

 

Section 15. FEES AND COMPENSATION OF DIRECTORS. Unless otherwise restricted by the Articles, the Board shall have the authority to fix the compensation of the Directors. The Directors may be paid their expenses, if any, of attendance at each meeting of the Board and may be paid a fixed sum for attendance at each meeting of the Board or paid a stated salary or paid other compensation as Director. No such payment shall preclude any Director from serving the Corporation in any other capacity and receiving compensation therefor. Members of special or standing committees may be allowed compensation for attending committee meetings.

 

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ARTICLE IV

 

COMMITTEES

 

Section 1. COMMITTEES OF DIRECTORS. The Board may, by resolution adopted by a majority of the authorized number of Directors, designate one or more committees, each consisting of one or more Directors, with such functions, duties and powers as the Board shall by resolution prescribe, including, without limitation, a nominating and governance committee, an audit committee and a compensation committee. The Board may designate one or more Directors as alternate members of any committees, who may replace any absent member at any meeting of the committee. Any such committee, to the extent provided in the resolution of the Board, shall have all the authority of the Board, except with regard to:

 

  (a) the approval of any action which, under the NGCL, also requires stockholders’ approval or approval of the outstanding shares;
     
  (b) the filing of vacancies on the board of Directors or in any committees;
     
  (c) the fixing of compensation of the Directors for serving on the board or on any committee;
     
  (d) the amendment or repeal of bylaws or the adoption of new bylaws;
     
  (e) the amendment or repeal of any resolution of the Board which by its express terms is not so amendable or repealable;
     
  (f) a distribution to the stockholders of the corporation, except at a rate or in a periodic amount or within a price range determined by the Board; or
     
  (g) the appointment of any other committees of the Board or the members thereof.

 

Section 2. MEETINGS AND ACTION BY COMMITTEES. Meetings and action of committees shall be governed by, and held and taken in accordance with, the provisions of Article III, Sections 6 (place of meetings), 8 (regular meetings), 9 (special meetings), 10 (quorum), 11 (waiver of notice), 12 (adjournment), 13 (notice of adjournment) and 14 (action without meeting), with such changes in the context of those bylaws as are necessary to substitute the committee and its members for the Board and its members, except that the time or regular meetings of committees may be determined by resolutions of the Board and notice of special meetings of committees shall also be given to all alternate members, who shall have the right to attend all meetings of the committee. The Board may adopt rules for the government of any committee not inconsistent with the provisions of these bylaws. The committees shall keep regular minutes of their proceedings and report the same to the board when required.

 

ARTICLE V

 

OFFICERS

 

Section 1. OFFICERS. The Officers of the Corporation may consist of: a Chairman of the Board, a Chief Executive Officer, a President, a Chief Financial Officer, one or more Vice Presidents (including Assistant, Executive and Senior Vice Presidents), a Treasurer, a Secretary and such other Officers or agents with such titles and such duties as the Board may from time to time determine, each to have such authority, functions and duties as provided in these By-laws or as the Board may from time to time determine, as may be appointed in accordance with the provisions of Section 3 of this Article V. Any two or more offices may be held by the same person.

 

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Section 2. ELECTION OF OFFICERS. The Officers of the Corporation, except such Officers as may be appointed in accordance with the provisions of Section 3 or Section 5 of this Article V, shall be elected by the Board, each to have such authority, functions and duties as provided in these By-laws or as the Board may from time to time determine, and each to hold office for such term as may be prescribed by the Board and until such person’s successor shall have been chosen and qualified, or until such person’s death or resignation, or until such person’s removal in the manner hereinafter provided, and each shall serve at the pleasure of the board, subject to the rights, if any, of an Officer under any contract of employment. The Board at its first meeting after each annual meeting of stockholders shall choose a President, a vice President, a Secretary and a treasurer, none of whom need be a member of the board. The salaries of all Officers and agents of the Corporation shall be fixed by the Board.

 

Section 3. SUBORDINATE OFFICERS, ETC. The Board may appoint, and may empower the President to appoint, such other Officers as the business of the Corporation may require, each of whom shall hold office for such period, have such authority and perform such duties as are provided in the bylaws or as the Board may from time to time determine.

 

Section 4. REMOVAL AND RESIGNATION OF OFFICERS. The Officers of the Corporation shall hold office until their successors are chosen and qualify. Subject to the rights, if any, of an Officer under any contract of employment, any Officer may be removed, either with or without cause, by the Board, at any regular or special meeting thereof, or, except in case of an Officer chosen by the Board, by any Officer upon whom such power or removal may be conferred by the Board.

 

Any Officer may resign at any time by giving written notice to the Corporation. Any such resignation shall take effect at the date of the receipt of such notice or at any later time specified therein; and, unless otherwise specified therein, the acceptance of such resignation shall not be necessary to make it effective. Any such resignation is without prejudice to the rights, if any, of the Corporation under any contract to which the Officer is a party.

 

Section 5. VACANCIES IN OFFICES. A vacancy in any office because of death, resignation, removal, disqualification or any other cause shall be filled in the manner prescribed in these bylaws for regular appointments to such office.

 

Section 6. CHAIRMAN OF THE BOARD. The Chairman of the Board may be an Officer of the Corporation, subject to the control of the Board, and shall report directly to the Board. The Chairman shall have supervisory responsibility over Officers operating and discharging their responsibilities as shall be determined by the Board. The Chairman shall preside over Board meetings and shall perform all such other duties which are commonly incident to the capacity of Chairman or which are delegated to him or her by the Board. The Chairman shall have the power to sign all stock certificates.

 

Section 7. CHIEF EXECUTIVE OFFICER. The Chief Executive Officer shall have general supervision and direction of the business and affairs of the Corporation, subject to control of the Board, and shall report directly to the Board. The Chief Executive Officer shall, if present and in the absence of the Chairman, preside at meetings of Stockholders.

 

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Section 8. PRESIDENT. The President shall have general supervision and direction of the business and affairs of the Corporation, subject to the control of the Board. The President shall have the power to sign all stock certificates.

 

Section 9. CHIEF FINANCIAL OFFICER. The Chief Financial Officer shall perform all the powers and duties of the office of the chief financial Officer and in general have overall supervision of the financial operations of the Corporation. The Chief Financial Officer shall, when requested, counsel with and advise the other Officers of the Corporation and shall perform such other duties as he may agree with the Chief Executive Officer or as the Board may from time to time determine.

 

Section 10. VICE-PRESIDENTS. Any Vice-President shall have such powers and duties as shall be prescribed by his superior Officer or the Board.

 

Section 11. SECRETARY. It shall be the duty of the Secretary to act as secretary at all meetings of the Board, of the committees of the Board and of the Stockholders and to record the proceedings of such meetings in a book or books to be kept for that purpose, the Secretary shall see that all notices required to be given by the Corporation are duly given and served, the Secretary shall be custodian of the seal of the Corporation and shall affix the seal or cause it to be affixed to all certificates of stock of the Corporation (unless the seal of the Corporation on such certificates shall be a facsimile, as hereinafter provided) and to all documents, the execution of which on behalf of the Corporation under its seal is duly authorized in accordance with the provisions of these By-laws, the Secretary shall have charge of the books, records and papers of the Corporation and shall see that the reports, statements and other documents required by applicable law to be kept and filed are properly kept and filed and in general shall perform all of the duties incident to the office of Secretary. The Secretary shall have the power to sign all stock certificates.

 

Section 12. TREASURER. The Treasurer shall supervise and be responsible for all the funds and securities of the Corporation, the deposit of all moneys and other valuables to the credit of the Corporation in depositories of the Corporation, borrowings and compliance with the provisions of all indentures, agreements and instruments governing such borrowings to which the Corporation is a party, the disbursement of funds of the Corporation and the investment of its funds and in general shall perform all of the duties incident to the office of the Treasurer. The Treasurer shall have the power to sign all stock certificates.

 

Section 13. ASSISTANT SECRETARIES AND ASSISTANT TREASURERS. Any Assistant Secretaries and Assistant Treasurers shall perform such duties as shall be assigned to them by the Board, by the Treasurer or Secretary, respectively, or by the Chief Executive Officer.

 

Section 14. ADDITIONAL MATTERS. The Chief Executive Officer, the President and the Chief Financial Officer of the Corporation shall have the authority to designate employees of the Corporation to have the title of Vice President, Assistant Vice President, Assistant Treasurer, Assistant Controller or Assistant Secretary. Any employee so designated shall have the powers and duties determined by the Officer making such designation. The persons upon whom such titles are conferred shall not be deemed Officers of the Corporation unless elected by the Board.

 

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ARTICLE VI

 

CAPITAL STOCK

 

Section 1. CERTIFICATES FOR SHARES; DIRECT REGISTRATION. The shares of capital stock of the Corporation may be represented by certificates or, if provided by a resolution of the Board, may be uncertificated shares that may be evidenced by a book-entry system (including, without limitation, a direct registration system) maintained by the registrar of such capital stock, or a combination of both. To the extent that shares of capital stock are represented by certificates, such certificates, whenever authorized by the Board, shall be in such form as shall be approved by the Board. The certificates representing shares of capital stock of each class shall be signed by, or in the name of the Corporation by, the Chief Executive Officer, President, or a Vice-President, and by the Treasurer or any Assistant Treasurer or the Secretary or any Assistant Secretary. Any or all such signatures may be facsimiles if countersigned by a transfer agent or registrar. Although any Officer, transfer agent or registrar whose manual or facsimile signature is affixed to such a certificate ceases to be such Officer, transfer agent or registrar before such certificate has been issued, it may nevertheless be issued by the Corporation with the same effect as if such Officer, transfer agent or registrar were still such at the date of its issue.

 

The stock ledger and blank share certificates shall be kept by the Secretary or by a transfer agent or by a registrar or by any other Officer or agent designated by the Board.

 

Section 2. TRANSFER OF SHARES. Transfers of shares of capital stock of each class of the Corporation shall be made only on the books of the Corporation upon authorization by the registered holder thereof, or by such holder’s attorney thereunto authorized by a power of attorney duly executed and filed with the Secretary or a transfer agent for such stock, if any, and if such shares are represented by a certificate, upon surrender of the certificate or certificates for such shares properly endorsed or accompanied by a duly executed stock transfer power (or by proper evidence of succession, assignment or authority to transfer) and the payment of any taxes thereon; provided, however, that the Corporation shall be entitled to recognize and enforce any lawful restriction on transfer. The person in whose name shares are registered on the books of the Corporation shall be deemed the owner thereof for all purposes as regards the Corporation.

 

Except to the extent that the corporation has obtained an opinion of counsel acceptable to the corporation that transfer restrictions are not required under applicable securities laws, or has otherwise satisfied itself that such transfer restrictions are not required, all certificates representing shares of the corporation shall bear a legend on the face of the certificate, or on the reverse of the certificate if a reference to the legend is contained on the face, which reads substantially as follows:

 

THE SECURITIES EVIDENCED BY THIS CERTIFICATE HAVE NOT BEEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE “ACT”), OR APPLICABLE STATE SECURITIES LAWS, AND NO INTEREST MAY BE SOLD, DISTRIBUTED, ASSIGNED, OFFERED, PLEDGED OR OTHERWISE TRANSFERRED UNLESS (A) THERE IS AN EFFECTIVE REGISTRATION STATEMENT UNDER THE ACT AND APPLICABLE STATE SECURITIES LAWS COVERING ANY SUCH TRANSACTION INVOLVING SAID SECURITIES, (B) THIS CORPORATION RECEIVES AN OPINION OF LEGAL COUNSEL FOR THE HOLDER OF THESE SECURITIES SATISFACTORY TO THIS CORPORATION STATING THAT SUCH TRANSACTION IS EXEMPT FROM REGISTRATION, OR (C) THIS CORPORATION OTHERWISE SATISFIES ITSELF THAT SUCH TRANSACTION IS EXEMPT FROM REGISTRATION.

 

Section 4. REGISTERED STOCKHOLDERS AND ADDRESS OF STOCKHOLDERS. The Corporation shall be entitled to recognize the exclusive right of a person registered on its records as the owner of shares of capital stock to receive dividends and to vote as such owner, and shall not be bound to recognize any equitable or other claim to or interest in such share or shares of capital stock on the part of any other person, whether or not it shall have express or other notice thereof, except as otherwise provided by applicable law.

 

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Each Stockholder shall designate to the Secretary or transfer agent of the Corporation an address at which notices of meetings and all other corporate notices may be given to such person, and, if any Stockholder fails to designate such address, corporate notices may be given to such person by mail directed to such person at such person’s post office address, if any, as the same appears on the stock record books of the Corporation or at such person’s last known post office address or as otherwise provided by applicable law.

 

Section 5. LOST, STOLEN, DESTROYED AND MUTILATED CERTIFICATES. The holder of any certificate representing any shares of capital stock of the Corporation shall notify the Corporation of any loss, theft, destruction or mutilation of such certificate. The Corporation may issue to such holder a new certificate or certificates for shares, upon the surrender of the mutilated certificate or, in the case of loss, theft or destruction of the certificate, upon satisfactory proof of such loss, theft or destruction. The Board, or a committee designated thereby, or the transfer agents and registrars for the capital stock, may, in their discretion, require the owner of the lost, stolen or destroyed certificate, or such person’s legal representative, to give the Corporation an indemnity or a bond in such sum and with such surety or sureties as they may direct to indemnify the Corporation and said transfer agents and registrars against any claim that may be made on account of the alleged loss, theft or destruction of any such certificate or the issuance of such new certificate.

 

Section 6. REGULATIONS. The Board may make such additional rules and regulations as it may deem expedient concerning the issue, transfer and registration of certificated or uncertificated shares of capital stock of each class of the Corporation and may make such rules and take such action as it may deem expedient concerning the issue of certificates in replacement of certificates claimed to have been lost, stolen, destroyed or mutilated.

 

Section 7. FIXING DATE FOR DETERMINATION OF STOCKHOLDERS OF RECORD. In order that the Corporation may determine the Stockholders entitled to notice of or to vote at any meeting of Stockholders or any adjournment thereof, or entitled to receive payment of any dividend or other distribution or allotment or any rights, or entitled to exercise any rights in respect of any change, conversion or exchange of stock or for the purpose of any other lawful action, the Board may, except as otherwise provided by applicable law, fix, in advance, a record date or record dates, as applicable. A determination of Stockholders of record entitled to notice of or to vote at a meeting of Stockholders shall apply to any adjournment of the meeting; provided, however, that the Board may fix a new record date or record dates.

 

Section 8. TRANSFER AGENTS AND REGISTRARS. The Board may appoint, or authorize any Officer or Officers to appoint, one or more transfer agents and one or more registrars.

 

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ARTICLE VII

 

INDEMNIFICATION OF DIRECTORS, OFFICERS, EMPLOYEES, AND OTHER AGENTS

 

Section 1. ACTIONS OTHER THAN BY THE CORPORATION. The Corporation shall, to the fullest extent permitted by the NRS and applicable Nevada law as in effect at any time, indemnify, hold harmless and defend any person who: (i) was or is a Director or Officer of the Corporation or was or is a Director or Officer of a direct or indirect wholly-owned subsidiary of the Corporation, and (ii) was or is a party or is threatened to be made a party to, or was or is otherwise directly involved in (including as a witness), any threatened, pending or completed action, suit or proceeding, whether civil, criminal, administrative or investigative (other than an action by or in the right of the Corporation) by reason of the fact that such person was or is a Director or Officer of the Corporation or any direct or indirect wholly-owned subsidiary of the Corporation, or was or is serving at the request of the Corporation as a Director, Officer, employee, partner, member or agent of another corporation, partnership, limited liability company, joint venture, trust, employee benefit plan or other enterprise, whether the basis of such proceeding is alleged action in an official capacity or in any other capacity, against expenses (including attorneys’ fees), judgments, fines and amounts paid in settlement actually and reasonably incurred by such person in connection with such action, suit or proceeding if such person acted in good faith and in a manner such person reasonably believed to be in or not opposed to the best interests of the Corporation, and, with respect to any criminal action or proceeding, had no reasonable cause to believe such person’s conduct was unlawful. The termination of any action, suit or proceeding by judgment, order, settlement, conviction, or upon a plea or nolo contendere or its equivalent, shall not, of itself, create a presumption that the person did not act in good faith and in a manner which such person reasonably believed to be in or not opposed to the best interests of the Corporation, and, with respect to any criminal action or proceeding, had reasonable cause to believe that such person’s conduct was unlawful.

 

Section 2. ACTIONS BY THE CORPORATION. The Corporation shall indemnify, hold harmless and defend any person who: (i) was or is a Director or Officer of the Corporation or was or is a Director or Officer of a direct or indirect wholly-owned subsidiary of the Corporation, and (ii) was or is a party or is threatened to be made a party to, or was or is otherwise directly involved in (including as a witness), any threatened, pending or completed action or suit by or in the right of the Corporation to procure a judgment in its favor by reason of the fact that such person was or is a Director or Officer of the Corporation or any direct or indirect wholly-owned subsidiary of the Corporation, or was or is serving at the request of the Corporation as a Director, Officer, employee, partner, member or agent of another corporation, partnership, limited liability company, joint venture, trust, employee benefit plan or other enterprise, and whether the basis of such action, suit or proceeding is alleged action in an official capacity or in any other capacity, against expenses (including attorneys’ fees) actually and reasonably incurred by such person in connection with the defense or settlement of such action or suit if such person acted in good faith and in a manner such person reasonably believed to be in or not opposed to the best interests of the Corporation; except that no indemnification shall be made in respect of any claim, issue or matter as to which such person shall have been adjudged to be liable to the Corporation unless and only to the extent that the Courts in the State of Nevada or the court in which such action or suit was brought shall determine upon application that, despite the adjudication of liability but in view of all the circumstances of the case, such person is fairly and reasonably entitled to indemnity for such expenses which the Court in the State of Nevada or such other court shall deem proper.

 

Section 3. SUCCESSFUL DEFENSE. To the extent that a Director, Officer, employee or agent of the Corporation has been successful on the merits or otherwise in defense of any action, suit or proceeding referred to in Sections 1 and 2, or in defense of any claim, issue or matter therein, he must be indemnified by the Corporation against expenses, including attorneys’ fees, actually and reasonably incurred by him in connection with the defense.

 

Section 4. REQUIRED APPROVAL. Any indemnification under Sections 1 and 2, unless ordered by a court or advanced pursuant to Section 5, must be made by the Corporation only as authorized in the specific case upon a determination that indemnification of the Director, Officer, employee or agent is proper in the circumstances. The determination must be made:

 

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  (a) By the stockholders;
     
  (b) By the Board by majority vote of a quorum consisting of Directors who were not parties to the act, suit or proceeding;
     
  (c) If a majority vote of a quorum consisting of Directors who were not parties to the act, suit or proceeding so orders, by independent legal counsel in a written opinion; or
     
  (d) If a quorum consisting of Directors who were not parties to the act, suit or proceeding cannot be obtained, by independent legal counsel in a written opinion.

 

Section 5. ADVANCE OF EXPENSES. Expenses, including attorney’s fees, incurred by a current or former Director or Officer in defending any action, suit or proceeding described in Section 1 or Section 2 of this Article VII shall be paid by the Corporation in advance of the final disposition of such action, suit or proceeding upon receipt of an undertaking by or on behalf of such Director or Officer to repay such amount if it shall ultimately be determined that such person is not entitled to be indemnified by the Corporation as authorized in this Article VII.

 

Section 6. OTHER RIGHTS. The indemnification and advancement of expenses authorized in or ordered by a court pursuant to this Article VII:

 

  (a) Does not exclude any other rights to which a person seeking indemnification or advancement of expenses may be entitled under the Articles or any bylaw, agreement, vote of stockholders or disinterested Directors or otherwise, for either an action in his official capacity or an action in another capacity while holding his office, except that indemnification, unless ordered by a court pursuant to Section 2 of this Article VII or for the advancement of expenses made pursuant to Section 5, may not be made to or on behalf of any Director or Officer if a final adjudication establishes that his acts or omissions involved intentional misconduct, fraud or a knowing violation of the law and was material to the cause of action.
     
  (b) Continues for a person who has ceased to be a Director, Officer, employee or agent and inures to the benefit of the heirs, executors and administrators of such a person.

 

Section 7. INSURANCE. The Corporation may purchase and maintain insurance on behalf of any person who is or was a Director, Officer, employee or agent of the Corporation, or is or was serving at the request of the Corporation as a Director, Officer, employee or agent of another corporation, partnership, joint venture, trust or other enterprise for any liability asserted against him and incurred by him in any such capacity, or arising out of his status as such, whether or not the Corporation would have the power to indemnify him against such liability under the provisions of this Article VII.

 

Section 8. RELIANCE ON PROVISIONS. Each person who shall act as an authorized representative of the Corporation shall be deemed to be doing so in reliance upon the rights of indemnification provided by this Article.

 

Section 9. SEVERABILITY. If any of the provisions of this Article are held to be invalid or unenforceable, this Article shall be construed as if it did not contain such invalid or unenforceable provision and the remaining provisions of this Article shall remain in full force and effect.

 

Section 10. RETROACTIVE EFFECT. To the extent permitted by applicable law, the rights and powers granted pursuant to this Article VII shall apply to acts and actions occurring or in progress prior to its adoption by the Board.

 

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ARTICLE VIII

 

RECORDS AND BOOKS

 

Section 1. MAINTENANCE OF SHARE REGISTER. The Corporation shall keep at its principal executive office, or at the office of its transfer agent or registrar, if either be appointed and as determined by resolution of the Board, a record of its stockholders, giving the names and addresses of all stockholders and the number and class of shares held by each stockholder.

 

Section 2. MAINTENANCE OF BYLAWS. The Corporation shall keep at its principal executive office, or if its principal executive office is not in this State at its principal business office in this State, the original or a copy of the bylaws as amended to date, which shall be open to inspection by the stockholders at all reasonable times during office hours. If the principal executive office of the Corporation is outside this state and the Corporation has no principal business office in this state, the Secretary shall, upon the written request of any stockholder, furnish to such stockholder a copy of the bylaws as amended to date.

 

Section 3. MAINTENANCE OF OTHER CORPORATE RECORDS. The accounting books and records and minutes of proceedings of the stockholders and the Board and any committee or committees of the Board shall be kept at such place or places designated by the Board, or, in the absence of such designation, at the principal executive office of the Corporation. The minutes shall be kept in written form and the accounting books and records shall be kept either in written form or in any other form capable of being converted into written form.

 

Every Director shall have the absolute right at any reasonable time to inspect and copy all books, records and documents of every kind and to inspect the physical properties of this Corporation and any subsidiary of this Corporation. Such inspection by a Director may be made in person or by agent or attorney and the right of inspection includes the right to copy and make extracts. The foregoing rights of inspection shall extend to the records of each subsidiary of the Corporation.

 

Section 4. ANNUAL REPORT TO STOCKHOLDERS. Nothing herein shall be interpreted as prohibiting the Board from issuing annual or other periodic reports to the stockholders of the Corporation as they deem appropriate.

 

Section 5. FINANCIAL STATEMENTS. A copy of any annual financial statement and any income statement of the Corporation for each quarterly period of each fiscal year, and any accompanying balance sheet of the Corporation as of the end of each such period, that has been prepared by the Corporation shall be kept on file in the principal executive office of the Corporation for twelve (12) months.

 

Section 6. ANNUAL LIST OF DIRECTORS, OFFICERS AND RESIDENT AGENT. The Corporation shall, on or before November 1st of each year, file with the Secretary of State of the State of Nevada, on the prescribed form, a list of its Officers and Directors and a designation of its resident agent in Nevada.

 

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ARTICLE IX

 

GENERAL CORPORATE MATTERS

 

Section 1. RECORD DATE. For purposes of determining the stockholders entitled to notice of any meeting or to vote or entitled to receive payment of any dividend or other distribution or allotment of any rights or entitled to exercise any rights in respect of any other lawful action, the Board may fix, in advance, a record date, which shall not be more than sixty (60) days nor less than ten (10) days prior to the date of any such meeting nor more than sixty (60) days prior to any other action, and in such case only stockholders of record on the date so fixed are entitled to notice and to vote or to receive the dividend, distribution or allotment of rights or to exercise the rights, as the case may be, notwithstanding any transfer of any shares on the books of the Corporation after the record date fixed as aforesaid, except as otherwise provided in the NGCL.

 

If the Board does not so fix a record date:

 

  (a) The record date for determining stockholders entitled to notice of or to vote at a meeting of stockholders shall be at the close of business on the day next preceding the day on which notice is given or, if notice is waived, at the close of business on the business day next preceding the day on which the meeting is held.
     
  (b) The record date for determining stockholders entitled to give consent to corporate action in writing without a meeting, when no prior action by the board has been taken, shall be the day on which the first written consent is given.
     
  (c) The record date for determining stockholders for any other purpose shall be at the close of business on the day on which the board adopts the resolution relating thereto, or the sixtieth (60th) day prior to the date of such other action, whichever is later.

 

Section 2. CLOSING OF TRANSFER BOOKS. The Directors may prescribe a period not exceeding sixty (60) days prior to any meeting of the stockholders during which no transfer of stock on the books of the corporation may be made, or may fix a date not more than sixty (60) days prior to the holding of any such meeting as the day as of which stockholders entitled to notice of and to vote at such meeting shall be determined; and only stockholders of record on such day shall be entitled to notice or to vote at such meeting.

 

Section 3. REGISTERED STOCKHOLDERS. The Corporation shall be entitled to recognize the exclusive right of a person registered on its books as the owner of shares to receive dividends, and to vote as such owner, and to hold liable for calls and assessments a person registered on its books as the owner of shares, and shall not be bound to recognize any equitable or other claim to or interest in such share or shares on the part of any other person, whether or not it shall have express or other notice thereof, except as otherwise provided by the laws of Nevada.

 

Section 4. CHECKS, DRAFTS, EVIDENCES OF INDEBTEDNESS. All checks, drafts or other orders for payment of money, notes or other evidences of indebtedness, issued in the name of or payable to the Corporation, shall be signed or endorsed by such person or persons and in such manner as, from time to time, shall be determined by resolution of the Board.

 

Section 5. CORPORATE CONTRACTS AND INSTRUMENTS; HOW EXECUTED. The Board, except as in the bylaws otherwise provided, may authorize any Officer or Officers, agent or agents, to enter into any contract or execute any instrument in the name of and on behalf of the Corporation, and such authority may be general or confined to specific instances; and, unless so authorized or ratified by the Board or within the agency power or authority to bind the Corporation by any contract or engagement or to pledge its credit or to render it liable for any purpose or to any amount.

 

  20  

 

 

Section 6. DIVIDENDS. Dividends upon the capital stock of the Corporation, subject to the provisions of the Articles, if any, may be declared by the Board at any regular or special meeting pursuant to law. Dividends may be paid in cash, in property, or in shares of the capital stock, subject to the provisions of the Articles.

 

Before payment of any dividend, there may be set aside out of any funds of the Corporation available for dividends such sum or sums as the Directors from time to time, in their absolute discretion, think proper as a reserve or reserves to meet contingencies, or for equalizing dividends, or for repairing or maintaining any property of the Corporation, or for such other purpose as the Directors shall think conducive to the interest of the Corporation, and the Directors may modify or abolish any such reserves in the manner in which it was created.

 

Section 8. FISCAL YEAR. The fiscal year of the Corporation shall be fixed by resolution of the Board and if not so fixed by the Board the fiscal year shall be the calendar year.

 

Section 9. SEAL. The Board shall provide a suitable corporate seal, which shall bear, but not be limited to, the full name of the Corporation, and the words “Corporate Seal, Nevada”, and shall be in the charge of the Secretary. The seal may be used by causing it or a facsimile thereof to be impressed or affixed or in any other manner reproduced. If and when so directed by the Board or a duly authorized committee thereof, duplicates of the seal may be kept and used by the Treasurer or by an Assistant Secretary or Assistant Treasurer.”

 

Section 10. REPRESENTATION OF SHARES OF OTHER CORPORATIONS. The Chairman, the President, or any vice President, or any other person authorized by resolution of the Board by any of the foregoing designated Officers, is authorized to vote on behalf of the Corporation any and all shares of any other corporation or corporations, foreign or domestic, standing in the name of the Corporation. The authority herein granted to said Officers to vote or represent on behalf of the Corporation any and all shares held by the Corporation in any other corporation or corporations may be exercised by any such Officer in person or by any person authorized to do so by proxy duly executed by said Officer.

 

Section 11. CONTROL SHARE ACQUISITION EXEMPTION. The Corporation elects not to be governed by the provisions of NGCL §78.378 to §78.3793 inclusive, generally known as the “Control Share Acquisition Statute” which contains a provision governing “Acquisition of Controlling Interest.”

 

Section 12. COMBINATIONS WITH INTERESTED STOCKHOLDERS. The Corporation elects not to be governed by the provisions of NGCL §78.411 through NGCL §78.444, inclusive.

 

Section 13. CONSTRUCTION AND DEFINITIONS. Unless the context requires otherwise, the general provisions, rules of construction, and definitions in the NGCL shall govern the construction of the bylaws. Without limiting the generality of the foregoing, the singular number includes the plural, the plural number includes the singular, and the term “person” includes both a corporation and a natural person.

 

  21  

 

 

ARTICLE X

 

AMENDMENTS

 

Section 1. AMENDMENTS. These bylaws or any of them may be altered or repealed, and new bylaws may be adopted, by the stockholders by a vote at a meeting or by written consent without a meeting. The Board shall also have the power, by a majority vote of the Whole Board, to alter or repeal any of these bylaws, and to adopt new bylaws, except as otherwise provided by law or by the Articles.

 

[BALANCE OF PAGE INTENTIONALLY LEFT BLANK]

 

  22  

 

 

CERTIFICATE OF SECRETARY

 

I, the undersigned, do hereby certify:

 

1. That I am the duly elected and Secretary of VIRTRA SYSTEMS, INC., a Nevada corporation; and

 

2. That the foregoing Bylaws, comprising twenty-three (23) pages, constitute the Bylaws of said Corporation as duly adopted and approved by the Board of said Corporation by a Unanimous Written Consent dated as of ________________, 2016, and duly adopted and approved by the stockholder of said Corporation at a special meeting held on ________________, 2016.

 

IN WITNESS WHEREOF, I have hereunto subscribed my name and affixed the seal of said Corporation this __________ day of _______________, 2016.

 

/S/ Gregg C. E. Johnson  

Gregg C. E. Johnson, Secretary

 

  23  

 

 

 

EXECUTION COPY

 

THIS WARRANT AND THE SECURITIES ISSUABLE UPON THE EXERCISE HEREOF HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED (the “ACT”). THEY MAY NOT BE SOLD, OFFERED FOR SALE, PLEDGED, HYPOTHECATED, OR OTHERWISE TRANSFERRED EXCEPT PURSUANT TO AN EFFECTIVE REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933, AS AMENDED, OR AN OPINION OF COUNSEL THAT IS SATISFACTORY TO THE COMPANY THAT REGISTRATION IS NOT REQUIRED UNDER SUCH ACT.

 

Date of Issuance   Void after
January 16, 2015   Expiration Date (as defined below)

 

VIRTRA SYSTEMS, INC.
WARRANT TO PURCHASE COMMON STOCK

 

 

 

This certifies that Barricade Enterprises Limited Partnership (the “Holder”), is entitled to purchase, at the Exercise Price (as defined below), from VirTra Systems Inc., a Texas corporation (the “Company”), a number of shares of Common Stock as set forth below (the “Warrant Amount”) in the Company.

 

1. Purchase of Shares.

 

(a) Warrant Amount. The Holder is entitled, upon surrender of this Warrant at the principal office of the Company (or at such other place as the Company shall notify the Holder in writing), to purchase from the Company 7,282,425 shares of Common Stock (“Shares”), representing five percent (5%) of the outstanding shares of Common Stock of the Company on a fully diluted basis, including Common Stock of the Company subject to options, warrants, and other purchase rights, or 9,193,820 Shares after taking into account warrants granted on the date hereof to other affiliates of Modern Round, L.L.C.

 

(b) Exercise Price. The purchase price for each Share issuable pursuant to this Warrant shall be $.1360, which is equal to the average of the closing or last price of the Common Stock of the Company on its principal trading market during the 15 trading days immediately prior to the issuance of this Warrant. Such purchase price is herein referred to as the “Exercise Price.”

 

2. Exercise Period. This Warrant shall be exercisable, in whole or in part, at any time and from time to time, during the term commencing at the earlier of the first anniversary of the opening of the first facility of Modern Round, L.L.C. utilizing VirTra Technology or after the opening of the first facility utilizing VirTra Technology and the payment of the minimum royalty has been made to VirTra and ending at 5:00 p.m. Eastern Time five years from the date hereof, which date shall be called the “Expiration Date.”

 

  Exhibit A-1  
 

 

3. Method of Exercise.

 

(a) While this Warrant remains outstanding and exercisable in accordance with Section 2 above, the Holder may exercise, in whole or in part, the purchase rights evidenced hereby. Unless exercised in accordance with Section 4 below, such exercise shall be effected by the following:

 

(i) the surrender of this Warrant, together with a duly executed copy of the Notice of Exercise attached hereto, to the Secretary of the Company at its principal office (or at such other place as the Company shall notify the Holder in writing); and

 

(ii) the payment to the Company of an amount equal to the aggregate Exercise Price for the number of Shares being purchased.

 

(b) Each exercise of this Warrant shall be deemed to have been effected immediately prior to the close of business on the day on which this Warrant is surrendered to the Company as provided in Section 3(a) above. At such time, the person or persons in whose name or names any certificate for the Shares shall be issuable upon such exercise as provided in Section 3(c) below shall be deemed to have become the holder or holders of record of the Shares represented by such certificate.

 

(c) As soon as practicable after the exercise of this Warrant in whole or in part, and in any event within ten (10) days thereafter, the Company at its expense will cause to be issued in the name of, and delivered to, the Holder, or as such Holder (upon payment by such Holder of any applicable transfer taxes) may direct:

 

(i) a certificate or certificates for the number of Shares to which such Holder shall be entitled or, if uncertificated, a book entry to that effect, and

 

(ii) in case such exercise is in part only, a new warrant or book entry (dated the date hereof) of like tenor, with a Warrant Amount equal to (x) the Warrant Amount, less (y) the aggregate amount of Exercise Price paid by the Holder in exercise of this Warrant prior to the date of issuance of such new warrant (including, in the event of any Net Exercise, the aggregate value of such amount of Shares foregone in such Net Exercise (calculated as X minus Y under the formula set forth in Section 4 below, as applied to such Net Exercise)).

 

4. Net Exercise. In lieu of exercising this Warrant for cash, the Holder may elect to receive Shares equal to the value of this Warrant (or the portion thereof being exercised) by surrender of this Warrant at the principal office of the Company together with notice of such election (a “Net Exercise”). A Holder that Net Exercises shall have the rights described in Sections 3(b) and 3(c) hereof, and the Company shall issue to such Holder a number of Shares computed using the following formula:

 

 

  Exhibit A-2  
 

 

Where

 

  X = The number of Shares to be issued to the Holder.
     
  Y = The number of Shares purchasable under this Warrant or, if only a portion of the Warrant is being exercised, the portion of the Warrant being exercised (at the date of such calculation).
     
  A = The fair market value of one (1) Share (at the date of such calculation).
     
  B = The Exercise Price per Share (as adjusted to the date of such calculation).

 

For purposes of this Section 4, the fair market value of a Share shall mean the following: (a) the volume weighted average of the closing sales prices of the Common Stock for such day on all domestic securities exchanges on which the Common Stock may at the time be listed; (b) if there have been no sales of the Common Stock on any such exchange on any such day, the average of the highest bid and lowest asked prices for the Common Stock on all such exchanges at the end of such day; (c) if on any such day the Common Stock is not listed on a domestic securities exchange, the closing sales price of the Common Stock as quoted on the OTC Bulletin Board, the Pink OTC Markets or similar quotation system or association for such day; or (d) if there have been no sales of the Common Stock on the OTC Bulletin Board, the Pink OTC Markets or similar quotation system or association on such day, the average of the highest bid and lowest asked prices for the Common Stock quoted on the OTC Bulletin Board, the Pink OTC Markets or similar quotation system or association at the end of such day; in each case under subsections (a), (b), (c), and (d) the price will be averaged over the fifteen (15) consecutive Business Days ending on the Business Day immediately prior to the day as of which “Fair Market Value” is being determined; provided, that if the Common Stock is listed on any domestic securities exchange, the term “Business Day” as used in this sentence means Business Days on which such exchange is open for trading. If at any time the Common Stock is not listed on any domestic securities exchange or quoted on the OTC Bulletin Board, the Pink OTC Markets or similar quotation system or association, the “Fair Market Value” of the Common Stock shall be the fair market value per Share as determined jointly by the Board and the Holder.

 

5. Covenants of the Company.

 

(a) Shares Outstanding Notice. Upon request by the Holder at any time during the Exercise Period, the Company shall deliver, the next business day after such request, a certificate of an officer of the Company, representing to the number of Shares outstanding as of the date of delivery by the Company of such notice, so that the Holder may determine the Exercise Price and number of Shares issuable as of such date of delivery. Absent manifest error, the Holder shall be entitled to rely without investigation on such certificate for the purposes of completing and submitting a Notice of Exercise.

 

(b) Covenants as to Exercise Shares. The Company covenants and agrees that this Warrant is, and any Warrant issued in substitution for or replacement of this Warrant shall be, upon issuance, duly authorized and validly issued, and that all Shares that may be issued upon the exercise of the rights represented by this Warrant will, upon issuance in accordance with the terms hereof, be duly authorized, validly issued and outstanding, fully paid and nonassessable, and free from all taxes, liens, and charges with respect to the issuance thereof. If, at any time during the Exercise Period, the number of authorized but unissued Shares shall not be sufficient to permit exercise of this Warrant, the Company will take such corporate action in the opinion of its counsel, to be necessary to increase its authorized but unissued Shares to such number of Shares as shall be sufficient for such purposes. Notwithstanding any other provision hereof, if an exercise of any portion of this Warrant is to be made in connection with a public offering or a sale of the Company (pursuant to a merger, sale of stock, or otherwise), such exercise may at the election of the Holder be conditioned upon the consummation of such transaction, in which case such exercise shall not be deemed to be effective until immediately prior to the consummation of such transaction.

 

  Exhibit A-3  
 

 

(c) No Impairment. Except and to the extent waived or consented to by the Holder or as otherwise permitted under the terms hereof, the Company will not, by amendment of its governing instruments or through any reorganization, transfer of assets, consolidation, merger, dissolution, issue or sale of securities, or any other voluntary action, avoid or seek to avoid the observance or performance of any of the terms to be observed or performed hereunder by the Company, but will at all times in good faith assist in the carrying out of all the provisions of this Warrant and in the taking of all such action as may be necessary or appropriate in order to protect the exercise rights of the Holder against impairment.

 

6. Adjustment of Exercise Price and Number of Shares.

 

(a) Stock Splits and Dividends. If outstanding Shares shall be subdivided (by any stock split, recapitulation, or otherwise) into a greater number of Shares or if the Company shall pay a dividend or may any other distribution upon the Shares shall be payable in shares of Common Stock, the Exercise Price in effect immediately prior to such subdivision or at the record date of such dividend or distribution shall simultaneously with the effectiveness of such subdivision, dividend, or distribution be proportionately reduced, and the number of Shares issuable upon exercise of this Warrant shall be proportionately increased. If outstanding Shares shall be combined into a smaller number of Shares, the Exercise Price in effect immediately prior to such combination shall, simultaneously with the effectiveness of such combination, be proportionately increased, and the number of Shares issuable upon exercise of this Warrant shall be proportionately decreased. When any adjustment is required to be made in the Exercise Price, the number of Shares purchasable upon the exercise of this Warrant shall be changed to the number determined by dividing (i) an amount equal to the number of Shares issuable upon the exercise of this Warrant immediately prior to such adjustment, multiplied by the Exercise Price in effect immediately prior to such adjustment, by (ii) the Exercise Price in effect immediately after such adjustment.

 

(b) Reclassification, Etc. In case of any reclassification or change of the outstanding securities of the Company (or any other corporation the stock or securities of which are at the time receivable upon the exercise of this Warrant)), consolidation or merger of the Company, sale of all or substantially all of its assets, or any similar corporate reorganization on or after the date hereof, then and in each such case the Holder, upon the exercise hereof at any time after the consummation of such reclassification, change, reorganization, merger, or conveyance, shall be entitled to receive, in lieu of the stock or other securities and property receivable upon the exercise hereof prior to such consummation, the stock or other securities or property to which such Holder would have been entitled upon such consummation if such Holder had exercised this Warrant immediately prior thereto, all subject to further adjustment as provided in Section 6; and in each such case; appropriate adjustment shall be made with respect to the Holder’s rights under this Warrant to ensure that the provisions of this Section 6 shall thereafter be applicable, as nearly as possible, to this Warrant in relation to any shares of stock, securities, or assets thereafter acquirable upon exercise of this Warrant (including, in the case of any consolidation, merger, sale, or similar transaction in which the successor or purchasing party is other than the Company, an immediate adjustment in the Exercise Price to the value for the Shares reflected by the terms of such consolidation, merger, sale, or similar transaction, and a corresponding immediate adjustment to the number of Shares acquirable upon exercise of this Warrant without regard to any limitations or restrictions on exercise, if the value so reflected is less than the Exercise Price in effect immediately prior to such consolidation, merger, sale, or similar transaction), and the terms of this Section 6 shall be applicable to the Shares or other securities properly receivable upon the exercise of this Warrant after such consummation.

 

  Exhibit A-4  
 

 

7. No Fractional Shares or Scrip. No fractional share or scrip representing fractional Shares shall be issued upon the exercise of this Warrant, but in lieu of such fractional shares the Company shall make a cash payment therefor on the basis of the Exercise Price then in effect.

 

8. No Member Rights. Prior to exercise of this Warrant, the Holder shall not be entitled to any rights of a shareholder with respect to the Shares underlying this Warrant, including (without limitation) the right to vote such Shares, receive distributions thereon, Shares or be notified of membership meetings.

 

9. Governing Law. This Warrant shall be governed by and construed under the laws of the state of Arizona as applied to agreements among Arizona residents, made and to be performed entirely within the state of Arizona.

 

10. Successors and Assigns. The terms and provisions of this Warrant shall inure to the benefit of, and be binding upon, the Company and the holders hereof and their respective successors and assigns.

 

11. Titles and Subtitles. The titles and subtitles used in this Warrant are used for convenience only and are not to be considered in construing or interpreting this Warrant.

 

12. Notices. All notices and other communications given or made pursuant hereto shall be in writing and shall be deemed effectively given: (a) upon personal delivery to the party to be notified, (b) when sent by confirmed electronic mail or facsimile if sent during normal business hours of the recipient, and if not so confirmed, then on the next business day, (c) five (5) days after having been sent by registered or certified mail, return receipt requested, postage prepaid, or (d) one (1) day after deposit with a nationally recognized overnight courier, specifying next day delivery, with written verification of receipt. All communications shall be sent to the respective parties at the following addresses (or at such other addresses as shall be specified by notice given in accordance with this Section 12):

 

  Exhibit A-5  
 

 

If to the Company:

 

7970 S Kyrene Road

Tempe, Arizona 85284

Attention: Bob Ferris, CEO

Email: bferris@vitra.com

 

with a copy to:

 

Snell & Wilmer L.L.P.

One Arizona Center

400 E Van Buren

Phoenix, Arizona 85004

Attention: Dan Mahoney, Esq.

Email: dmahoney@swlaw.com

 

If to Holder:

 

At the address shown on the signature page hereto
with a copy to

 

Greenberg Traurig, LLP

2375 E Camelback Road, Suite 700

Phoenix, Arizona 85016

Attention: Robert S. Kant, Esq.

Email: kantr@gtlaw.com

 

13. Amendments and Waivers. Any term of this Warrant may be amended or waived with the written consent of the Company and Holder.

 

14. Severability. If any provision of this Warrant is held to be unenforceable under applicable law, such provision shall be excluded from this Warrant and the balance of the Warrant shall be interpreted as if such provision were so excluded and shall be enforceable in accordance with its terms.

 

15. Transfer. Subject to applicable laws and the restriction on transfer set forth on the first page of this Warrant, this Warrant and all rights hereunder are transferable, by the Holder in person or by duly authorized attorney, upon delivery of this Warrant and the form of assignment attached hereto to any transferee designated by Holder. The transferee shall sign an investment letter in form and substance satisfactory to the Company.

 

  Exhibit A-6  
 

 

IN WITNESS WHEREOF, the parties have executed this Warrant as of the date first written above.

 

  VITRA SYSTEMS, INC.
     
  By:            

 

ACKNOWLEDGED AND AGREED:
     
     
Printed Name:         
     
Title:    
     
Address:    
     
     

 

SIGNATURE PAGE TO WARRANT TO PURCHASE COMMON STOCK
 

 

Schedule A

 

  Schedule A-1  
 

 

NOTICE OF EXERCISE

 

TO: ______________________

 

(1) [  ] The undersigned hereby elects to purchase ________ Shares (the “Exercise Shares”) of ViTra Systems, Inc. (the “Company”) pursuant to the terms of the attached Warrant, and tenders herewith payment of the exercise price in full, together with all applicable transfer taxes, if any.

 

[  ] The undersigned hereby elects to purchase ________ Shares (the “Exercise Shares”) of ViTra Systems, Inc. (the “Company”) pursuant to the terms of the net exercise provisions set forth in Section 4 of the attached Warrant, and shall tender payment of all applicable transfer taxes, if any.

 

(2) Please issue a certificate or certificates representing said Exercise Shares in the name of the undersigned or in such other name as is specified below:

 

   
(Name)  
   
 
   
(Address)  

 

(3) The undersigned represents that (i) the aforesaid Exercise Shares are being acquired for the account of the undersigned for investment and not with a view to, or for resale in connection with, the distribution thereof and that the undersigned has no present intention of distributing or reselling such Shares; (ii) the undersigned is aware of the Company’s business affairs and financial condition and has acquired sufficient information about the Company to reach an informed and knowledgeable decision regarding its investment in the Company; (iii) the undersigned is experienced in making investments of this type and has such knowledge and background in financial and business matters that the undersigned is capable of evaluating the merits and risks of this investment and protecting the undersigned’s own interests; (iv) the undersigned understands that Exercise Shares issuable upon exercise of this Warrant have not been registered under the Securities Act of 1933, as amended (the “Securities Act”), by reason of a specific exemption from the registration provisions of the Securities Act, which exemption depends upon, among other things, the bona fide nature of the investment intent as expressed herein, and, because such securities have not been registered under the Securities Act, they must be held indefinitely unless subsequently registered under the Securities Act or an exemption from such registration is available; (v) the undersigned is aware that the aforesaid Exercise Shares may not be sold pursuant to Rule 144 adopted under the Securities Act unless certain conditions are met and until the undersigned has held the Shares for the number of years prescribed by Rule 144, that among the conditions for use of the Rule is the availability of current information to the public about the Company and the Company has not made such information available and has no present plans to do so; and (vi) the undersigned agrees not to make any disposition of all or any part of the aforesaid Shares of Exercise Shares unless and until there is then in effect a registration statement under the Securities Act covering such proposed disposition of the Exercise Shares and such disposition is made in accordance with said registration statement, or, if requested by the Company, the undersigned has provided the Company with an opinion of counsel satisfactory to the Company, stating that such registration is not required.

 

 
(Date)   (Signature)
     
    (Print name)

 

  2  
 

 

ASSIGNMENT FORM

 

(To assign the foregoing Warrant, execute this form

and supply required information. Do not use this

form to purchase Shares.)

 

For Value Received, the foregoing Warrant and all rights evidenced thereby are hereby assigned to

     
Name:  
  (Please Print)
Address:  
  (Please Print)

 

Dated: _________, 20____

 

Holder’s    
Signature:    
     
Holder’s    
Address:    

 

NOTE: The signature to this Assignment Form must correspond with the name as it appears on the face of the Warrant, without alteration or enlargement or any change whatever. Officers of corporations and those acting in a fiduciary or other representative capacity should file proper evidence of authority to assign the foregoing Warrant.

 

     
 

 

 

DIRECTOR’S OPTION AGREEMENT

 

For certain good and valuable consideration, the receipt of which is hereby acknowledged, VirTra Systems, Inc., a Texas corporation (the “Company”), hereby grants to Robert D. Ferris, a director of the Company (“Director”), the option to purchase (“Options”), for seven (7) years from the date of this Agreement (the “Option Period”), fully paid and non-assessable shares of the Company’s Common Stock, par value $0.005 per share (the “Common Stock”), as more fully set forth below.

 

  1.

Number of Options. As compensation for Chief Executive Officer and Director’s service as a director of the Company, Director shall receive Options as follows:

 
100,000 options on 1/4/2016 at a strike price of: $0.1399 (for service to be provided during 1st Quarter 2016).

     
  2. Exercise Price. The purchase rights represented by this Agreement are exercisable at the option of the Director, in whole or in part during the Option Period. These Options are exercisable at the closing price of the Company’s stock on the Grant Date (such price, the “Purchase Price”). The Purchase Price shall be payable in cash or by certified or official bank check in New York Clearing House funds, subject to adjustment as provided in Sections 5 and 6 hereof.
     
  3. Termination of Option Period. Upon the termination of the Director’s service as a director of the Company, the Option Period shall become three (3) months from the date of termination of Director’s employment, unless such termination was for any of the reasons set forth below. If Director’s service was terminated for any of the reasons set forth below or if it is later discovered that the Director had engaged in conduct that would have satisfied the criteria set forth below (“Cause”), then the Option Period shall cease as of the date of termination of service.
     
    For purposes of this Agreement, Cause means if (i) the Director shall have committed fraud or any felony in connection with his duties as an Director of the Company, willful misconduct or any act of disloyalty, dishonesty, fraud or breach of trust or confidentiality as to the Company, or any other act which is intended to cause or may reasonably be expected to cause economic or reputational injury to the Company or (ii) such termination is or would be deemed to be for Cause under any employment agreement between the Company and the Director.
     
  4. Issuance of Stock Certificates. Upon receipt of the Purchase Price and a request to exercise the Options properly directed to the Company’s Secretary, certificates for the Common Stock shall be issued in the name of, or in such names as may be directed by, the Director.
     
  5. Restriction on Common Stock Upon Exercise. The Director acknowledges that the Common Stock issuable upon exercise of the Options will be restricted and cannot be sold unless registered under the Securities Act of 1933 or pursuant to an applicable exemption therefrom.

 

Option Agreement – Page 1 of 3
   

 

  6. Price. The initial purchase price shall be as set forth in Section 2. The adjusted purchase price shall result from time to time from any and all adjustments of the initial purchase price in accordance with the provisions of Section 6 hereof. The term “Purchase Price” as used herein shall mean the initial purchase price or the adjusted purchase price, as the context may require.
     
  7. Adjustments of Purchase Price and Number of Shares.

 

  (a) Subdivision and Combination. In case the Company shall at any time subdivide or combine the outstanding shares of Common Stock, the Purchase Price shall forthwith be proportionately decreased in the case of subdivision or increased in the case of combination.
     
  (b) Reclassification, Consolidation, Merger, Etc. In case of any reclassification or change of the outstanding shares of Common Stock (other than a change in par value to no par value, or from no par value to par value, or as a result of a subdivision or combination), or in the case of any consolidation of the Company with, or merger of the Company into, another corporation (other than a consolidation or merger in which the Company is the surviving corporation and which does not result in any reclassification or change of the outstanding shares of Common Stock, except a change as a result of a subdivision or combination of such shares or a change in par value, as aforesaid), or in the case of a sale or conveyance to another corporation of the property of the Company as an entirety, the Director shall thereafter have the right to purchase the kind and number of shares of stock and other securities and property which would have been received upon such reclassification, change, consolidation, merger, sale or conveyance if such Director had exercised this Options immediately prior to such transaction, at a price equal to the product of (x) the number of shares issuable upon exercise of this Options and (y) the Purchase Price in effect immediately prior to the record date for such reclassification, change, consolidation, merger, sale or conveyance.
     
  (c) No Adjustment of Purchase Price in Certain Cases. No adjustment of the Purchase Price shall be made upon the issuance or becoming issuable of shares of Common Stock pursuant to the antidilution provisions contained in any of the Company’s securities.
     
  (d) Adjustment in Number of Shares. Upon each adjustment of the Purchase Price pursuant to the provisions of this Section 6, the number of shares of Common Stock issuable upon the exercise of each Option shall be adjusted to the nearest full share by multiplying the Purchase Price in effect immediately prior to such adjustment by the number of shares of Common Stock issuable upon exercise of the Options immediately prior to such adjustment and dividing the product so obtained by the adjusted Purchase Price.

 

  8. Elimination of Fractional Interests. The Company shall not be required to issue stock certificates representing fractions of shares of Common Stock, nor shall it be required to issue scrip or pay cash in lieu of fractional interests, it being the intent of the parties that all fractional interests shall be eliminated.

 

Option Agreement – Page 2 of 3
   

 

  9. Non-Transferability of Options. The Options granted hereby are non-transferable.
     
  10. Headings. The article and section headings in this Agreement are inserted for purposes of convenience only and shall have no substantive effect.

 

Executed this ______ day of _________________________, 201__.

 

    VirTra Systems, Inc.
     
  By:
    Matthew D. Burlend, COO and Director
     

Director

   
   
Signature    
Printed name: Robert D. Ferris    

 

Option Agreement – Page 3 of 3
   

 

 

SUBSCRIPTION AGREEMENT

 

Common Stock

of

VIRTRA, Inc.

 

This subscription (this “Subscription”) is dated               , 2017, by and between the investor identified on the signature page hereto (the “Investor”) and VIRTRA, Inc., a Nevada corporation (the “Company”), whereby the parties agree as follows:

 

1. Subscription

 

Investor agrees to buy and the Company agrees to sell and issue to Investor such number of shares (the “Shares”) of the Company’s common stock, $0.0001 par value per share, as set forth on the signature page hereto, for an aggregate purchase price (the “Purchase Price”) equal to the product of (x) the aggregate number of Shares the Investor has agreed to purchase and (y) the purchase price per share (the “Purchase Price”) as set forth on the signature page hereto. The Purchase Price is set forth on the signature page hereto.

 

The Shares are being offered pursuant to an offering statement on Form 1-A, File No. [ ] (the “Offering Statement”). The Offering Statement will have been qualified by the Securities and Exchange Commission (the “Commission”) prior to issuance of any Shares and acceptance of Investor’s subscription. The offering circular (the “Offering Circular”) which forms a part of the Offering Statement, however, is subject to change. A final Offering Circular and/or supplement to Offering Circular will be delivered to the Investor as required by law.

 

The Shares are being offered by Boustead Securities, LLC (the “Underwriter”) as underwriter on a “best efforts, minimum/maximum” basis. The completion of the purchase and sale of the Shares (the “Closing”) shall take place at a place and time (the “Closing Date”) to be specified by the Company and Underwriters in accordance with Rule 15c6-1 promulgated under the Securities Exchange Act of 1934, as amended (the “Exchange Act”). Upon satisfaction or waiver of all the conditions to closing set forth in the Underwriting Agreement and Offering Statement, at the Closing, (i) the Investor shall pay the Purchase Price by check or by wire transfer of immediately available funds to the Company’s Offering Deposit Account per wire instructions as provided on the signature line below, and (ii) the Company shall cause the Shares to be delivered to the Investor with the delivery of the Shares to be made through the facilities of The Depository Trust Company’s DWAC system in accordance with the instructions set forth on the signature page attached hereto under the heading “DWAC Instructions” (or, if requested by the Investor on the signature page hereto, through the physical delivery of certificates evidencing the Shares to the residential or business address indicated thereon).

 

The Underwriter and any participating broker dealers (the “Members”) shall confirm, via the selected dealer agreement or master selected dealer agreement that it will comply with Exchange Act Rule 15c2-4. As per Exchange Act Rule 15c2-4 and FINRA Notice to Members Rule 84-7 (the “Rule”), all checks that are accompanied by a subscription agreement will be promptly sent along with the subscription agreements to the Offering Deposit Account by noon the next business day. In regards to monies being wired from an investor’s bank account, the Members shall request the investors send their wires by the next business day, however, the Company cannot insure the investors will forward their respective monies as per the Rule. In regards to monies being sent from an investor’s account held at the participating broker, the funds will be “promptly transmitted” to the Deposit Account Agent following the receipt of a completed subscription document and completed wire instructions by the investor to send funds to the Offering Deposit Account. Absent unusual circumstances, funds in customer accounts will be transmitted by noon of the next business day. In the event that funds are sent in and the offering does not close for any reason prior to the Termination Date set forth in the final Offering Statement, all funds will be returned to investors promptly in accordance with the escrow agreement terms and applicable law.

 

2. Certifications, Representations and Warranties

 

In order to induce the Company to accept this Subscription Agreement for the Shares and as further consideration for such acceptance, the undersigned hereby makes, adopts, confirms and agrees to all of the following covenants, acknowledgments, representations and warranties with the full knowledge that the Company and its affiliates will expressly rely thereon in making a decision to accept or reject this Subscription Agreement:

 

I understand that to purchase Shares, I must either be an “accredited investor” as such term is defined in Rule 501 of Regulation D promulgated under the Securities Act of 1933, as amended, or I must limit my investment in the Shares to a maximum of: (i) 10% of my net worth or annual income, whichever is greater, if I am a natural person; or (ii) 10% of my revenues or net assets, whichever is greater, for my most recently completed fiscal year, if I am a non-natural person.

 

1
 

 

I understand that if I am a natural person I should determine my net worth for purposes of these representations by calculating the difference between my total assets and total liabilities. I understand this calculation must exclude the value of my primary residence and may exclude any indebtedness secured by my primary residence (up to an amount equal to the value of your primary residence). In the case of fiduciary accounts, net worth and/or income suitability requirements may be satisfied by the beneficiary of the account or by the fiduciary, if the fiduciary directly or indirectly provides funds for the purchase of the Shares.

 

I hereby represent and warrant that I meet the qualifications to purchase Shares because:

 

[  ] The aggregate purchase price for the Shares I am purchasing in the Offering does not exceed 10% of my net worth or annual income, whichever is greater.
   
[  ] I am an accredited investor.

 

I understand that the Company reserves the right to, in its sole discretion, accept or reject this Subscription, in whole or in part, for any reason whatsoever, and to the extent not accepted, unused funds transmitted herewith shall be returned to the undersigned in full, with any interest accrued thereon.

 

I have received the Offering Circular.

 

I am purchasing the Shares for my own account.

 

I hereby represent and warrant that I am not, and am not acting as an agent, representative, intermediary or nominee for any person identified on the list of blocked persons maintained by the Office of Foreign Assets Control, U.S. Department of Treasury. In addition, I have complied with all applicable U.S. laws, regulations, directives, and executive orders relating to anti-money laundering including but not limited to the following laws: (1) the Uniting and Strengthening America by Providing Appropriate Tools Required to Intercept and Obstruct Terrorism Act of 2001, Public Law 107-56; and (2) Executive Order 13224 (Blocking Property and Prohibiting Transactions with Persons Who Commit, Threaten to Commit, or Support Terrorism) of September 23, 2001.

 

By making the foregoing representations you have not waived any right of action you may have under federal or state securities law. Any such waiver would be unenforceable. The Company will assert your representations as a defense in any subsequent litigation where such assertion would be relevant. This Subscription Agreement and all rights hereunder shall be governed by, and interpreted in accordance with, the laws of the State of [California] without giving effect to the principles of conflict of laws.

 

3. Miscellaneous

 

This Subscription Agreement may be executed in any number of counterparts, all of which taken together shall constitute one and the same instrument and shall become effective when counterparts have been signed by each party and delivered to the other parties hereto, it being understood that all parties need not sign the same counterpart. Execution may be made by delivery by facsimile or via electronic format.

 

All communications hereunder, except as may be otherwise specifically provided herein, shall be in writing and shall be mailed, hand delivered, sent by a recognized overnight courier service such as FedEx, or sent via facsimile and confirmed by letter, to the party to whom it is addressed at the following addresses or such other address as such party may advise the other in writing:

 

To the Company: as set forth on the signature page hereto.

 

To the Investor: as set forth on the signature page hereto.

 

All notices hereunder shall be effective upon receipt by the party to which it is addressed.

 

If the foregoing correctly sets forth the parties’ agreement, please confirm this by signing and returning to the Company the duplicate copy of this Subscription Agreement.

 

4. FINRA Rules 5130 and 5131

 

This rule states that “restricted persons” are prohibited from participating in Syndicate or new issue offerings. Please review the following definition of a “restricted person” on Schedule A prior to signing this form acknowledging you do not fall into ‘“restricted person” status.

 

The undersigned hereby represents and warrants as of the date set forth below that:

 

  i. The undersigned is the holder of the account identified below or is authorized to represent the beneficial holders of the account;
  ii. Neither the undersigned nor any beneficial holder of the account is a “restricted person” as that term is described in FINRA Rule 5130 (described in Schedule A); and
  iii. The undersigned understands FINRA. Rule 5130 and the account is eligible to purchase new issues in compliance with such rule.

 

2
 

 

[Signature Page to Investor Subscription Agreement for VIRTRA, Inc.]

 

If the foregoing correctly sets forth the parties agreement, please confirm this by signing and returning to us the duplicate copy of this Subscription Agreement.

 

  VIRTRA, Inc.
Number of Shares: ___________________________ By:     
  Name:
Purchase Price per Share: $ _____[  ] share_ Title:
   
Aggregate Purchase Price: $____________________ Address Notice:
  VIRTRA, Inc.
  7970 S. Kyrene Rd.
INVESTOR: ________________________________ Tempe, AZ 85284

 

By:     Address: ______________________________________
Name:     ______________________________________________
Title:     Phone: ________________________________________
      SSN or EIN: ____________________________________

 

[  ] Check Method of Payment: Check enclosed _____or

 

[  ] Please wire $______________________from my account held at: _____________________

 

Account Title: ______________________; Account Number: ____________________

 

To the following instructions:

 

Signature Bank; 950 Third Avenue, 9th Floor New York, New York 10022

ABA/Routing # 026013576

Swift #: SIGNUS33

Account #: [  ]

Account Title: Signature Bank as Escrow Agent for VIRTRA, Inc.

Telephone No. (646) 822 1940

Fax No. (646) 758 8372

 

By: ____________________________________ Date: ________, 2017
Name: __________________________________  
Title: ___________________________________  

 

Select method of delivery of Shares: DRS or DWAC

 

DWAC DELIVERY DWAC Instructions:

 

  1. ___________________________________________________________
    Name of DTC Participant (broker dealer at which the account or accounts to be credited with the Shares are maintained)
     
  2. _______________________________________________________________
    DTC Participant Number
     
  3. _______________________________________________________________
    Name of Account at DTC Participant being credited with the Shares
     
  4. _______________________________________________________________
    Account Number of DTC Participant being credited with the Shares

 

Or DRS Electronic Book Entry Delivery Instructions:

 

Name in which Shares should be issued:_________________________________

 

Address: ________________________; ____________________;

Attention: ________________________

Telephone No.: ____________________

 

3
 

 

SCHEDULE A

 

a) FINRA Member Firms or other Broker/Dealers

 

b) Broker-Dealer Personnel

 

  Any officer, director, General partner, associated person or employee of a member firm or any other Broker/dealer.
  Any agent of a member firm or any other Broker/dealer that is engaged in the investment banking or securities business
  Any immediate family member of a person specified above. Immediate family members include a person’s parents, mother-in-law or father-in-law, spouse, brother or sister, brother-in-law or sister-in-law, son-in-law or daughter-in law, and children.

 

  i. Person that materially supports or receives material support from the immediate family member.
  ii. Person employed by or associated with the member, or an affiliate of the member, selling the new issue to the immediate family member.
  iii. Person that has an ability to control the allocation of the new issue.

 

c) Finders and Fiduciaries. With respect to the security being offered, a finder or any person acting in a fiduciary capacity to the managing underwriter, including, but not limited to, attorneys, accountants, and financial consultants; and any immediate family members (or person(s) receiving material support or receives material support from the family member) of a person identified as a Finder or Fiduciary.

 

d) Portfolio Managers

 

  a. Any person who has authority to buy or sell securities for a bank, savings and loan institution, insurance company, investment company, investment advisor, or collective investment account.
  b. Any immediate family member of a person specified under portfolio Managers that materially supports, or receives material support from such person.

 

e) Persons Owning a Broker/Dealer

 

  a. Any person listed, or required to be listed, in Schedule A of a Form BD, except persons identified by ownership of less than 10%.
  b. Any person listed, or required to be listed, in Schedule B of a Form BD, except persons identified by ownership of less than 10%.
  c. Any person listed, or required to be listed, in Schedule C of a Form BD that meets the criteria of (e)(bullet point 1) or (e) (bullet point 2) above.
  d. Any person that directly or indirectly owns 10% or more of a public reporting company listed, or required to be listed, in Schedule B of a Form BD.
  e. Any person that directly or indirectly owns 25% or more of a public reporting company listed, or required to be listed, in Schedule B of a Form BD.
  f. Any immediate family member of a person specified in (5) (bullet points 1-5) unless the person owning the Broker/dealer:

 

  i. Does not materially support, or receive material support from the immediate family member.
  ii. Is not an owner of the member, or an affiliate of the member, selling the new issue to the immediate family member.
  iii. Has no ability to control the allocation of the new issue.

 

4
 

 

 

 

 

 
   

 

 

 
   

 

 

 
   

 

 

 
   

 

 
   

 

 

 
   

 

 

 
   

 

 

 
   

 

 

 
   

 

 

 
   

 

 

 
   

 

 

 
   

 

 

 
   

 

 

 
   

 

 

 
   

 

 

 
   

 

 

 
   

 

 

 
   

 

 

 
   

 

 

 
   

 

 

 
   

 

 

 
   

 

 

 
   

 

 

 
   

 

 

 
   

 

 

 
   

 

 

 
   

 

 

 
   

 

 

 
   

 

 

 
   

 

 

 

 
   

 

 

 
   

 

 

 

 
   

 

 

 
   

 

 

 
   

 

 

 
   

 

 

 
   

 

 

 
   

 

 

 
   

 

 

 
   

 

 

 
   

 

 

 
   

 

 
   

 

 

 
   

 

 

 
   

 

 

 
   

 

 
   

 

 

 
   

 

 

 
   

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Exhibit 6.4

 

NOTE: PORTIONS OF THIS EXHIBIT INDICATED BY “[****]” ARE SUBJECT TO A CONFIDENTIAL TREATMENT REQUEST AND HAVE BEEN OMITTED FROM THIS EXHIBIT. COMPLETE, UNREDACTED COPIES OF THIS EXHIBIT HAVE BEEN FILED WITH THE SECURITIES AND EXCHANGE COMMISSION AS PART OF MODERN ROUND ENTERTAINMENT CORPORATION’S CONFIDENTIAL TREATMENT REQUEST AND THE SEC’S ORDER GRANTING CONFIDENTIAL TREATMENT FILE NO. 000-55212 – CF#33321.

 

EXECUTION COPY

 

CO-VENTURE AGREEMENT

 

This Co-Venture Agreement (the “Agreement”) is entered into this 16th day of January, 2015 (the “Effective Date”), by and between VirTra Systems, Inc., a Texas corporation (“VirTra”), and Modern Round, L.L.C., a Nevada limited liability company and its Affiliates (“Modern Round”). VirTra and Modern Round may be referred to herein individually as a “Party,” and collectively as the “Parties.”

 

WHEREAS, Modern Round is in the development stage of creating an entertainment concept, uniquely centered around a compelling indoor simulated shooting entertainment experience with a restaurant/bar which is modeled after the successful TopGolf style (the “Concept”); and

 

WHEREAS, VirTra owns or otherwise controls rights to certain software and related technology relating to firearms simulation training; and

 

WHEREAS, the Parties desire for VirTra to license or sell the VirTra Technology (as defined below) to Modern Round to assist with the further development of the Concept; and

 

WHEREAS, the Parties wish to formalize an arrangement whereby VirTra and Modern Round will collaborate on developing and operating the Concept.

 

NOW THEREFORE, in consideration of the mutual promises and covenants set forth below and other good and valuable consideration, the receipt and sufficiency of which is hereby acknowledged, the Parties hereby agree as follows:

 

1. Definitions. 

 

1.1. “AAA” shall have the meaning assigned to it in Section 11.6(b).

 

1.2. “Affiliate(s)” means (i) with respect to any specified Person, any other Person(s) that directly, or indirectly through one or more intermediaries or other affiliated Person(s), controls, is controlled by or is under common control with such specified Person(s), with the terms “control” and “controlled” meaning for purposes of this definition, the power to direct the management and policies of a Person, directly or indirectly, whether through the ownership of voting securities or partnership or other ownership interests, or by contract or otherwise, and (ii) with respect to any individual Person, any legal or common law spouse or cohabitant of that Person.

 

1.3. “Commercialization” means any and all marketing activities related to enhancing the commercial success of the Concept at any Location. When used as a verb, “Commercialize” will mean to engage in Commercialization.

 

1.4. “Confidential Information” means, with respect to each Party, non-public proprietary data or information that belongs in whole or in part to such Party or its Affiliates and/or information designated as Confidential Information of such Party hereunder, in all cases that, if disclosed in writing, is marked with the words “Confidential,” “Proprietary” or words of similar import, and if disclosed orally or visually, is described in reasonable detail in a written notice (including email communication) sent by the Disclosing Party to the Receiving Party within thirty (30) days of the oral or visual disclosure requesting that such information be treated as Confidential Information hereunder.

 

-1-
 

 

NOTE: PORTIONS OF THIS EXHIBIT INDICATED BY “[****]” ARE SUBJECT TO A CONFIDENTIAL TREATMENT REQUEST AND HAVE BEEN OMITTED FROM THIS EXHIBIT. COMPLETE, UNREDACTED COPIES OF THIS EXHIBIT HAVE BEEN FILED WITH THE SECURITIES AND EXCHANGE COMMISSION AS PART OF THIS COMPANY’S CONFIDENTIAL TREATMENT REQUEST.

 

EXECUTION COPY

 

1.5. “Collaboration Activities” means activities that the Parties have described in a Development Plan and which the Parties shall pursue in connection with development and testing leading to the Commercialization of the Concept.

 

1.6. “Commercial Milestone” shall have the meaning assigned to it in Section 4.3.

 

1.7. “Concept” shall have the meaning assigned to it in the first recital.

 

1.8. “Customer” means an individual who visits a Location to use the Integrated Software.

 

1.9. “Customizations” means those modifications to the VirTra Software carried out by VirTra as described as such in a Development Plan, and including all associated Documentation and Updates.

 

1.10. “Development Budget” shall have the meaning assigned to it in Section 2.3.

 

1.11. “Development Expense” shall have the meaning assigned to it in Section 2.3.

 

1.12. “Development Plan” shall have the meaning assigned to it in Section 2.1.

 

1.13. “Disclosing Party” shall have the meaning assigned to it in Section 7.1.

 

1.14. “Documentation” means all written or electronic documentation reasonably sufficient to explain the characteristics and functionality of the VirTra Software, Customizations, Integrated Software and Scenarios, and shall include without limitation all such documentation called for in any Development Plan.

 

1.15. “Equipment” shall mean equipment used to operate the Concept at a Location, including projectors, cameras, computers, screens, simulated weapons, and other equipment offered for sale by VirTra or by VirTra’s vendors from time to time as described in Section 4.5.

 

1.16. “Existing Scenarios” shall mean those Scenarios that are in existence as of the Effective Date.

 

1.17. “Future Weapons” means [****] for use with the Integrated Software that are developed by or on behalf of Modern Round, or by a third party after the Effective Date, and owned by Modern Round.

 

1.18. “Gander Mountain Locations” means, with respect to each location set forth on Exhibit C attached to this Agreement, either (a) the seventy-five (75) air mile radius around such location if Modern Round and/or its Affiliates invest in, operate, or provide any services for any firearm instruction within such geographic area reasonably similar to the type of instruction performed at such location, or (b) the ten (10) air mile radius around each such location if Modern Round and/or its Affiliate invest in, operate, or provide any entertainment services within such geographic area; provided, however, that with respect to each location set forth on Exhibit C attached to this Agreement, the restricted geographical area set forth above for such location shall terminate on the seven (7) anniversary of the corresponding opening date for such location as set forth on Exhibit C attached to this Agreement.

 

1.19. “GMP Market” means Customers that are: (a) U.S. or foreign governments; (b) military; (c) police/law enforcement agencies; or (d) entities whose sole, or substantially sole, business is offering training and education to train and support government, military, and/or police/law enforcement agency Customers.

 

-2-
 

 

NOTE: PORTIONS OF THIS EXHIBIT INDICATED BY “[****]” ARE SUBJECT TO A CONFIDENTIAL TREATMENT REQUEST AND HAVE BEEN OMITTED FROM THIS EXHIBIT. COMPLETE, UNREDACTED COPIES OF THIS EXHIBIT HAVE BEEN FILED WITH THE SECURITIES AND EXCHANGE COMMISSION AS PART OF THIS COMPANY’S CONFIDENTIAL TREATMENT REQUEST.

 

EXECUTION COPY

 

1.20. “Gross Revenue” means [****].

 

1.21. “Indemnitee” shall have the meaning assigned to it in Section 10.4.

 

1.22. “Integrated Software” means [****] as described in a Development Plan, and including all associated Documentation and Updates.

 

1.23. “Locations” means each facility located in the Territory that operates the Concept.

 

1.24. “Losses” shall have the meaning assigned to it in Section 10.1.

 

1.25. “Milestone Date” shall have the meaning assigned to it in Section 4.3.

 

1.26. “Modern Round Indemnitee” shall have the meaning assigned to it in Section 10.2.

 

1.27. “Monthly Expense” shall have the meaning assigned to it in Section 2.3.

 

1.28. “Modern Round Technology” means the Noma Software and any and all technology, including Future Weapons and hardware and software, developed by Modern Round independent of this Agreement.

 

1.29. “Noma Software” means the software owned by Modern Round or licensed to Modern Round by Noma Technologies,

LLC, and described as such in Exhibit E.

 

1.30. “Non-Concept Location” means any facility or location that has been agreed to by Modern Round as not competitive with the Concept.

 

1.31. “Monthly Expense” shall have the meaning assigned to it in Section 2.3.

 

1.32. “Object Code” means software in machine executable format, including all associated Documentation and Updates.

 

1.33. “Operating Agreement” means that certain Amended and Restated Operating Agreement of Modern Round, dated as of January 16, 2015, as amended.

 

1.34. “Operations-Related Communication” shall have the meaning assigned to it in Section 11.5(b).

 

1.35. “Overhead” shall have the meaning assigned to it in Section 2.3.

 

-3-
 

 

EXECUTION COPY

 

1.36. “Person” means any individual, corporation, limited liability company, partnership (general or limited), syndicate, joint venture, society, association, trust, unincorporated organization or governmental authority, or any trustee, executor, administrator or other legal representative thereof.

 

1.37. “Project” shall have the meaning assigned to it in Section 2.1.

 

1.38. “Project Manager” means the representative designated by each of Modern Round and VirTra to be responsible for managing the Development Plan and the Development Budget.

 

1.39. “Receiving Party” shall have the meaning assigned to it in Section 7.1.

 

1.40. “Representatives” shall have the meaning assigned to it in Section 7.2.

 

1.41. “Royalties” shall have the meaning assigned to it in Section 5.4.

 

1.42. “Royalty Period” shall have the meaning assigned to it in Section 5.4.

 

1.43. “Scenario” means a software file that contains data to enable the presentation of a dramatic or visual scene to a Customer through use of the Integrated Software, such as a game, battle scene, crime scene or geometric shapes or designs, and including all associated Documentation and Updates, and further described in Section 2.8.

 

1.44. “Shortfall” shall have the meaning assigned to it in Section 5.1(b).

 

1.45. “Source Code” means fully annotated and compilable software in human-perceivable format, not suitable for machine execution without compilation or interpretation, and including all associated Documentation and Updates.

 

1.46. “Support” shall have the meaning assigned to it in Section 4.2.

 

1.47. “Surplus” shall have the meaning assigned to it in Section 5.1(b).

 

1.48. “Technical Contact” shall have the meaning assigned to it in Section 4.2.

 

1.49. “Term” shall have the meaning assigned to it in Section 9.1.

 

1.50. “Territory” means worldwide, but excluding the Gander Mountain Locations.

 

1.51. “Updates” shall have the meaning assigned to it in Section 4.2.

 

1.52. “Units” shall have the meaning assigned to it in Section5.3(a).

 

1.53. “Updates” shall have the meaning assigned to it in Section 4.2.

 

1.54. “VirTra Indemnitee” shall have the meaning assigned to it in Section 10.1.

 

1.55. “VirTra Software” means that software program described as such in Exhibit F, plus any and all Customizations, Scenarios, Updates and Documentation.

 

-4-
 

 

NOTE: PORTIONS OF THIS EXHIBIT INDICATED BY “[****]” ARE SUBJECT TO A CONFIDENTIAL TREATMENT REQUEST AND HAVE BEEN OMITTED FROM THIS EXHIBIT. COMPLETE, UNREDACTED COPIES OF THIS EXHIBIT HAVE BEEN FILED WITH THE SECURITIES AND EXCHANGE COMMISSION AS PART OF THIS COMPANY’S CONFIDENTIAL TREATMENT REQUEST.

 

EXECUTION COPY

 

1.56. “VirTra Technology” means the VirTra Software, Customizations, Scenarios, and Equipment any and all technology, including hardware and software, developed by VirTra independent of this Agreement.

 

2. Development Activities.

 

2.1 Customizations. Subject to all terms of this Agreement including without limitation the payment of Fees, VirTra shall develop and deliver to Modern Round the Scenarios and Customizations described in Exhibit G, along with and integrated into the VirTra Software, according to the development plan (“Development Plan”) described therein. The Parties may agree as to other Development Plans in the future, and such agreement as to each such Development Plan shall be in writing. The development and integration of the Customizations, the VirTra Software, Scenarios, the Noma Software and Equipment shall be deemed the “Project.” Parties shall cooperate in the development of the Project, and exchange information as reasonably necessary or desirable in order to effect the completion of such Project. Any changes to the Development Plan shall be agreed to in writing by the Parties.

 

2.2 Project Managers. Each Party will appoint a Project Manager for the work described herein. The Project Managers will be the focal points for general relationship and process issues, and will be responsible for managing the overall relationship of the Parties. Project Managers will review the status of tasks and responsibilities hereunder as mutually agreed by the Parties. During the Term, the Parties shall meet on mutually agreeable dates and times to facilitate, review, coordinate, or otherwise carry out the Collaboration Activities. Such meetings shall take place at such locations as the Parties agree, and may be conducted in person or through telephonic or other electronic means. The Parties further acknowledge and agree that appropriate employees of the Parties may attend such meetings.

 

2.3 Development Budget. [****].

 

2.4 Staffing. Each Party agrees to cooperate and cause all necessary and appropriate employees and authorized contractors of such Party, and those of its Affiliates, to cooperate in such Party’s performance obligations under this Agreement; specifically VirTra will staff for the Project to levels as directed and approved by Modern Round. Each Party will use commercially reasonable efforts to timely complete the Collaboration Activities set forth herein, and each Party agrees to cooperate in good faith to allow the other Party to achieve completion of the assigned activities in a timely and professional manner. Each Party understands and agrees that the other Party’s performance of the assigned activities may depend on timely approvals and completion of certain tasks or adherence to schedules within the other Party’s control. Consequently, any scheduling of assigned activities may require adjustments or changes if such tasks or schedules change, are modified, or are not completed as anticipated. Each Party agrees, whenever reasonably possible, to provide notice in any case where scheduling needs to be adjusted.

 

2.5 Resources. Each Party will provide resources and utilize its employees and authorized contractors as it reasonably deems necessary to perform the Collaboration Activities based on approved expenditures. The manner and means used by each Party to perform the Collaboration Activities are in the sole discretion and control of the obligated Party.

 

2.6 Testing. The Parties shall perform validation testing of the elements of the Project developed under this Agreement at appropriate stages in accordance with a mutually generated test plan. The Parties will mutually agree to a Development Budget with respect to any validation testing with Modern Round being solely responsible for payment of the Monthly Expense and any Capital Expense pursuant to such Development Budget. Validation shall include the validation requirements as applicable for the end product, prototype, or part, the processes and all lower level component/sub-assemblies and related materials to be used. In addition to validation testing, Modern Round agrees that testing with representative customers prior to public release is important to ensure success and will be used as needed and a part of the Development Budget.

 

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NOTE: PORTIONS OF THIS EXHIBIT INDICATED BY “[****]” ARE SUBJECT TO A CONFIDENTIAL TREATMENT REQUEST AND HAVE BEEN OMITTED FROM THIS EXHIBIT. COMPLETE, UNREDACTED COPIES OF THIS EXHIBIT HAVE BEEN FILED WITH THE SECURITIES AND EXCHANGE COMMISSION AS PART OF THIS COMPANY’S CONFIDENTIAL TREATMENT REQUEST.

 

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2.7 Ownership. Specifically excluding the Noma Software, VirTra shall retain all right, title, and interest in and to the Existing Scenarios, the Scenarios, the Integrated Software, and the Customizations. Modern Round shall retain all right, title, and interest in and to the Noma Software. Subject to the foregoing, the Parties each retain the entire right, title and interest in and to their respective developed technologies and intellectual property, subject only to any licenses expressly set forth herein.

 

2.8 Scenarios. The Parties hereby agree that all Scenarios existing as of the Effective Date, and not subject to use or license restrictions in any agreement between VirTra and a third party, are accurately described in Exhibit H, and are considered part of the VirTra Software and the Integrated Software hereunder. Where VirTra develops or has developed additional Scenarios after the Effective Date, VirTra shall promptly notify Modern Round, and such additional Scenarios shall be deemed part of VirTra Software. Modern Round may from time to time develop its own Scenarios, which shall be owned solely by Modern Round, and Modern Round shall have no obligation to use any Scenarios provided by VirTra; provided, however, that any [****]. VirTra hereby agrees that it shall develop and deliver additional Scenarios as set forth in the Development Plan during the Term of this Agreement.

 

3. Licenses. 

 

3.1 Licenses Granted by VirTra. During the Term and subject to Modern Round’s material compliance with the terms and conditions of this Agreement, VirTra hereby grants Modern Round an exclusive, non-transferrable Royalty-bearing right and license to use, execute, publicly perform, publicly display, digitally perform, copy and distribute the VirTra Software, including without limitations all Scenarios and Customizations: (a) solely in Object Code Format; (b) solely as integrated into the Integrated Software for use with Equipment; and (c) solely for use at Locations to operate the Concept in the Territory. Additionally, except for the Gander Mountain Locations, the GMP Market and Non-Concept Locations, at no time during the term of this Agreement shall VirTra grant, directly or indirectly, any licenses to any third party for the use of VirTra Software or the Customizations.

 

3.2 Licenses Granted by Modern Round.

 

(a) Noma Software. During the Term and subject to VirTra’s material compliance with the terms and conditions of this Agreement, Modern Round hereby grants VirTra a non-exclusive, non-transferrable right and license, without the right to grant sublicense, to use, execute, and copy the Noma Software solely to complete the Project and to ensure that the Concept functions properly with the Noma Software at each Location.

 

(b) Future Weapons. [****].

 

3.3 Termination of Licenses. Except as otherwise set forth herein, upon any expiration or termination of this Agreement, all licenses granted hereunder shall be terminated without further notice.

 

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NOTE: PORTIONS OF THIS EXHIBIT INDICATED BY “[****]” ARE SUBJECT TO A CONFIDENTIAL TREATMENT REQUEST AND HAVE BEEN OMITTED FROM THIS EXHIBIT. COMPLETE, UNREDACTED COPIES OF THIS EXHIBIT HAVE BEEN FILED WITH THE SECURITIES AND EXCHANGE COMMISSION AS PART OF THIS COMPANY’S CONFIDENTIAL TREATMENT REQUEST.

 

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4. Commercialization.

 

4.1 Commercialization. Modern Round will use its commercially reasonable efforts, with the commercially reasonable assistance of VirTra, to Commercialize and operate the Concept in Locations determined by Modern Round in the Territory.

 

4.2 Support. During the Term and during each Location’s normal business hours, VirTra shall provide technical support and advice regarding the use of the VirTra Technology together with the Modern Round Technology via telephone and email (“Support”). Modern Round shall be billed for Support charges [****]. Modern Round shall provide at least one (1) Modern Round employee (each, a “Technical Contact”) to receive such Support, which Technical Contact shall be responsible to communicate Support to each corresponding Location operator. In no event shall VirTra be responsible for providing Support directly to Location operators unless otherwise agreed to by VirTra. Such Support shall include the provision to Modern Round, and the integration into new versions of the Integrated Software, of all updates, enhancements, corrections, versions and releases of the VirTra Software, Customizations and Scenarios (collectively, “Updates”). The consideration for Support provided by VirTra shall be [****].

 

4.3 Commercial Milestones. Modern Round will open its first Location in the US or Canada (the “First Commercial Milestone”) on or before one (1) of the following dates (each, a “Milestone Date”): (a) the eighteen (18) month anniversary of the Effective Date with respect to any Location to be housed in a physical facility that is in existence as of the Effective Date, or (b) the twenty-four (24) month anniversary of the Effective Date with respect to any Location to be housed in a Modern Round-newly-constructed facility. Notwithstanding any other provision the First Commercial Milestone shall occur no later than twenty-four (24) months after the Effective Date. The Parties acknowledge and agree that Modern Round’s failure to achieve the First Commercial Milestone by the applicable Milestone Date shall be subject to Section 4.4, unless as otherwise mutually agreed by the Parties. Additionally, Modern Round shall open at least one Location outside the US and Canada (the “Second Commercial Milestone”) no later than the five (5) year anniversary of the Effective Date. The Parties acknowledge and agree that Modern Round’s failure to achieve the Second Commercial Milestone by the applicable Milestone Date shall be subject to Section 4.4, unless as otherwise mutually agreed by the Parties.

 

4.4 Loss of Exclusivity.

 

(a) In the event that (i) Modern Round does not achieve the First Commercial Milestone by the applicable Milestone Date, and (ii) Modern Round fails to pay to VirTra the corresponding Minimum Royalty Payment for any 12-month period as specified under Section 5.4, the exclusive licenses granted by VirTra under Section 3 for the US and Canada will become non-exclusive. Additionally, after conversion to non-exclusive licenses, VirTra shall have no further obligation to: i) license Modern Round to operate the Concept at any new Location in the US or Canada; or ii) provide Modern Round with any new Scenarios for the US or Canada that were completed after Modern Round’s failure as set forth in Section 4.3.

 

(b) In the event that (i) Modern Round does not achieve the Second Commercial Milestone by the five (5) year anniversary of the Effective Date, and (ii) Modern Round fails to pay to VirTra the corresponding Minimum Royalty Payment for any 12-month period as specified under Section 5.4, the exclusive licenses granted by VirTra under Section 3 for Locations outside the US and Canada will become non-exclusive. Additionally, after conversion to non-exclusive licenses, VirTra shall have no further obligation to: i) license Modern Round to operate the Concept at any new Location outside the US or Canada; or ii) provide Modern Round with any new Scenarios for use outside the US or Canada that were completed after Modern Round’s failure as set forth in Section 4.3.

 

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NOTE: PORTIONS OF THIS EXHIBIT INDICATED BY “[****]” ARE SUBJECT TO A CONFIDENTIAL TREATMENT REQUEST AND HAVE BEEN OMITTED FROM THIS EXHIBIT. COMPLETE, UNREDACTED COPIES OF THIS EXHIBIT HAVE BEEN FILED WITH THE SECURITIES AND EXCHANGE COMMISSION AS PART OF THIS COMPANY’S CONFIDENTIAL TREATMENT REQUEST.

 

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4.5 Equipment. From time to time, Modern Round may submit to VirTra one or more written or electronic purchase orders for the purchase of certain Equipment, including projectors. VirTra shall use its diligent efforts to accept and fulfill on a timely basis all such purchase orders, and the prices payable thereunder shall be [****]. Where Equipment or other materials are to be sold by VirTra vendors, Modern Round hereby agrees to pay such vendors directly upon request by VirTra, [****].

 

4.6 Commercialization at Non-Concept Locations. From time to time, VirTra may submit one or more written proposals for Non-Concept Location business opportunities to the Chairman and CEO of Modern Round. Should Modern Round disapprove, Modern Round shall submit a written explanation of the reasons for disapproval within ten (10) days of receipt of any written proposal. Should Modern Round not respond within ten (10) days of receipt of a written proposal for a Non-Concept Location business opportunity, the Non-Concept Location business opportunity shall be deemed approved.

 

5. Payments. 

 

5.1 Monthly Expense and Reconciliation.

 

(a) Monthly Expense. [****].

 

(b) Reconciliation Process. Within five (5) business days after the end of each month during the term of any Development Plan, VirTra will submit to Modern Round a monthly invoice for the actual costs of conducting the services contemplated by the Development Plan in the immediately preceding month, including a reasonably detailed itemization of such costs. To the extent the invoiced amounts are less than the Monthly Expense for such month (the “Surplus”), the Surplus shall be credited against the subsequent month’s Monthly Expense owed to VirTra by Modern Round. To the extent the invoiced amounts are more than the Monthly Expense (the “Shortfall”), then Modern Round shall pay to VirTra the Shortfall, so long as Modern Round approved or does approve the expenses, within fifteen (15) calendar days after receiving each such monthly invoice, along with the subsequent month’s Monthly Expense when due. The Parties agree that the prior written approval of Modern Round is required before Modern Round is obligated to pay to VirTra any Shortfall that is more than 10% percent of the corresponding month’s Monthly Expense.

 

5.2 Capital Items. [****].

 

5.3 Equity.

 

(a) Modern Round Stock. On the Effective Date, Modern Round shall issue to VirTra 1,365,789 units, representing five percent (5%) of the units representing an ownership interest in Modern Round (“Units”), on a fully-diluted basis, including Units subject to outstanding options, warrants, and other purchase rights, provided that (1) Modern Round shall issue to VirTra, for no additional consideration, such additional Units as may be necessary to assure that all Units granted to VirTra equal one percent (1%) of the outstanding Units of Modern Round on a fully-diluted basis, and (2) Modern Round shall allow VirTra the right to participate to the extent of five percent (5%) of any offerings of Units effected by Modern Round to third parties for the primary purpose of raising funds by providing at least fifteen (15) days’ notice prior to any such offering, but such right shall exist only during the period that Modern Round is a privately held limited liability company and shall be reduced proportionately to reflect any sale or other disposition of Units by VirTra.

 

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(b) VirTra Warrants.

 

(1) On the Effective Date, VirTra shall issue to Modern Round or to its designated affiliates, for no additional consideration, one or more warrants in the form of Exhibit A to purchase shares of VirTra’s common stock totaling five percent (5%) of the capital stock of VirTra on a fully-diluted and as-converted basis as of the Effective Date, which shall be exercisable commencing at the earlier of the first anniversary of Modern Round opening its first range facility utilizing VirTra Technology or after Modern Round opening its first range facility utilizing VirTra Technology and the payment of all required US/Canada Minimum Royalty Payments during the first 12 month period has been made to VirTra.

 

(2) On the Effective Date, VirTra shall issue to Modern Round or to its designated affiliates, for no additional consideration, a warrant in the form of Exhibit B to purchase shares of VirTra’s common stock totaling five percent (5%) of the capital stock of VirTra on a fully-diluted and as-converted basis as of the Effective Date, which shall be exercisable commencing at the time that Modern Round has paid VirTra at least $2,000,000 in Royalty payments pursuant to this Agreement.

 

(c) Modern Round Warrants. On the Effective Date, Modern Round shall issue to VirTra, for no additional consideration, a warrant in the form of Exhibit C to purchase1,365,789 Units of Modern Round, representing five percent (5%) of the outstanding Units of Modern Round on a fully-diluted basis, including Units subject to outstanding options, warrants, and other purchase rights, which shall be exercisable commencing on the twelve (12) month anniversary of the opening of Modern Round’s first range facility utilizing VirTra Technology pursuant to this Agreement.

 

5.4 Royalties. During the period of time beginning on the applicable Milestone Date and extending until the termination of this Agreement (the “Royalty Period”), Modern Round will pay VirTra the following royalty payments (“Royalties”):

 

(a) Royalty Payment. Modern Round will pay or cause to be paid to VirTra on or about the first business day of each month during the Term a monthly license fee equal to seven percent (7%) of the Gross Revenue during the prior month at each Location that uses the Integrated Software and/or any VirTra Technology.

 

(b) Minimum Royalty Payment (US and Canada). Beginning with the subsequent 12-month period following the applicable Milestone Date, and continuing thereafter during the Term, Modern Round agrees that if the total Royalty payments paid to VirTra under Section 5.4(a) hereof for Locations in the United States and Canada together do not total at least the minimum Royalty amount specified in the table set forth below for such 12-month period (the “US/Canada Minimum Royalty Payment”), Modern Round may pay to VirTra within thirty (30) days after the end of each such 12-month period, as additional Royalty payments, the difference between (a) the amount of total Royalty payments paid to VirTra by Modern Round in such 12-month period and (b) the US/Canada Minimum Royalty Payment for such 12-month period.

 

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Table of Minimum Royalty Payments (US and Canada)

 

12-Month Period   US/Canada
Minimum
Royalty
Payment
 
1   $ 280,000  
2   $ 560,000  
3   $ 840,000  
Each 12-month period thereafter   $ 840,000  

 

(c) Minimum Royalty Payment (Other Than US). Beginning with the subsequent 12-month period following the opening of a Location other than in the US and Canada, and continuing thereafter during the Term, Modern Round agrees that if the total Royalty payments paid to VirTra under Section 5.4(a) hereof for Locations outside the United States and Canada do not total at least the minimum Royalty amount specified in the table set forth below for such 12-month period (the “Non-US/Canada Minimum Royalty Payment”), Modern Round may pay to VirTra within thirty (30) days after the end of each such 12-month period, as additional Royalty payments, the difference between (a) the amount of total Royalty payments paid to VirTra by Modern Round in such 12-month period and (b) the Non-US/Canada Minimum Royalty Payment for such 12-month period.

 

Table of Minimum Royalty Payments (Other Than US and Canada)

 

12-Month Period   Non-US/Canada Minimum Royalty
Payment
 
1   $ 280,000  
2   $ 560,000  
3   $ 840,000  
Each 12-month period thereafter   $ 840,000  

 

5.5 Reports and Royalty Payments. Within ten (10) business days after the end of each month during the Royalty Period, Modern Round will deliver to VirTra a report setting forth for such month the Gross Revenue for each Location that uses the Integrated Software and/or any VirTra Technology. Modern Round will make payment to VirTra for all Royalty amounts owed to VirTra within thirty (30) days of the end of the applicable month.

 

5.6 Taxes and Withholding. All payments under this Agreement will be made without any deduction or withholding for or on account of any tax unless such deduction or withholding is required by applicable laws or regulations. If Modern Round is so required to deduct or withhold, Modern Round will (a) promptly notify VirTra of such requirement, (b) pay to the relevant authorities the full amount required to be deducted or withheld promptly upon the earlier of determining that such deduction or withholding is required or receiving notice that such amount has been assessed against VirTra, (c) promptly forward to VirTra an official receipt (or certified copy) or other documentation reasonably acceptable to VirTra evidencing such payment to such authorities, and (d) make payments due to VirTra net of such deductions or withholdings.

 

5.7 Overdue Payments. If any payment due under this Agreement (other than payments that are the subject of a good faith dispute between the Parties) is overdue, Modern Round will pay interest to VirTra at a rate per annum equal to the lesser of the prime rate of interest, as reported by New York edition of The Wall Street Journal on the last business day of the applicable month, plus one percent (1%), or the highest rate permitted by applicable law, calculated on the number of days such payments are paid after the date such payments are due.

 

5.8 Maintenance of Records; Audits.

 

(a) Record Keeping. Each Party will keep, and will cause its Affiliates to keep, books and accounts of record in connection with its obligations under this Agreement (including those necessary for determining the Gross Revenue for each Location) in sufficient detail to permit accurate determination of all figures necessary for verification of Monthly Expenses, Capital Expenses, and Royalty payments to be paid pursuant to this Agreement. Each Party will maintain, and will cause its Affiliates to maintain, such records for a period of at least three (3) years after any termination of this Agreement.

 

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(b) Audits. During the Term and for three (3) years following any termination or expiration of this Agreement, upon thirty (30) days’ prior written notice from VirTra to Modern Round and no more than one (1) time in any twelve (12) month period, Modern Round will permit VirTra’s designated certified public accountant who is reasonably acceptable to Modern Round to examine, at VirTra’s initial expense (subject to the last sentence in this Section 5.8(b)), the relevant books and records of Modern Round, and its Affiliates as may be reasonably necessary to verify the amounts reported by Modern Round as Gross Revenue for each Location. Such accountant will be provided access to such books and records at Modern Round’s facility(ies) where such books and records are normally kept and such examination will be conducted during the Modern Round’s normal business hours. Upon completion of the audit, the accountant will provide both Modern Round and VirTra a written report disclosing any discrepancies in the reports submitted by Modern Round under this Agreement, and, in each case, the specific details concerning any discrepancy or breach. If such accountant’s report reveals an underpayment pursuant to this Agreement, Modern Round will pay to VirTra the additional payments within thirty (30) days of the date Modern Round receives such accountant’s written report so correctly concluding. If such underpayment exceeds 5% of the payments that were due to VirTra, Modern Round also will reimburse VirTra for all reasonable out-of-pocket expenses incurred in conducting the audit.

 

(c) Confidentiality. All information of Modern Round that is subject to audit under Section 5.8(b) will be deemed to be Confidential Information of Modern Round, and neither the accountant nor VirTra will disclose such Confidential Information to any third party or use such Confidential Information for any purpose other than verifying payments to be made hereunder.

 

6. Intellectual Property Rights. 

 

6.1 VirTra Ownership and Intellectual Property Rights. Modern Round acknowledges and agrees that VirTra is the exclusive owner or authorized licensee of all VirTra Technology and retains all right, title, and interest in and to the VirTra Technology and all associated intellectual property rights. Modern Round’s rights to the VirTra Technology are set forth in this Agreement and all rights not expressly granted to Modern Round hereunder are reserved exclusively to VirTra.

 

6.2 Modern Round Ownership and Intellectual Property Rights. VirTra acknowledges and agrees that Modern Round is the exclusive owner or authorized licensee of all Modern Round Technology and retains all right, title, and interest in and to the Modern Round Technology and all associated intellectual property rights. VirTra’s rights to the Modern Round Technology are set forth in this Agreement and all rights not expressly granted to VirTra hereunder are reserved exclusively to Modern Round.

 

6.3 Protection. Except as otherwise set forth in this Agreement, during the Term, each Party agrees that it shall not directly or indirectly through any entity owned or controlled by such Party offer goods or services that compete with the goods or services offered at any Location. Without limiting the generality of the foregoing, and except for the GMP Market and the Gander Mountain Locations, in no event shall VirTra license any third party to use the VirTra Software or Scenarios at any facility other than a Non-Concept Location during the Term. In addition, Modern Round hereby agrees that it shall not offer goods or services in the GMP Market.

 

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7. Confidentiality and Non-Solicitation. 

 

7.1 Confidentiality. Except to the extent expressly authorized by this Agreement or otherwise agreed in writing, the Parties agree that, for the Term and for five (5) years after any termination of this Agreement, and thereafter for so long as any such Confidential Information remains protectable or legally enforceable under a related agreement or under any applicable law, including (without limitation) applicable copyright, trade secret and patent laws, each Party (the “Receiving Party”) receiving any Confidential Information of the other Party (the “Disclosing Party”) hereunder will keep such Confidential Information confidential and will not publish or otherwise disclose or use such Confidential Information for any purpose other than as provided for in this Agreement, except for Confidential Information that the Receiving Party can establish:

 

(a) was already known by the Receiving Party (other than under an obligation of confidentiality) at the time of disclosure by the Disclosing Party and the Receiving Party has documentary evidence to that effect;

 

(b) was generally available to the public or otherwise part of the public domain at the time of its disclosure to the Receiving Party;

 

(c) became generally available to the public or otherwise part of the public domain after its disclosure or development, as the case may be, other than through any act or omission of the Receiving Party or any of its Affiliates;

 

(d) was disclosed to the Receiving Party, other than under an obligation of confidentiality, by a third party who had no obligation to the Disclosing Party not to disclose such information to others; or

 

(e) was independently discovered or developed by or on behalf of the Receiving Party without the use of any Confidential Information belonging to the Disclosing Party and the Receiving Party has contemporaneous documentary evidence to that effect.

 

7.2 Use. Each Receiving Party shall safeguard all Confidential Information received by it using a reasonable degree of care, but not less than that degree of care used by the Receiving Party in safeguarding its own similar information or material, and prevent unauthorized, negligent or inadvertent use or disclosure thereof. Each Receiving Party will have the right to use the Disclosing Party’s Confidential Information in carrying out the Receiving Party’s responsibilities or exercising its rights under this Agreement, or as otherwise expressly authorized by this Agreement; provided, however, that the Receiving Party shall limit access to any Confidential Information received by it to only those directors, officers, Affiliates, associates, partners, employees, authorized contractor or advisors (“Representatives”) as are critically necessary for the sole purpose of performing the Receiving Party’s obligations under this Agreement (it being agreed that, prior to any such disclosure, such Representatives shall be informed by Receiving Party of the confidential nature of such information and that by receiving such information they are agreeing to be bound by this Agreement and, if the Disclosing Party so requests, that such Representative enters into a confidentiality agreement with the Disclosing Party on terms equivalent to those contained in this Agreement), and Receiving Party hereby agrees to be responsible for any breach of this Agreement by any of its Representatives, and, further, Receiving Party agrees, at its sole expense, to take all reasonable measures (including, but not limited to, court proceedings) to restrain its Representatives from prohibited or unauthorized disclosure or use of the Confidential Information.

 

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7.3 Disclosure.

 

(a) Request for Disclosure. No Receiving Party shall disclose any Confidential Information of the Disclosing Party. In the event any Receiving Party receives any valid request (by oral questions, interrogatories, requests for information or documents, subpoena, civil investigative demand or similar process) to disclose (i) any Confidential Information of the Disclosing Party or (ii) any information relating to Receiving Party’s opinion, judgment or recommendations concerning the Disclosing Party, the Receiving Party shall provide the Disclosing Party with prompt written notice of such request so that the Disclosing Party may seek an appropriate protective order and/or waive Receiving Party’s compliance with the provisions of this Agreement.

 

(b) SEC Filings and Related Disclosures. Either Party may disclose the terms of this Agreement (i) to the extent required, in the reasonable opinion of such Party’s legal counsel, to comply with applicable laws, including, without limitation, the rules and regulations promulgated by the United States Securities and Exchange Commission and (ii) in connection with a prospective acquisition, merger, financing or license for such Party, to prospective acquirers or merger candidates or to existing or potential investors or licensees; provided, however, that prior to such disclosure each such candidate or investor will agree in writing to be bound by obligations of confidentiality and non-use at least equivalent in scope to those set forth in this Section 7. If a Party discloses this Agreement or any of the terms hereof in accordance with this Section 7.3, such Party agrees, at its own expense, to seek confidential treatment of portions of this Agreement or such terms, as may be reasonably requested by the other Party.

 

7.4 Public Announcements. VirTra and Modern Round will, from time to time and at the request of the other Party, discuss and agree on the general information content relating to this Agreement that may be publicly disclosed. Effective upon the Effective Date, the Parties have agreed to the content of a press release publicly announcing this Agreement. Except as may be appropriate for Modern Round to make in connection with its Commercialization activities as contemplated hereunder, neither Party will make any public announcement regarding this Agreement without the prior written approval of the other Party; provided, however, that in no event shall Modern Round disclose any Confidential Information of VirTra without VirTra’s prior written consent.

 

7.5 Non-Solicitation. During the Term and for two (2) years after any termination of this Agreement, neither Party shall, nor shall either Party cause, assist or permit any of its Affiliates or Representatives to, without obtaining the other Party’s prior written consent, solicit for employment any of the current officers or employees of such other Party. The term “solicit for employment” does not include any general solicitation or advertising for employment through the mass media, the internet or job fairs to fill one or more positions on a basis consistent with the soliciting Party’s past practice.

 

7.6 Equitable Relief. Each Party acknowledges and agrees that its covenants and obligations under Section 6 and Section 7 are necessary and reasonable in order to protect the legitimate business interests of the Parties and that neither Party would disclose or continue to disclose any Confidential Information to the other or enter into this Agreement without its prior undertaking of such covenants and obligations. Each Party further acknowledges and agrees that any violation or threatened violation by it (or any of its representatives) of its covenants and obligations hereunder would cause irreparable injury to the other Party and that monetary damages, even if determinable, would not alone be adequate to compensate for such injury. Accordingly, the Parties agree that, in addition to any other remedy that may be available to them at law, they each shall be entitled to injunctive relief, specific performance and other equitable remedies in furtherance of this Agreement without posting bond or other security and without having to prove actual damage or harm.

 

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8. Representations, Warranties and Covenants.

 

8.1 Representations and Warranties of Each Party. Each of the Parties hereby represents, warrants, and covenants to the other Parties as follows:

 

(a) It is a Person, as the case may be, duly organized and validly existing under the laws of the state or other jurisdiction of its incorporation or formation.

 

(b) The execution, delivery and performance of this Agreement by such Party has been duly authorized by all requisite corporate or limited liability company action, as the case may be, and does not require any shareholder or manager or member action or approval, as the case may be, or if such approval is required, such approval has been obtained.

 

(c) It has the corporate or limited liability company power and authority, as applicable, to execute and deliver this Agreement and to perform its obligations hereunder.

 

(d) The execution, delivery and performance by such Party of this Agreement and its compliance with the terms and provisions hereof does not and will not conflict with or result in a breach of any of the terms and provisions of or constitute a default under, or result in a right to accelerate payment under, obligation to make any payment pursuant to, or loss of material rights under, (i) any loan agreement, guaranty, financing agreement, agreement relating to it or its property; (ii) the provisions of its certificate of incorporation, bylaws, articles of organization, operating agreement, or any other operative documents, as applicable; (iii) any order, writ, injunction or decree of any court or governmental authority entered against it or by which any of its property is bound; or (iv) any applicable law, rule, regulation or permit.

 

(e) It will at all times comply with all material laws and regulations applicable to its activities under this Agreement.

 

(f) It does not have in effect, and after the Effective Date, will not enter into, any oral or written agreement or arrangement that is or would be inconsistent with its obligations under this Agreement.

 

8.2 Additional Representations, Warranties and Covenants of VirTra. In addition to the representations, warranties and covenants made by VirTra elsewhere in this Agreement, VirTra hereby represents, warrants, and covenants to Modern Round that:

 

(a) To the best of VirTra’s knowledge, as of the Effective Date, the VirTra Technology does not infringe any third party intellectual property rights.

 

(b) Effective as of the Effective Date, VirTra will execute a joinder agreement to the Operating Agreement and will execute that certain First Amendment to the Operating Agreement in the form attached hereto as Exhibit D.

 

8.3 Additional Representations, Warranties and Covenants of Modern Round. In addition to the representations, warranties and covenants made by Modern Round elsewhere in this Agreement, Modern Round hereby represents, warrants, and covenants to VirTra that:

 

(a) Modern Round’s Units to be issued to VirTra on the Effective Date pursuant to this Agreement equals five percent (5%) of the equity interests of Modern Round on a fully-diluted and as-converted basis as of the Effective Date, are duly authorized and, when issued in accordance with Section 5.3(a) hereof, will be validly issued, fully paid and nonassessable equity interests of Modern Round, and will be free and clear of all taxes, liens and charges. Effective on the Effective Date, the issuance of such Units (i) will be duly authorized pursuant to all requisite entity action by Modern Round and its managers and members, (ii) will not conflict with the articles of organization, operating agreement, or other governing documents of Modern Round, (iii) will comply in all respects with all applicable laws, (iv) will be enforceable pursuant to the terms and conditions of this Agreement and the Operating Agreement, and (v) result in VirTra being the owner of record, and having good, valid and marketable title in, to and under such Units.

 

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(b) The Modern Round Balance Sheet dated December 31, 2104, and delivered to VirTra, is true, correct and complete in all respects and accurately presents the financial position of Modern Round for the period covered thereby.

 

(c) Modern Round is not required to qualify to do business as a foreign limited liability company in any jurisdiction in respect of its business, and does not have any activities, assets, employees, offices, operations and/or properties located in any jurisdiction, other than the State of Nevada.

 

(d) Other than the Operating Agreement, there are no other voting trust agreements, members’ agreements, other arrangements to vote equity jointly, equity pledges or other agreements affecting voting, transfer or ownership of the equity securities of Modern Round.

 

(e) At a minimum interval of a quarterly basis, Modern Round shall provide to VirTra a copy of any financial records and reports that Modern Round provides to each of its members and holders of its equity interests.

 

(f) To the best of Modern Round’s knowledge, as of the Effective Date, the Modern Round Technology does not infringe any third party intellectual property rights.

 

(g) Modern Round has both the means and the intent to invest the funds needed to develop a professional product for the Concept, to properly test products, and to adapt products to enhance the chances of success prior to the Commercial Milestone.

 

(h) Effective as of the Effective Date, Modern Round will execute, and will cause each of its managers and members to execute, that certain First Amendment to the Operating Agreement in the form attached hereto as Exhibit D.

 

8.4 Warranty Disclaimer. THE FOREGOING WARRANTIES IN THIS SECTION 8 BY EACH PARTY ARE IN LIEU OF ANY OTHER WARRANTIES, EXPRESS OR IMPLIED, INCLUDING, WITHOUT LIMITATION, ANY IMPLIED WARRANTIES OF MERCHANTABILITY OR ANY IMPLIED WARRANTIES OF FITNESS FOR A PARTICULAR PURPOSE, OR NON-INFRINGEMENT, ALL OF WHICH ARE HEREBY SPECIFICALLY EXCLUDED AND DISCLAIMED.

 

9. Term and Termination.

 

9.1 Term. The term of this Agreement will commence on the Effective Date and will continue so long as Modern Round exercises any rights hereunder with respect to the VirTra Technology (the “Term”), unless terminated earlier in accordance with this Agreement.

 

9.2 Termination for Cause. This Agreement may be terminated in its entirety at any time during the Term upon written notice by either Party if the other Party (the “Breaching Party”) is in breach of any material obligation under this Agreement and has not cured any such material breach for thirty (30) days as measured from the date written notice of such material breach is given to the Breaching Party.

 

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9.3 Effects of Termination for Cause.

 

(a) Effect of Termination by VirTra for Cause. If Modern Round is the Breaching Party and VirTra terminates this Agreement in accordance with Section 9.1, then Modern Round will, within fifteen (15) calendar days of the termination, pay VirTra all amounts due and owing pursuant to this Agreement prior to the date of termination and Section 6 and Section 7 will survive any such termination.

 

(b) Effect of Termination by Modern Round for Cause. If VirTra is the Breaching Party and Modern Round terminates this Agreement in accordance with Section 9.1, then Modern Round may elect to have all or any portion of the licenses granted to Modern Round pursuant to Section 3 survive, in which case Modern Round’s obligations to VirTra under Sections 5.3, 5.4, 5.5, 5.6 and 5.7 will continue to the extent that Modern Round elects to retain such license.

 

9.4 Termination Rights upon Insolvency of VirTra. This Agreement may be terminated in its entirety at any time during the Term by Modern Round if at any time during the Term (a) a case is commenced by or against VirTra under the U.S. bankruptcy code, (b) VirTra files for or is subject to the institution of bankruptcy, liquidation or receivership proceedings (other than a case under the U.S. bankruptcy code), (c) VirTra assigns all or a substantial portion of its assets for the benefit of creditors, (d) a receiver or custodian is appointed for VirTra’s business, or (e) a substantial portion of VirTra’s business is subject to attachment or similar process; provided, however, that in the case of any involuntary case under the U.S. bankruptcy code, such right to terminate will only become effective if VirTra consents to the involuntary bankruptcy or receivership or such proceeding is not dismissed within sixty (60) days after the commencement thereof.

 

9.5 Termination upon Insolvency of Modern Round. This Agreement may be terminated in its entirety at any time during the Term by VirTra if (a) a case is commenced by or against Modern Round under the U.S. bankruptcy code, (b) Modern Round files for or is subject to the institution of bankruptcy, liquidation or receivership proceedings (other than a case under the U.S. bankruptcy code), (c) Modern Round assigns all or a substantial portion of its assets for the benefit of creditors, (d) a receiver or custodian is appointed for Modern Round’s business, or (e) a substantial portion of Modern Round’s business is subject to attachment or similar process; provided, however, that in the case of any involuntary case under the U.S. bankruptcy code, such right to terminate will only become effective if Modern Round consents to the involuntary bankruptcy or receivership or such proceeding is not dismissed within sixty (60) days after the filing thereof.

 

9.6 Remedies Cumulative. Any termination under Section 9.2 above will be in addition to, and not in substitution for or a condition to, the pursuit of any other remedies available under this Agreement or in law or equity. Without limiting the foregoing, in the event of a breach by either Party of this Agreement, subject to Section 10.7, the Party that is not the Breaching Party, without exercising any right of termination otherwise available to it, may pursue its remedies for damages or other relief under the dispute resolution procedures set forth in Section 11.6.

 

9.7 Return of Confidential Information. Upon any termination of this Agreement, each Party will promptly return to the other Party, delete or destroy all relevant records and materials in such Party’s possession or control containing Confidential Information of the other Party. Upon the return of such materials, such Party agrees to certify, in writing, that all of the foregoing records and materials have been returned to the other Party or destroyed.

 

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9.8 Survival of Certain Obligations. Expiration or termination of the Agreement will not relieve the Parties of any obligation accruing before such expiration or termination. The following provisions of this Agreement will survive the expiration or termination of the Agreement: Sections 5.8 (Maintenance of Records; Audits), 6 (Intellectual Property Rights), 7 (Confidentiality and Non-Solicit), 9.3 (Effects of Termination for Cause), 10 (Indemnification and Insurance), and 11 (Miscellaneous); and, for purposes of clarification, until the Royalty Period has expired, the following provisions of this Agreement will survive: Sections 5.3 (Equity), 5.4 (Royalties), 5.5 (Reports and Royalty Payments), 5.6 (Taxes and Withholding), and 5.7 (Overdue Payments). Except as set forth in this Section 9.8, upon termination or expiration of this Agreement, all other rights and obligations under this Agreement shall then be null and void and have no further force and effect. Any expiration or early termination of this Agreement will be without prejudice to the rights of either Party against the other accrued or accruing under this Agreement before termination.

 

10. Indemnification and Insurance.

 

10.1 Indemnification by Modern Round. Subject to Section 10.4 below, Modern Round will indemnify, defend and hold harmless VirTra, its Affiliates, and their respective managers, members, directors, officers, stockholders, employees and agents (each, a “VirTra Indemnitee”) from and against any third party claims, suits, losses, liabilities, damages, costs, fees and expenses (including reasonable attorneys’ fees) (collectively, “Losses”) arising out of or resulting from, directly or indirectly: (a) any material breach of, or inaccuracy in, any representation or warranty made by Modern Round in this Agreement, or any breach or violation of any covenant or agreement of Modern Round in or pursuant to this Agreement; (b) the negligence or willful misconduct by or of Modern Round and its Affiliates, and their respective managers, members, directors, officers, stockholders, employees and agents with respect to this Agreement; (c) the Commercialization and operation of the Concept at a Location by Modern Round and its Affiliates, as the case may be.

 

10.2 Indemnification by VirTra. Subject to Section 10.3 below, VirTra agrees to indemnify, defend and hold harmless Modern Round, its Affiliates, and their respective managers, members, directors, officers, stockholders, employees and agents (“Modern Round Indemnitees”) from and against only those Losses reasonably arising out of or resulting from, directly or indirectly: (a) any material breach of, or inaccuracy in, any representation or warranty made by VirTra in this Agreement, or any breach or violation of any covenant or agreement of VirTra in or pursuant to this Agreement; or (b) the negligence or willful misconduct by or of VirTra, its Affiliates, and their respective managers, members, directors, officers, stockholders, employees and agents.

 

10.3 Intellectual Property Indemnification by VirTra. VirTra shall defend, indemnify and hold harmless Modern Round Indemnitees from and against any Losses arising out of or in connection with a claim that the VirTra Technology, when used within the scope of this Agreement, infringes, violates or misappropriates a valid third party patent, copyright or other proprietary right, provided that VirTra is notified promptly in writing of the action, Modern Round has not reached any compromise or settlement of such action or made any admissions in respect of the same, and VirTra is given the option, at its expense, to control the action and receives all requested reasonable assistance from Modern Round to defend the same. Notwithstanding the foregoing, VirTra shall have no obligation for indemnification for any Losses reasonably related to: (a) any use of the Modern Round Technology alone; (b) any combination or operation of the Modern Round Technology or the VirTra Technology with any third party technology or product; or (c) any addition to or modification made to the VirTra Technology that is specifically requested by or directed by Modern Round. Should any third party infringement claim be made against VirTra, for which VirTra lacks third party indemnification, then VirTra may, at its sole option and expense (i) replace or modify the VirTra Technology so that it becomes non-infringing; (ii) procure any necessary right and license to allow Modern Round to continue to offer and operate the Concept at the Locations; or (iii) if neither of the previous options are commercially practicable, require Modern Round to terminate use of the VirTra Technology and Modern Round’s obligation to pay Royalties shall be suspended during any period of non-operation of the Concept at the Locations necessitated by any third party infringement claim.

 

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10.4 Intellectual Property Indemnification by Modern Round. Modern Round shall defend, indemnify and hold harmless VirTra Indemnitees from and against any Losses arising out of or in connection with a claim that the Modern Round Technology, when used within the scope of this Agreement, infringes, violates or misappropriates a valid third party patent, copyright or other proprietary right, provided that Modern Round is notified promptly in writing of the action, VirTra has not reached any compromise or settlement of such action or made any admissions in respect of the same, and Modern Round is given the option, at its expense, to control the action and receives all requested reasonable assistance from VirTra to defend the same. Notwithstanding the foregoing, Modern Round shall have no obligation for indemnification for any Losses reasonably related to: (a) any use of the VirTra Technology alone; (b) any combination or operation of the Modern Round Technology or the VirTra Technology with any third party technology or product; or (c) any addition to or modification made to the Modern Round Technology that is specifically requested by or directed by VirTra. Should any third party infringement claim be made against Modern Round, for which Modern Round lacks third party indemnification, then Modern Round may, at its sole option and expense (i) replace or modify the Modern Round Technology so that it becomes non-infringing; (ii) procure any necessary right and license to allow VirTra to continue to offer and operate the Concept at the Locations; or (iii) if neither of the previous options are commercially practicable, require VirTra to terminate use of the Modern Round Technology.

 

10.5 Indemnification Procedure. In the event of any such claim against any Modern Round Indemnitee or VirTra Indemnitee (individually, an “Indemnitee”), the Indemnitee will promptly notify the other Party in writing of the claim and the indemnifying Party will manage and control, at its sole expense, the defense of the claim and its settlement. The Indemnitee will cooperate with the indemnifying Party and may, at its option and expense, be represented in any such action or proceeding. The indemnifying Party will not be liable for any settlements, litigation costs or expenses incurred by any Indemnitee without the indemnifying Party’s written authorization. Notwithstanding the foregoing, if the indemnifying Party believes that any of the exceptions to its obligation of indemnification of any Indemnitee set forth in this Section 10 may apply, the indemnifying Party will promptly notify such Indemnitees, which will then have the right to be represented in any such action or proceeding by separate counsel at their expense; provided that the indemnifying Party will be responsible for payment of such expenses if such Indemnitees are ultimately determined to be entitled to indemnification from the indemnifying Party. The indemnifying Party will not settle any claims against any Indemnitee in any way that adversely impacts such Indemnitee or its Affiliates without obtaining the prior written consent of such Indemnitee, which consent will not be unreasonably withheld.

 

10.6 Sole Remedy. The indemnification provisions set forth in Sections 10.1, 10.2, 10.3, or 10.4 constitute the sole and exclusive remedies of the VirTra Indemnitees and Modern Round Indemnitees, respectively, for any and all Losses suffered by such Indemnitees in respect of this Agreement.

 

10.7 Insurance. Each Party shall, at such Party’s expense and at all times during the Term, hold and maintain commercially reasonable insurance policies with minimum limits as set forth below. Such insurance must be with an insurance company of nationally recognized standing with a rating of A-/Class IX, or better, as rated by A.M. Best and must name the other Party as an additional insured for all liability coverage related to or arising from performance under this Agreement. Each Party’s insurance shall be primary insurance and non-contributory to that maintained by such Party. Each Party waives all rights of subrogation, with respect to all applicable insurance policies, against the other Party, its managers, officers, directors, agents, employees and against other contractors and vendors, to the extent of such Party’s negligence. Each Party shall provide at least thirty (30) days written notice to the other Party in the event of any material changes, cancellation and renewal of such Party’s insurance policies. Prior to the performance of any services under this Agreement, certificates of insurance evidencing satisfactory coverage of the types and limits set forth below shall be furnished to each Party. The limits set forth below do not in any way limit liability assumed elsewhere in this Agreement.

 

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(a) General Liability Insurance. Commercial general liability insurance with limits not less than $1,000,000 each occurrence for bodily injury or property damage and $2,000,000 in the aggregate.

 

(b) Workers Compensation Insurance. Workers compensation insurance in accordance with applicable state law, and including Employer’s Liability for all employees of each Party in the amount of $1,000,000 per accident.

 

10.8 Limitations on Liability. EXCEPT FOR THEIR RESPECTIVE OBLIGATIONS UNDER SECTION 7 (CONFIDENTIALITY AND NON-SOLICIT), SECTION 10.2 (INDEMNIFICATION BY VIRTRA), AND SECTION 10.4 (INDEMNIFICATION BY MODERN ROUND), NEITHER PARTY SHALL BE LIABLE TO THE OTHER PARTY FOR ANY EXEMPLARY, INCIDENTAL, SPECIAL OR PUNITIVE DAMAGES ARISING OUT OF OR IN CONNECTION WITH THIS AGREEMENT OR ITS SUBJECT MATTER (INCLUDING, WITHOUT LIMITATION, LOST PROFITS), REGARDLESS OF WHETHER A PARTY HAS BEEN ADVISED OF THE POSSIBILITY OF SUCH DAMAGES IN ADVANCE OR WHETHER SUCH DAMAGES ARE REASONABLY FORESEEABLE. EXCEPT FOR VIRTRA’s OBLIGATIONS UNDER SECTION 7 (CONFIDENTIALITY AND NON-SOLICIT) OR SECTION 10.2 (INDEMNIFICATION BY VIRTRA), IN NO EVENT SHALL VIRTRA BE LIABLE FOR DAMAGES IN EXCESS OF THE SUM OF ALL ROYALTY PAYMENTS VIRTRA HAS RECEIVED FROM MODERN ROUND UNDER THE TERMS OF THIS AGREEMENT DURING THE TWELVE (12) MONTH PERIOD PRECEDING THE DATE THE CLAIM AROSE.

 

11. Miscellaneous

 

11.1 Governing Law. This Agreement, the rights of the Parties and all claims arising under or in connection herewith, will be governed by and interpreted in accordance with the domestic substantive laws of the State of Arizona, without regard to any choice or conflict of law principles that would cause the application of the laws of any other jurisdiction.

 

11.2 Assignment. Neither this Agreement, nor any right or interest hereunder, will be assignable by either Party without the prior written consent of the other Party, which consent will not be unreasonably withheld or delayed. Notwithstanding the foregoing, either Party may assign their respective rights and obligations hereunder to an Affiliate or to a third party that acquires all or substantially all of that Party’s assets or equity. This Agreement will be binding upon the permitted successors and assigns of the Parties and the name of a Party appearing herein will be deemed to include the names of such Party’s successors and permitted assigns to the extent necessary to carry out the intent of this Agreement. Any assignment not in accordance with this Section 11.2 will be void.

 

11.3 Further Assurances. Each Party agrees to execute, acknowledge and deliver such further instruments, and to do all such other acts, as may be necessary or appropriate in order to carry out the purposes and intent of the Agreement.

 

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11.4 Force Majeure. The failure of either Party to timely perform any obligation under this Agreement (except for any obligations to make payments to the other Party hereunder) by reason of epidemic, earthquake, riot, civil commotion, fire, act of God, war, terrorist act, strike, flood, or governmental act or restriction, or other cause that is beyond the reasonable control of the respective Party, will not be deemed to be a material breach of this Agreement, but will be excused to the extent and for the duration of such cause, and the affected Party will provide the other Party with full particulars thereof as soon as it becomes aware of the same (including its best estimate of the likely extent and duration of the interference with its activities) and will use its commercially reasonable efforts to avoid or remove such cause, and will perform its obligation(s) with the utmost dispatch when the cause is removed. If the performance of any such obligation under this Agreement is delayed owing to such a force majeure for any continuous period of more than ninety (90) days, the Parties hereto will consult with respect to an equitable solution, including the possibility of the mutual termination of this Agreement.

 

11.5 Notices.

 

(a) Except as expressly provided otherwise in Section 11.5(b), all notices and demands between the Parties, or any authorizations, approvals, or consents provided in connection with terms of this Agreement that expressly require such authorizations, approvals, or consents to be in writing, by one of the Parties hereto to the other will be in writing and (i) delivered by hand, (ii) sent by nationally recognized overnight delivery service, or (iii) sent by registered or certified mail, return receipt requested, postage prepaid, and will be deemed to have been properly served to the addressee upon receipt of such written communication, in any event to the following addresses:

 

If to Modern Round:

 

Mr. Barry Monheit

Mr. Mitch Saltz

Modern Round, L.L.C.

7377 E. Doubletree Road

Suite 200

Scottsdale AZ 85258

 

with a copy to:

 

Greenberg Traurig, LLP

2375 E. Camelback Road

Suite 700

Phoenix , Arizona 85016

Attn: Robert Kant, Esq.

Email: kantr@gtlaw.com

 

If to VirTra:

 

7970 S. Kyrene Rd.

Tempe, AZ 85284

Attn: Bob Ferris, CEO

Email: bferris@virtra.com

 

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with a copy to:

 

Snell & Wilmer L.L.P.

One Arizona Center

400 E. Van Buren

Phoenix, Arizona 85004-2202

Attn: Dan Mahoney, Esq.

Email: dmahoney@swlaw.com

 

(b) Notices or other communications by either Party to the other in the normal course of performing under this Agreement or routine operational communications, including, without limitation, invoicing, any communication relating to any requested changes to the Development Plan or Development Budget, or technical support issues (collectively, “Operations-Related Communication”) may be delivered and shall be deemed properly given and effective when (y) provided under any of the methods described in the Section 11.5(a), or (z) provided by e-mail if properly addressed to the receiving Party at the addresses provided in or pursuant to this Agreement and sent via the Internet as evidenced by the computer records or any archival copy thereof kept in the ordinary course of business by the sender, whichever method is first used by the sender for a particular Operations-Related Communication. Regarding any Operations-Related Communication, if sender sends it before 5:00 p.m. Phoenix, Arizona time on the receiving Party’s business day, it shall be deemed effective on the date sent by sender; otherwise it will deemed effective on the receiving Party’s next business day.

 

11.6 Dispute Resolution. Any disputes arising between the Parties relating to, arising out of or in any way connected with this Agreement or any term or condition hereof, or the performance by either Party of its obligations hereunder, whether before or after termination of this Agreement, will be resolved as follows:

 

(a) Senior Management. Disputes will be submitted to escalating levels of Modern Round’s and VirTra’s senior management for review.

 

(b) Arbitration. If the senior management of the Parties are unable to resolve such dispute within a thirty (30) day period following such escalation, either Party may submit the matter to binding arbitration in accordance with this Section 11.6(b). Except as specified below, the arbitration will be conducted in accordance with the rules of, and under the auspices of, the American Arbitration Association (the “AAA”). The arbitration will be conducted by a single arbitrator with relevant technical expertise who is jointly selected by the Parties or, if the Parties cannot mutually agree, is selected by the AAA administrator and is not employed by and does not have a material financial relationship with, a Party or any of its Affiliates. The arbitration shall take place at a location that is jointly selected by the Parties or, if the Parties cannot mutually agree, is selected by such AAA administrator. This Agreement will remain in effect pending completion of the proceedings brought under this Section 11.6(b). Within ten (10) business days after the arbitrator is selected, each Party will submit to the arbitrator that Party’s proposed resolution of the dispute and justification therefor. All arbitration proceedings must be completed within thirty (30) days after the arbitration is convened. The Parties hereby agree that the arbitrator has authority to issue rulings and orders regarding all procedural and evidentiary matters that the arbitrator deems reasonable and necessary with or without petition therefor by the Parties as well as the final ruling and judgment. Rulings will be issued by written order summarizing the arbitration proceedings. Any judgment or award by the arbitrator in any dispute will have the same force and effect as the final judgment of a court of competent jurisdiction. Nothing in this arbitration clause will prevent either Party from seeking a pre-award attachment of assets or injunctive relief to enforce its rights in intellectual property, confidentiality, or non-solicit obligations under this Agreement, or to enjoin any event that might cause irreparable injury, in a court of competent jurisdiction prior to an award on the merits by the arbitrator.

 

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11.7 Amendment. No amendment, modification or supplement of any provision of this Agreement will be valid or effective unless made in writing and signed by a duly authorized officer of each Party.

 

11.8 Waiver. No provision of the Agreement will be waived by any act, omission or knowledge of a Party or its agents or employees except by an instrument in writing expressly waiving such provision and signed by a duly authorized officer of the waiving Party.

 

11.9 No Implied Waivers; Rights Cumulative. No failure on the part of Modern Round or VirTra to exercise, and no delay in exercising, any right, power, remedy or privilege under this Agreement, or provided by statute or at law or in equity or otherwise, will impair, prejudice or constitute a waiver of any such right, power, remedy or privilege or be construed as a waiver of any breach of this Agreement or as an acquiescence therein, nor will any single or partial exercise of any such right, power, remedy or privilege preclude any other or further exercise thereof or the exercise of any other right, power, remedy or privilege.

 

11.10 Severability. If any clause or portion thereof in this Agreement is for any reason held to be invalid, illegal or unenforceable, the same will not affect any other portion of this Agreement, as it is the intent of the Parties that this Agreement will be construed in such fashion as to maintain its existence, validity and enforceability to the greatest extent possible. In any such event, this Agreement will be construed as if such clause or portion thereof had never been contained in this Agreement, and there will be deemed substituted therefore such provision as will most nearly carry out the intent of the Parties as expressed in this Agreement to the fullest extent permitted by applicable law.

 

11.11 Descriptive Headings. The descriptive headings of this Agreement are for convenience only and will be of no force or effect in construing or interpreting any of the provisions of this Agreement.

 

11.12 No Strict Construction. This Agreement has been prepared jointly and will not be strictly construed against either Party. Additionally, each Party further acknowledges and agrees that they have had the opportunity to consult with counsel of their choosing regarding the terms and conditions of this Agreement and have either done so or freely elected not to do so.

 

11.13 No Third Party Beneficiaries. No Person other than the Parties and their respective Affiliates and permitted assignees hereunder will be deemed an intended beneficiary hereunder or have any right to enforce any obligation of this Agreement.

 

11.14 Independent Contractors. Both Parties are independent contractors under this Agreement. Nothing herein contained will be deemed to create an employment, agency, joint venture or partnership relationship between the Parties hereto or any of their agents or employees, or any other legal arrangement that would impose liability upon one Party for the act or failure to act of the other Party. Neither Party will have any express or implied power to enter into any contracts or commitments or to incur any liabilities in the name of, or on behalf of, the other Party, or to bind the other Party in any respect whatsoever.

 

11.15 Entire Agreement. This Agreement (including each Development Plan and Development Budget) constitutes and contains the complete, final and exclusive understanding and agreement of the Parties and cancels and supersedes any and all prior negotiations, correspondence, understandings and agreements, whether oral or written, between the Parties respecting the subject matter hereof and thereof. In the event of any conflict between the terms of this Agreement and either a Development Plan or Development Budget, this Agreement shall control.

 

11.16 Counterparts. This Agreement may be executed in any number of counterparts and by facsimile signature, each of which counterparts, when so executed and delivered, will be deemed to be an original, and all of which counterparts, taken together, will constitute one and the same instrument.

 

[Signature page follows.]

 

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IN WITNESS WHEREOF, duly authorized representatives of the Parties have duly executed this Agreement to be effective as of the Effective Date.

 

VirTra Systems, Inc.   Modern Round, L.L.C.
     
By:

/s/ Bob Ferris

  By:

/s/ Barry Monheit

Name:  Bob Ferris   Name:  Barry Monheit
Its: CEO   Its: CEO

 

 
 

 

Exhibit A

VirTra Warrant

[See attached]

 

 
 

 

THIS WARRANT AND THE SECURITIES ISSUABLE UPON THE EXERCISE HEREOF HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED (the “ACT”). THEY MAY NOT BE SOLD, OFFERED FOR SALE, PLEDGED, HYPOTHECATED, OR OTHERWISE TRANSFERRED EXCEPT PURSUANT TO AN EFFECTIVE REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933, AS AMENDED, OR AN OPINION OF COUNSEL THAT IS SATISFACTORY TO THE COMPANY THAT REGISTRATION IS NOT REQUIRED UNDER SUCH ACT.

 

Date of Issuance   Void after
 , 2015  

Expiration Date (as defined

below)

 

VIRTRA SYSTEMS, INC.

WARRANT TO PURCHASE COMMON STOCK

 

 

 

This certifies that _________________________ (the “Holder”), is entitled to purchase, at the Exercise Price (as defined below), from VirTra Systems Inc., a Texas corporation (the “Company”), a number of shares of Common Stock as set forth below (the “Warrant Amount”) in the Company.

 

1. Purchase of Shares.

 

(a) Warrant Amount. The Holder is entitled, upon surrender of this Warrant at the principal office of the Company (or at such other place as the Company shall notify the Holder in writing), to purchase from the Company _______ shares of Common Stock (“Shares”), representing five percent (5%) of the outstanding shares of Common Stock of the Company on a fully diluted basis, including Common Stock of the Company subject to options, warrants, and other purchase rights, or 9,193,820 Shares after taking into account warrants granted on the date hereof to other affiliates of Modern Round, L.L.C.

 

(b) Exercise Price. The purchase price for each Share issuable pursuant to this Warrant shall be $.1367, which is equal to the average of the closing or last price of the Common Stock of the Company on its principal trading market during the 15 trading days immediately prior to the issuance of this Warrant. Such purchase price is herein referred to as the “Exercise Price.”

 

2. Exercise Period. This Warrant shall be exercisable, in whole or in part, at any time and from time to time, during the term commencing on the first anniversary of the opening of the first facility of Modern Round, L.L.C. and ending at 5:00 p.m. Eastern Time five years from the date hereof, which date shall be called the “Expiration Date.”

 

Exhibit A-1
 

 

3. Method of Exercise.

 

(a) While this Warrant remains outstanding and exercisable in accordance with Section 2 above, the Holder may exercise, in whole or in part, the purchase rights evidenced hereby. Unless exercised in accordance with Section 4 below, such exercise shall be effected by the following:

 

(i) the surrender of this Warrant, together with a duly executed copy of the Notice of Exercise attached hereto, to the Secretary of the Company at its principal office (or at such other place as the Company shall notify the Holder in writing); and

 

(ii) the payment to the Company of an amount equal to the aggregate Exercise Price for the number of Shares being purchased.

 

(b) Each exercise of this Warrant shall be deemed to have been effected immediately prior to the close of business on the day on which this Warrant is surrendered to the Company as provided in Section 3(a) above. At such time, the person or persons in whose name or names any certificate for the Shares shall be issuable upon such exercise as provided in Section 3(c) below shall be deemed to have become the holder or holders of record of the Shares represented by such certificate.

 

(c) As soon as practicable after the exercise of this Warrant in whole or in part, and in any event within ten (10) days thereafter, the Company at its expense will cause to be issued in the name of, and delivered to, the Holder, or as such Holder (upon payment by such Holder of any applicable transfer taxes) may direct:

 

(i) a certificate or certificates for the number of Shares to which such Holder shall be entitled or, if uncertificated, a book entry to that effect, and

 

(ii) in case such exercise is in part only, a new warrant or book entry (dated the date hereof) of like tenor, with a Warrant Amount equal to (x) the Warrant Amount, less (y) the aggregate amount of Exercise Price paid by the Holder in exercise of this Warrant prior to the date of issuance of such new warrant (including, in the event of any Net Exercise, the aggregate value of such amount of Shares foregone in such Net Exercise (calculated as X minus Y under the formula set forth in Section 4 below, as applied to such Net Exercise)).

 

4. Net Exercise. In lieu of exercising this Warrant for cash, the Holder may elect to receive Shares equal to the value of this Warrant (or the portion thereof being exercised) by surrender of this Warrant at the principal office of the Company together with notice of such election (a “Net Exercise”). A Holder that Net Exercises shall have the rights described in Sections 3(b) and 3(c) hereof, and the Company shall issue to such Holder a number of Shares computed using the following formula:

 

 

 

X=   Y (A-B)  
  A  

 

Exhibit A-2
 

 

Where

 

  X = The number of Shares to be issued to the Holder.
     
  Y = The number of Shares purchasable under this Warrant or, if only a portion of the Warrant is being exercised, the portion of the Warrant being exercised (at the date of such calculation).
     
  A = The fair market value of one (1) Share (at the date of such calculation).
     
  B = The Exercise Price per Share (as adjusted to the date of such calculation).

 

For purposes of this Section 4, the fair market value of a Share shall mean the following: (a) the volume weighted average of the closing sales prices of the Common Stock for such day on all domestic securities exchanges on which the Common Stock may at the time be listed; (b) if there have been no sales of the Common Stock on any such exchange on any such day, the average of the highest bid and lowest asked prices for the Common Stock on all such exchanges at the end of such day; (c) if on any such day the Common Stock is not listed on a domestic securities exchange, the closing sales price of the Common Stock as quoted on the OTC Bulletin Board, the Pink OTC Markets or similar quotation system or association for such day; or (d) if there have been no sales of the Common Stock on the OTC Bulletin Board, the Pink OTC Markets or similar quotation system or association on such day, the average of the highest bid and lowest asked prices for the Common Stock quoted on the OTC Bulletin Board, the Pink OTC Markets or similar quotation system or association at the end of such day; in each case under subsections (a), (b), (c), and (d) the price will be averaged over the fifteen (15) consecutive Business Days ending on the Business Day immediately prior to the day as of which “Fair Market Value” is being determined; provided, that if the Common Stock is listed on any domestic securities exchange, the term “Business Day” as used in this sentence means Business Days on which such exchange is open for trading. If at any time the Common Stock is not listed on any domestic securities exchange or quoted on the OTC Bulletin Board, the Pink OTC Markets or similar quotation system or association, the “Fair Market Value” of the Common Stock shall be the fair market value per Share as determined jointly by the Board and the Holder.

 

5. Covenants of the Company.

 

(a) Shares Outstanding Notice. Upon request by the Holder at any time during the Exercise Period, the Company shall deliver, the next business day after such request, a certificate of an officer of the Company, representing to the number of Shares outstanding as of the date of delivery by the Company of such notice, so that the Holder may determine the Exercise Price and number of Shares issuable as of such date of delivery. Absent manifest error, the Holder shall be entitled to rely without investigation on such certificate for the purposes of completing and submitting a Notice of Exercise.

 

(b) Covenants as to Exercise Shares. The Company covenants and agrees that this Warrant is, and any Warrant issued in substitution for or replacement of this Warrant shall be, upon issuance, duly authorized and validly issued, and that all Shares that may be issued upon the exercise of the rights represented by this Warrant will, upon issuance in accordance with the terms hereof, be duly authorized, validly issued and outstanding, fully paid and nonassessable, and free from all taxes, liens, and charges with respect to the issuance thereof. If, at any time during the Exercise Period, the number of authorized but unissued Shares shall not be sufficient to permit exercise of this Warrant, the Company will take such corporate action in the opinion of its counsel, to be necessary to increase its authorized but unissued Shares to such number of Shares as shall be sufficient for such purposes. Notwithstanding any other provision hereof, if an exercise of any portion of this Warrant is to be made in connection with a public offering or a sale of the Company (pursuant to a merger, sale of stock, or otherwise), such exercise may at the election of the Holder be conditioned upon the consummation of such transaction, in which case such exercise shall not be deemed to be effective until immediately prior to the consummation of such transaction.

 

Exhibit A-3
 

 

(c) No Impairment. Except and to the extent waived or consented to by the Holder or as otherwise permitted under the terms hereof, the Company will not, by amendment of its governing instruments or through any reorganization, transfer of assets, consolidation, merger, dissolution, issue or sale of securities, or any other voluntary action, avoid or seek to avoid the observance or performance of any of the terms to be observed or performed hereunder by the Company, but will at all times in good faith assist in the carrying out of all the provisions of this Warrant and in the taking of all such action as may be necessary or appropriate in order to protect the exercise rights of the Holder against impairment.

 

6. Adjustment of Exercise Price and Number of Shares.

 

(a) Stock Splits and Dividends. If outstanding Shares shall be subdivided (by any stock split, recapitulation, or otherwise) into a greater number of Shares or if the Company shall pay a dividend or may any other distribution upon the Shares shall be payable in shares of Common Stock, the Exercise Price in effect immediately prior to such subdivision or at the record date of such dividend or distribution shall simultaneously with the effectiveness of such subdivision, dividend, or distribution be proportionately reduced, and the number of Shares issuable upon exercise of this Warrant shall be proportionately increased. If outstanding Shares shall be combined into a smaller number of Shares, the Exercise Price in effect immediately prior to such combination shall, simultaneously with the effectiveness of such combination, be proportionately increased, and the number of Shares issuable upon exercise of this Warrant shall be proportionately decreased. When any adjustment is required to be made in the Exercise Price, the number of Shares purchasable upon the exercise of this Warrant shall be changed to the number determined by dividing (i) an amount equal to the number of Shares issuable upon the exercise of this Warrant immediately prior to such adjustment, multiplied by the Exercise Price in effect immediately prior to such adjustment, by (ii) the Exercise Price in effect immediately after such adjustment.

 

(b) Reclassification, Etc. In case of any reclassification or change of the outstanding securities of the Company (or any other corporation the stock or securities of which are at the time receivable upon the exercise of this Warrant)), consolidation or merger of the Company, sale of all or substantially all of its assets, or any similar corporate reorganization on or after the date hereof, then and in each such case the Holder, upon the exercise hereof at any time after the consummation of such reclassification, change, reorganization, merger, or conveyance, shall be entitled to receive, in lieu of the stock or other securities and property receivable upon the exercise hereof prior to such consummation, the stock or other securities or property to which such Holder would have been entitled upon such consummation if such Holder had exercised this Warrant immediately prior thereto, all subject to further adjustment as provided in Section 6; and in each such case; appropriate adjustment shall be made with respect to the Holder’s rights under this Warrant to ensure that the provisions of this Section 6 shall thereafter be applicable, as nearly as possible, to this Warrant in relation to any shares of stock, securities, or assets thereafter acquirable upon exercise of this Warrant (including, in the case of any consolidation, merger, sale, or similar transaction in which the successor or purchasing party is other than the Company, an immediate adjustment in the Exercise Price to the value for the Shares reflected by the terms of such consolidation, merger, sale, or similar transaction, and a corresponding immediate adjustment to the number of Shares acquirable upon exercise of this Warrant without regard to any limitations or restrictions on exercise, if the value so reflected is less than the Exercise Price in effect immediately prior to such consolidation, merger, sale, or similar transaction), and the terms of this Section 6 shall be applicable to the Shares or other securities properly receivable upon the exercise of this Warrant after such consummation.

 

Exhibit A-4
 

 

7. No Fractional Shares or Scrip. No fractional share or scrip representing fractional Shares shall be issued upon the exercise of this Warrant, but in lieu of such fractional shares the Company shall make a cash payment therefor on the basis of the Exercise Price then in effect.

 

8. No Member Rights. Prior to exercise of this Warrant, the Holder shall not be entitled to any rights of a shareholder with respect to the Shares underlying this Warrant, including (without limitation) the right to vote such Shares, receive distributions thereon, Shares or be notified of membership meetings.

 

9. Governing Law. This Warrant shall be governed by and construed under the laws of the state of Arizona as applied to agreements among Arizona residents, made and to be performed entirely within the state of Arizona.

 

10. Successors and Assigns. The terms and provisions of this Warrant shall inure to the benefit of, and be binding upon, the Company and the holders hereof and their respective successors and assigns.

 

11. Titles and Subtitles. The titles and subtitles used in this Warrant are used for convenience only and are not to be considered in construing or interpreting this Warrant.

 

12. Notices. All notices and other communications given or made pursuant hereto shall be in writing and shall be deemed effectively given: (a) upon personal delivery to the party to be notified, (b) when sent by confirmed electronic mail or facsimile if sent during normal business hours of the recipient, and if not so confirmed, then on the next business day, (c) five (5) days after having been sent by registered or certified mail, return receipt requested, postage prepaid, or (d) one (1) day after deposit with a nationally recognized overnight courier, specifying next day delivery, with written verification of receipt. All communications shall be sent to the respective parties at the following addresses (or at such other addresses as shall be specified by notice given in accordance with this Section 12):

 

Exhibit A-5
 

 

If to the Company:

 

7970 S Kyrene Road

Tempe, Arizona 85284

Attention: Bob Ferris, CEO

Email: bferris@vitra.com

 

with a copy to:

 

Snell & Wilmer L.L.P.

One Arizona Center

400 E Van Buren

Phoenix, Arizona 85004

Attention: Dan Mahoney, Esq.

Email: dmahoney@swlaw.com

 

If to Holder:

 

At the address shown on the signature page hereto with a copy to

 

Greenberg Traurig, LLP

2375 E Camelback Road, Suite 700

Phoenix, Arizona 85016

Attention: Robert S. Kant, Esq.

Email: kantr@gtlaw.com

 

13. Amendments and Waivers. Any term of this Warrant may be amended or waived with the written consent of the Company and Holder.

 

14. Severability. If any provision of this Warrant is held to be unenforceable under applicable law, such provision shall be excluded from this Warrant and the balance of the Warrant shall be interpreted as if such provision were so excluded and shall be enforceable in accordance with its terms.

 

15. Transfer. Subject to applicable laws and the restriction on transfer set forth on the first page of this Warrant, this Warrant and all rights hereunder are transferable, by the Holder in person or by duly authorized attorney, upon delivery of this Warrant and the form of assignment attached hereto to any transferee designated by Holder. The transferee shall sign an investment letter in form and substance satisfactory to the Company.

 

Exhibit A-6
 

 

IN WITNESS WHEREOF, the parties have executed this Warrant as of the date first written above.

 

  VITRA SYSTEMS, INC.
   
  By:             

 

ACKNOWLEDGED AND AGREED:                         

 

 
     
Printed Name:    
     
     
Title:  
     
     
Address:    
     
     
     

 

SIGNATURE PAGE TO WARRANT TO PURCHASE COMMON STOCK

 

 
 

 

Schedule A

 

  Schedule A-1  
 

 

NOTICE OF EXERCISE

TO:

 

(1) [  ] The undersigned hereby elects to purchase Shares (the “Exercise Shares”) of ViTra Systems, Inc. (the “Company”) pursuant to the terms of the attached Warrant, and tenders herewith payment of the exercise price in full, together with all applicable transfer taxes, if any.

   

[  ] The undersigned hereby elects to purchase Shares (the “Exercise Shares”) of ViTra Systems, Inc. (the “Company”) pursuant to the terms of the net exercise provisions set forth in Section 4 of the attached Warrant, and shall tender payment of all applicable transfer taxes, if any.

 

(2) Please issue a certificate or certificates representing said Exercise Shares in the name of the undersigned or in such other name as is specified below:

 

   
(Name)  
   
   
(Address)  

 

(3) The undersigned represents that (i) the aforesaid Exercise Shares are being acquired for the account of the undersigned for investment and not with a view to, or for resale in connection with, the distribution thereof and that the undersigned has no present intention of distributing or reselling such Shares; (ii) the undersigned is aware of the Company’s business affairs and financial condition and has acquired sufficient information about the Company to reach an informed and knowledgeable decision regarding its investment in the Company; (iii) the undersigned is experienced in making investments of this type and has such knowledge and background in financial and business matters that the undersigned is capable of evaluating the merits and risks of this investment and protecting the undersigned’s own interests; (iv) the undersigned understands that Exercise Shares issuable upon exercise of this Warrant have not been registered under the Securities Act of 1933, as amended (the “Securities Act”), by reason of a specific exemption from the registration provisions of the Securities Act, which exemption depends upon, among other things, the bona fide nature of the investment intent as expressed herein, and, because such securities have not been registered under the Securities Act, they must be held indefinitely unless subsequently registered under the Securities Act or an exemption from such registration is available; (v) the undersigned is aware that the aforesaid Exercise Shares may not be sold pursuant to Rule 144 adopted under the Securities Act unless certain conditions are met and until the undersigned has held the Shares for the number of years prescribed by Rule 144, that among the conditions for use of the Rule is the availability of current information to the public about the Company and the Company has not made such information available and has no present plans to do so; and (vi) the undersigned agrees not to make any disposition of all or any part of the aforesaid Shares of Exercise Shares unless and until there is then in effect a registration statement under the Securities Act covering such proposed disposition of the Exercise Shares and such disposition is made in accordance with said registration statement, or, if requested by the Company, the undersigned has provided the Company with an opinion of counsel satisfactory to the Company, stating that such registration is not required.

 

     
     

 

     
(Date)   (Signature)
     
     
    (Print name)

 

2  
 

 

ASSIGNMENT FORM

 

 

(To assign the foregoing Warrant, execute this form and supply required information. Do not use this form to purchase Shares.)

 

 

FOR VALUE RECEIVED, the foregoing Warrant and all rights evidenced thereby are hereby assigned to

 

Name:
(Please Print)
   
   
Address:
(Please Print)

 

Dated: _, 20_

 

Holder’s

Signature:

 
     

Holder’s

Address:

 

 

NOTE: The signature to this Assignment Form must correspond with the name as it appears on the face of the Warrant, without alteration or enlargement or any change whatever. Officers of corporations and those acting in a fiduciary or other representative capacity should file proper evidence of authority to assign the foregoing Warrant.

 

 
 

 

THIS WARRANT AND THE SECURITIES ISSUABLE UPON THE EXERCISE HEREOF HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED (the “ACT”). THEY MAY NOT BE SOLD, OFFERED FOR SALE, PLEDGED, HYPOTHECATED, OR OTHERWISE TRANSFERRED EXCEPT PURSUANT TO AN EFFECTIVE REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933, AS AMENDED, OR AN OPINION OF COUNSEL THAT IS SATISFACTORY TO THE COMPANY THAT REGISTRATION IS NOT REQUIRED UNDER SUCH ACT.

 

Date of Issuance   Void after
, 2015   Expiration Date (as defined below)

 

VIRTRA SYSTEMS, INC.

WARRANT TO PURCHASE COMMON STOCK

 

 

This certifies that (the “Holder”), is entitled to purchase, at the Exercise Price (as defined below), from VirTra Systems Inc., a Texas corporation (the “Company”), a number of shares of Common Stock as set forth below (the “Warrant Amount”) in the Company.

 

1. Purchase of Shares.

 

(a) Warrant Amount. The Holder is entitled, upon surrender of this Warrant at the principal office of the Company (or at such other place as the Company shall notify the Holder in writing), to purchase from the Company _____ shares of Common Stock (“Shares”), representing five percent (5%) of the outstanding shares of Common Stock of the Company on a fully diluted basis, including Common Stock of the Company subject to options, warrants, and other purchase rights, or 9,193,820 Shares after taking into account warrants granted on the date hereof to other affiliates of Modern Round, L.L.C.

 

(b) Exercise Price. The purchase price for each Share issuable pursuant to this Warrant shall be $.1367, which is equal to the average of the closing or last price of Common Stock of the Company on its principal trading market during the 15 trading days immediately prior to the issuance of this Warrant. Such purchase price is herein referred to as the “Exercise Price.”

 

2. Exercise Period. This Warrant shall be exercisable, in whole or in part, at any time and from time to time, during the term commencing at the time that Modern Round, L.L.C. has paid the Company at least $2,000 in Royalty payments pursuant to that Co-Venture Agreement between Modern Round, L.L.C. and the Company and ending at 5:00 p.m. Eastern Time five years from the date hereof, which date shall be called the “Expiration Date.”

 

  Exhibit B-1  
 

 

3. Method of Exercise.

 

(a) While this Warrant remains outstanding and exercisable in accordance with Section 2 above, the Holder may exercise, in whole or in part, the purchase rights evidenced hereby. Unless exercised in accordance with Section 4 below, such exercise shall be effected by the following:

 

(i) the surrender of this Warrant, together with a duly executed copy of the Notice of Exercise attached hereto, to the Secretary of the Company at its principal office (or at such other place as the Company shall notify the Holder in writing); and

 

(ii) the payment to the Company of an amount equal to the aggregate Exercise Price for the number of Shares being purchased.

 

(b) Each exercise of this Warrant shall be deemed to have been effected immediately prior to the close of business on the day on which this Warrant is surrendered to the Company as provided in Section 3(a) above. At such time, the person or persons in whose name or names any certificate for the Shares shall be issuable upon such exercise as provided in Section 3(c) below shall be deemed to have become the holder or holders of record of the Shares represented by such certificate.

 

(c) As soon as practicable after the exercise of this Warrant in whole or in part, and in any event within ten (10) days thereafter, the Company at its expense will cause to be issued in the name of, and delivered to, the Holder, or as such Holder (upon payment by such Holder of any applicable transfer taxes) may direct:

 

(i) a certificate or certificates for the number of Shares to which such Holder shall be entitled or, if uncertificated, a book entry to that effect, and

 

(ii) in case such exercise is in part only, a new warrant or book entry (dated the date hereof) of like tenor, with a Warrant Amount equal to (x) the Warrant Amount, less (y) the aggregate amount of Exercise Price paid by the Holder in exercise of this Warrant prior to the date of issuance of such new warrant (including, in the event of any Net Exercise, the aggregate value of such amount of Shares foregone in such Net Exercise (calculated as X minus Y under the formula set forth in Section 4 below, as applied to such Net Exercise)).

 

4. Net Exercise. In lieu of exercising this Warrant for cash, the Holder may elect to receive Shares equal to the value of this Warrant (or the portion thereof being exercised) by surrender of this Warrant at the principal office of the Company together with notice of such election (a “Net Exercise”). A Holder that Net Exercises shall have the rights described in Sections 3(b) and 3(c) hereof, and the Company shall issue to such Holder a number of Shares computed using the following formula:

 

    X   =  

Y(A-B)

   
      A    

 

  Exhibit B-2  
 

 

Where

 

X = The number of Shares to be issued to the Holder.
     
Y = The number of Shares purchasable under this Warrant or, if only a portion of the Warrant is being exercised, the portion of the Warrant being exercised (at the date of such calculation).
     
A = The fair market value of one (1) Shares (at the date of such calculation).
     
B = The Exercise Price per Share (as adjusted to the date of such calculation).

 

For purposes of this Section 4, the fair market value of a Share shall mean the following: (a) the volume weighted average of the closing sales prices of the Common Stock for such day on all domestic securities exchanges on which the Common Stock may at the time be listed; (b) if there have been no sales of the Common Stock on any such exchange on any such day, the average of the highest bid and lowest asked prices for the Common Stock on all such exchanges at the end of such day; (c) if on any such day the Common Stock is not listed on a domestic securities exchange, the closing sales price of the Common Stock as quoted on the OTC Bulletin Board, the Pink OTC Markets or similar quotation system or association for such day; or (d) if there have been no sales of the Common Stock on the OTC Bulletin Board, the Pink OTC Markets or similar quotation system or association on such day, the average of the highest bid and lowest asked prices for the Common Stock quoted on the OTC Bulletin Board, the Pink OTC Markets or similar quotation system or association at the end of such day; in each case under subsections (a), (b), (c), and (d) the price will be averaged over the fifteen (15) consecutive Business Days ending on the Business Day immediately prior to the day as of which “Fair Market Value” is being determined; provided, that if the Common Stock is listed on any domestic securities exchange, the term “Business Day” as used in this sentence means Business Days on which such exchange is open for trading. If at any time the Common Stock is not listed on any domestic securities exchange or quoted on the OTC Bulletin Board, the Pink OTC Markets or similar quotation system or association, the “Fair Market Value” of the Common Stock shall be the fair market value per Share as determined jointly by the Board and the Holder.

 

5. Covenants of the Company.

 

(a) Shares Outstanding Notice. Upon request by the Holder at any time during the Exercise Period, the Company shall deliver, the next business day after such request, a certificate of an officer of the Company, representing to the number of Shares outstanding as of the date of delivery by the Company of such notice, so that the Holder may determine the Exercise Price and number of Shares issuable as of such date of delivery. Absent manifest error, the Holder shall be entitled to rely without investigation on such certificate for the purposes of completing and submitting a Notice of Exercise.

 

(b) Covenants as to Exercise Shares. The Company covenants and agrees that this Warrant is, and any Warrant issued in substitution for or replacement of this Warrant shall be, upon issuance, duly authorized and validly issued, and that all Shares that may be issued upon the exercise of the rights represented by this Warrant will, upon issuance in accordance with the terms hereof, be duly authorized, validly issued and outstanding, fully paid and nonassessable, and free from all taxes, liens, and charges with respect to the issuance thereof. If, at any time during the Exercise Period, the number of authorized but unissued Shares shall not be sufficient to permit exercise of this Warrant, the Company will take such corporate action in the opinion of its counsel, to be necessary to increase its authorized but unissued Shares to such number of Shares as shall be sufficient for such purposes. Notwithstanding any other provision hereof, if an exercise of any portion of this Warrant is to be made in connection with a public offering or a sale of the Company (pursuant to a merger, sale of stock, or otherwise), such exercise may at the election of the Holder be conditioned upon the consummation of such transaction, in which case such exercise shall not be deemed to be effective until immediately prior to the consummation of such transaction.

 

  Exhibit B-3  
 

 

(c) No Impairment. Except and to the extent waived or consented to by the Holder or as otherwise permitted under the terms hereof, the Company will not, by amendment of its governing instruments or through any reorganization, transfer of assets, consolidation, merger, dissolution, issue or sale of securities, or any other voluntary action, avoid or seek to avoid the observance or performance of any of the terms to be observed or performed hereunder by the Company, but will at all times in good faith assist in the carrying out of all the provisions of this Warrant and in the taking of all such action as may be necessary or appropriate in order to protect the exercise rights of the Holder against impairment.

 

6. Adjustment of Exercise Price and Number of Shares.

 

(a) Stock Splits and Dividends. If outstanding Shares shall be subdivided (by any stock split, recapitulation, or otherwise) into a greater number of Shares or if the Company shall pay a dividend or may any other distribution upon the Shares shall be payable in shares of Common Stock, the Exercise Price in effect immediately prior to such subdivision or at the record date of such dividend or distribution shall simultaneously with the effectiveness of such subdivision, dividend, or distribution be proportionately reduced, and the number of Shares issuable upon exercise of this Warrant shall be proportionately increased. If outstanding Shares shall be combined into a smaller number of Shares, the Exercise Price in effect immediately prior to such combination shall, simultaneously with the effectiveness of such combination, be proportionately increased, and the number of Shares issuable upon exercise of this Warrant shall be proportionately decreased. When any adjustment is required to be made in the Exercise Price, the number of Shares purchasable upon the exercise of this Warrant shall be changed to the number determined by dividing (i) an amount equal to the number of Shares issuable upon the exercise of this Warrant immediately prior to such adjustment, multiplied by the Exercise Price in effect immediately prior to such adjustment, by (ii) the Exercise Price in effect immediately after such adjustment.

 

(b) Reclassification, Etc. In case of any reclassification or change of the outstanding securities of the Company (or any other corporation the stock or securities of which are at the time receivable upon the exercise of this Warrant)), consolidation or merger of the Company, sale of all or substantially all of its assets, or any similar corporate reorganization on or after the date hereof, then and in each such case the Holder, upon the exercise hereof at any time after the consummation of such reclassification, change, reorganization, merger, or conveyance, shall be entitled to receive, in lieu of the stock or other securities and property receivable upon the exercise hereof prior to such consummation, the stock or other securities or property to which such Holder would have been entitled upon such consummation if such Holder had exercised this Warrant immediately prior thereto, all subject to further adjustment as provided in Section 6; and in each such case, appropriate adjustment shall be made with respect to the Holder’s rights under this Warrant to ensure that the provisions of this Section 6 shall thereafter be applicable, as nearly as possible, to this Warrant in relation to any shares of stock, securities, or assets thereafter acquirable upon exercise of this Warrant (including, in the case of any consolidation, merger, sale, or similar transaction in which the successor or purchasing party is other than the Company, an immediate adjustment in the Exercise Price to the value for the Shares reflected by the terms of such consolidation, merger, sale, or similar transaction, and a corresponding immediate adjustment to the number of Shares acquirable upon exercise of this Warrant without regard to any limitations or restrictions on exercise, if the value so reflected is less than the Exercise Price in effect immediately prior to such consolidation, merger, sale, or similar transaction), and the terms of this Section 6 shall be applicable to the Shares or other securities properly receivable upon the exercise of this Warrant after such consummation.

 

  Exhibit B-4  
 

 

7. No Fractional Shares or Scrip. No fractional share or scrip representing fractional Shares shall be issued upon the exercise of this Warrant, but in lieu of such fractional shares the Company shall make a cash payment therefor on the basis of the Exercise Price then in effect.

 

8. No Member Rights. Prior to exercise of this Warrant, the Holder shall not be entitled to any rights of a shareholder with respect to the Shares underlying this Warrant, including (without limitation) the right to vote such Shares, receive distributions thereon, Shares or be notified of membership meetings.

 

9. Governing Law. This Warrant shall be governed by and construed under the laws of the state of Arizona as applied to agreements among Arizona residents, made and to be performed entirely within the state of Arizona.

 

10. Successors and Assigns. The terms and provisions of this Warrant shall inure to the benefit of, and be binding upon, the Company and the holders hereof and their respective successors and assigns.

 

11. Titles and Subtitles. The titles and subtitles used in this Warrant are used for convenience only and are not to be considered in construing or interpreting this Warrant.

 

12. Notices. All notices and other communications given or made pursuant hereto shall be in writing and shall be deemed effectively given: (a) upon personal delivery to the party to be notified, (b) when sent by confirmed electronic mail or facsimile if sent during normal business hours of the recipient, and if not so confirmed, then on the next business day, (c) five (5) days after having been sent by registered or certified mail, return receipt requested, postage prepaid, or (d) one (1) day after deposit with a nationally recognized overnight courier, specifying next day delivery, with written verification of receipt. All communications shall be sent to the respective parties at the following addresses (or at such other addresses as shall be specified by notice given in accordance with this Section 12):

 

  Exhibit B-5  
 

 

If to the Company:

 

7970 S Kyrene Road

Tempe, Arizona 85284

Attention: Bob Ferris, CEO

Email: bferris@vitra.com

 

with a copy to:

 

Snell & Wilmer L.L.P.

One Arizona Center

400 E Van Buren

Phoenix, Arizona 85004

Attention: Dan Mahoney, Esq.

Email: dmahoney@swlaw.com

 

If to Holder:

 

At the address shown on the signature page hereto

 

with a copy to:

 

Greenberg Traurig, LLP

2375 E Camelback Road, Suite 700

Phoenix, Arizona 85016

Attention: Robert S. Kant, Esq.

Email: kantr@gtlaw.com

 

13. Amendments and Waivers. Any term of this Warrant may be amended or waived with the written consent of the Company and Holder.

 

14. Severability. If any provision of this Warrant is held to be unenforceable under applicable law, such provision shall be excluded from this Warrant and the balance of the Warrant shall be interpreted as if such provision were so excluded and shall be enforceable in accordance with its terms.

 

15. Transfer. Subject to applicable laws and the restriction on transfer set forth on the first page of this Warrant, this Warrant and all rights hereunder are transferable, by the Holder in person or by duly authorized attorney, upon delivery of this Warrant and the form of assignment attached hereto to any transferee designated by Holder. The transferee shall sign an investment letter in form and substance satisfactory to the Company.

 

  Exhibit B-6  
 

 

IN WITNESS WHEREOF, the parties have executed this Warrant as of the date first written above.

 

  VITRA SYSTEMS, INC.
     
  By:               

 

ACKNOWLEDGED AND AGREED:
 
   
Printed Name:         
Title:  
Address:  
   
   

 

SIGNATURE PAGE TO WARRANT TO PURCHASE UNITS

 

 
 

 

Schedule A

 

Schedule A-1
 

 

NOTICE OF EXERCISE

TO:

 

(1) [  ] The undersigned hereby elects to purchase Shares (the “Exercise Shares”) of ViTra Systems, Inc. (the “Company”) pursuant to the terms of the attached Warrant, and tenders herewith payment of the exercise price in full, together with all applicable transfer taxes, if any.

   

[  ]  The undersigned hereby elects to purchase Shares (the “Exercise Shares”) of ViTra Systems, Inc. (the “Company”) pursuant to the terms of the net exercise provisions set forth in Section 4 of the attached Warrant, and shall tender payment of all applicable transfer taxes, if any.

 

(2) Please issue a certificate or certificates representing said Exercise Shares in the name of the undersigned or in such other name as is specified below:

 

 
(Name)  
   
 
 
(Address)  

 

(3) The undersigned represents that (i) the aforesaid Exercise Shares are being acquired for the account of the undersigned for investment and not with a view to, or for resale in connection with, the distribution thereof and that the undersigned has no present intention of distributing or reselling such Shares; (ii) the undersigned is aware of the Company’s business affairs and financial condition and has acquired sufficient information about the Company to reach an informed and knowledgeable decision regarding its investment in the Company; (iii) the undersigned is experienced in making investments of this type and has such knowledge and background in financial and business matters that the undersigned is capable of evaluating the merits and risks of this investment and protecting the undersigned’s own interests; (iv) the undersigned understands that Exercise Shares issuable upon exercise of this Warrant have not been registered under the Securities Act of 1933, as amended (the “Securities Act”), by reason of a specific exemption from the registration provisions of the Securities Act, which exemption depends upon, among other things, the bona fide nature of the investment intent as expressed herein, and, because such securities have not been registered under the Securities Act, they must be held indefinitely unless subsequently registered under the Securities Act or an exemption from such registration is available; (v) the undersigned is aware that the aforesaid Exercise Shares may not be sold pursuant to Rule 144 adopted under the Securities Act unless certain conditions are met and until the undersigned has held the Shares for the number of years prescribed by Rule 144, that among the conditions for use of the Rule is the availability of current information to the public about the Company and the Company has not made such information available and has no present plans to do so; and (vi) the undersigned agrees not to make any disposition of all or any part of the aforesaid Shares of Exercise Shares unless and until there is then in effect a registration statement under the Securities Act covering such proposed disposition of the Exercise Shares and such disposition is made in accordance with said registration statement, or, if requested by the Company, the undersigned has provided the Company with an opinion of counsel satisfactory to the Company, stating that such registration is not required.

 

     
     

 

     
(Date)   (Signature)
     
     
    (Print name)

 

2
 

 

 

ASSIGNMENT FORM

 

(To assign the foregoing Warrant, execute this form and supply required information. Do not use this form to purchase Shares.)

 

 

FOR VALUE RECEIVED, the foregoing Warrant and all rights evidenced thereby are hereby assigned to

 

   
Name:
  (Please Print)
   
Address:
  (Please Print)

 

Dated: _, 20_    
     
Holder’s Signature:  
     
Holder’s Address:  

 

NOTE: The signature to this Assignment Form must correspond with the name as it appears on the face of the Warrant, without alteration or enlargement or any change whatever. Officers of corporations and those acting in a fiduciary or other representative capacity should file proper evidence of authority to assign the foregoing Warrant.

 

 
 

 

Exhibit B

Modern Round Warrant

[See attached]

 

  3  
 

 

THIS WARRANT AND THE SECURITIES ISSUABLE UPON THE EXERCISE HEREOF HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED (the “ACT”). THEY MAY NOT BE SOLD, OFFERED FOR SALE, PLEDGED, HYPOTHECATED, OR OTHERWISE TRANSFERRED EXCEPT PURSUANT TO AN EFFECTIVE REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933, AS AMENDED, OR AN OPINION OF COUNSEL THAT IS SATISFACTORY TO THE COMPANY THAT REGISTRATION IS NOT REQUIRED UNDER SUCH ACT.

 

Date of Issuance   Void after
, 2015   Expiration Date (as defined below)

 

MODERN ROUND, L.L.C.

WARRANT TO PURCHASE UNITS

 

 

 

This certifies that VirTra Systems, Inc., a Texas corporation (the “Holder”), is entitled to purchase, at the Exercise Price (as defined below), from Modern Round, L.L.C., a Nevada limited liability company (the “Company”), a number of Units as set forth below (the “Warrant Amount”) in the Company.

 

1. Purchase of Units.

 

(a) Warrant Amount. The Holder is entitled, upon surrender of this Warrant at the principal office of the Company (or at such other place as the Company shall notify the Holder in writing), to purchase from the Company 1,365,789 Units, representing five percent (5%) of the outstanding Units of the Company on a fully diluted basis, including Units subject to options, warrants, and other purchase rights, in each case at the close of business on the business day immediately preceding the issuance of this Warrant (as shown on Schedule A).

 

(b) Exercise Price. The purchase price for each Unit issuable pursuant to this Warrant shall be $0.25. Such purchase price is herein referred to as the “Exercise Price.”

 

2. Exercise Period.

 

(a) This Warrant shall be exercisable, in whole or in part, at any time and from time to time, during the term commencing on the

first anniversary of the opening of the Company’s first facility and ending at 5:00 p.m. Eastern Time on the earlier of (i) one business day prior to the one (1) year anniversary of an Initial Public Offering as defined below, (ii) one business day prior to the two (2) year anniversary a Listing Event as defined below, (iii) the record date for a Liquidation Event, or (iv) five years from the date hereof, which dates shall be called the “Expiration Date.”

 

Exhibit C-1
 

 

(b) Notwithstanding the foregoing, in the event of, at any time prior to the Expiration Date, an initial public offering of securities of the Company registered under the Securities Act of 1933 (an “Initial Public Offering”), or the Company becoming a reporting company (a “Listing Event”) under the Securities Exchange Act of 1934 (the “Exchange Act”), or a Liquidation Event (as defined below), the Company shall notify the Holder at least fifteen (15) days prior to the consummation of such Initial Public Offering, Listing Event, or Liquidation Event.

 

(c) For purposes of this Warrant, “Liquidation Event” shall mean:

 

(i) a merger, reorganization, or consolidation involving the Company in which

 

(A) the Company is a constituent party or

 

(B) a subsidiary of the Company is a constituent party and the Company issues shares of its capital stock pursuant to such merger or consolidation,

 

except any such merger, reorganization, or consolidation involving the Company or a subsidiary in which the equity of the Company outstanding immediately prior to such merger, reorganization, or consolidation continue to represent, or are converted into or exchanged for equity that represent, immediately following such merger, reorganization, or consolidation, at least a majority, by voting power, of the equity of (1) the surviving or resulting corporation or (2) if the surviving or resulting corporation is a wholly owned subsidiary of another corporation immediately following such merger, reorganization, or consolidation, the parent corporation of such surviving or resulting corporation;

 

(ii) the sale, lease, transfer, exclusive license, or other disposition, in a single transaction or series of related transactions, by the Company or any subsidiary of the Company of all or substantially all the assets of the Company and its subsidiaries taken as a whole, or all or substantially all of the intellectual property of the Company, or the sale or disposition (whether by merger or otherwise) of one or more subsidiaries of the Company if substantially all of the assets of the Company and its subsidiaries taken as a whole are held by such subsidiary or subsidiaries, except where such sale, lease, transfer, exclusive license or other disposition is to a wholly owned subsidiary of the Company; or

 

(iii) a transaction or series of related transactions after the date hereof in which a person or group of persons (as defined in Rule 13d-5(b) of the Exchange Act acquires beneficial ownership (as determined in accordance with Rule 13d-3 under the Exchange Act) of a majority of the voting power of the Units of the Company.

 

3. Method of Exercise.

 

(a) While this Warrant remains outstanding and exercisable in accordance with Section 2 above, the Holder may exercise, in whole or in part, the purchase rights evidenced hereby. Unless exercised in accordance with Section 4 below, such exercise shall be effected by the following:

 

Exhibit C-2
 

 

(i) the surrender of this Warrant, together with a duly executed copy of the Notice of Exercise attached hereto, to the Secretary of the Company at its principal office (or at such other place as the Company shall notify the Holder in writing); and

 

(ii) the payment to the Company of an amount equal to the aggregate Exercise Price for the number of Units being purchased.

 

(b) Each exercise of this Warrant shall be deemed to have been effected immediately prior to the close of business on the day on which this Warrant is surrendered to the Company as provided in Section 3(a) above. At such time, the person or persons in whose name or names any certificate for the Units shall be issuable upon such exercise as provided in Section 3(c) below shall be deemed to have become the holder or holders of record of the Units represented by such certificate.

 

(c) As soon as practicable after the exercise of this Warrant in whole or in part, and in any event within ten (10) days thereafter, the Company at its expense will cause to be issued in the name of, and delivered to, the Holder, or as such Holder (upon payment by such Holder of any applicable transfer taxes) may direct:

 

(i) a certificate or certificates for the number of Units to which such Holder shall be entitled or, if uncertificated, a book entry to that effect, and

 

(ii) in case such exercise is in part only, a new warrant or book entry (dated the date hereof) of like tenor, with a Warrant Amount equal to (x) the Warrant Amount, less (y) the aggregate amount of Exercise Price paid by the Holder in exercise of this Warrant prior to the date of issuance of such new warrant (including, in the event of any Net Exercise, the aggregate value of such amount of Units foregone in such Net Exercise (calculated as X minus Y under the formula set forth in Section 4 below, as applied to such Net Exercise)).

 

4. Net Exercise. In lieu of exercising this Warrant for cash, the Holder may elect to receive Units equal to the value of this Warrant (or the portion thereof being exercised) by surrender of this Warrant at the principal office of the Company together with notice of such election (a “Net Exercise”). A Holder that Net Exercises shall have the rights described in Sections 3(b) and 3(c) hereof, and the Company shall issue to such Holder a number of Units computed using the following formula:

 

    X   =  

Y (A-B)

   
      A    

 

Where

 

    X   =   The number of Units to be issued to the Holder.
       
    Y   =   The number of Units purchasable under this Warrant or, if only a portion of the Warrant is being exercised, the portion of the Warrant being exercised (at the date of such calculation).
       
    A   =   The fair market value of one (1) Unit (at the date of such calculation).

 

    B   =   The Exercise Price per Unit (as adjusted to the date of such calculation).

 

Exhibit C-3
 

 

For purposes of this Section 4, the fair market value of a Unit shall mean the following:

 

(I) In the event that this Warrant is exercised pursuant to this Section 4 in connection with the Initial Public Offering, the fair market value per Unit shall be the per share offering price to the public of the Initial Public Offering.

 

(II) In the event that this Warrant is exercised pursuant to this Section 4 in connection with a Liquidation Event, the fair market value per Unit shall be the value of the consideration payable in such transaction in respect of an outstanding Unit, assuming that all Units then-issuable upon exercise of this Warrant were outstanding and the aggregate Exercise Price therefor had been paid to the Company in cash immediately prior to such Liquidation Event.

 

(III) In the event this Warrant is exercised pursuant to Section 4 in connection with a Listing Event, the fair market value shall be (a) the volume weighted average of the closing sales prices of the Common Stock for such day on all domestic securities exchanges on which the Common Stock may at the time be listed; (b) if there have been no sales of the Common Stock on any such exchange on any such day, the average of the highest bid and lowest asked prices for the Common Stock on all such exchanges at the end of such day; (c) if on any such day the Common Stock is not listed on a domestic securities exchange, the closing sales price of the Common Stock as quoted on the OTC Bulletin Board, the Pink OTC Markets or similar quotation system or association for such day; or (d) if there have been no sales of the Common Stock on the OTC Bulletin Board, the Pink OTC Markets or similar quotation system or association on such day, the average of the highest bid and lowest asked prices for the Common Stock quoted on the OTC Bulletin Board, the Pink OTC Markets or similar quotation system or association at the end of such day; provided, that if the Common Stock is listed on any domestic securities exchange, the term “Business Day” as used in this sentence means Business Days on which such exchange is open for trading. If at any time the Common Stock is not listed on any domestic securities exchange or quoted on the OTC Bulletin Board, the Pink OTC Markets or similar quotation system or association, the “Fair Market Value” of the Common Stock shall be the fair market value per share as determined jointly by the Board and the Holder.

 

(IV) In the event that this Warrant is exercised other than in connection with an Initial Public Offering, Liquidation Event, or Listing Event, the fair market value of a Unit shall be an amount determined by an independent nationally recognized financial advisor, which advisor shall make such determination within twenty (20) days of its appointment; engaged by the Company to value all Units.

 

Exhibit C-4
 

 

In the case of (IV), the fair market value shall be calculated by the applicable financial advisor(s) in good faith by calculating the then fair market value of the Company assuming a sale of the Company as a whole and then determining the amount payable to a holder of each Unit as a result of such a hypothetical sale and assuming distribution of the proceeds of such sale in accordance with the Company’s governing instruments then in effect (assuming that all Units then-issuable upon exercise of this Warrant were outstanding and the aggregate Exercise Price therefor had been paid to the Company in cash immediately prior to such hypothetical sale and distribution); provided, further, the financial advisor shall assume that the buyer is under no compulsion to buy and the sellers are under no compulsion to sell and without applying any minority interest discount. The decisions and calculations by the financial advisor selected in accordance with the foregoing paragraph shall be rendered in writing and shall be signed by such advisor. In the absence of bad faith or intentional wrongdoing by such advisor, the final determination of the fair market value by such financial advisor in accordance with this Warrant shall be conclusive, final, and binding on the Company and the Holder and shall be enforceable in any court having jurisdiction over a proceeding brought to seek such enforcement. The cost of such fair market value determination shall be borne by the Company. In the event that a Notice of Exercise has been submitted to the Company prior to the end of the Exercise Period or an automatic Net Exercise pursuant to Section 3(d) above has been triggered as of the end of the Exercise Period, the Exercise Period shall (notwithstanding anything is this Warrant to the contrary) automatically be extended until such time as the determination of fair market value hereunder has been completed and the Units issuable in such Net Exercise have been issued to the Holder.

 

5. Covenants of the Company.

 

(a) Units Outstanding Notice. Upon request by the Holder at any time during the Exercise Period, the Company shall deliver, the next business day after such request, a certificate of an officer of the Company, representing to the number of Units outstanding as of the date of delivery by the Company of such notice, so that the Holder may determine the Exercise Price and number of Units issuable as of such date of delivery. Absent manifest error, the Holder shall be entitled to rely without investigation on such certificate for the purposes of completing and submitting a Notice of Exercise.

 

(b) Covenants as to Exercise Units. The Company covenants and agrees that this Warrant is, and any Warrant issued in substitution for or replacement of this Warrant shall be, upon issuance, duly authorized and validly issued, and that all Units that may be issued upon the exercise of the rights represented by this Warrant will, upon issuance in accordance with the terms hereof, be duly authorized, validly issued and outstanding, fully paid and nonassessable, and free from all taxes, liens and charges with respect to the issuance thereof. If, at any time during the Exercise Period, the number of authorized but unissued Units shall not be sufficient to permit exercise of this Warrant, the Company will take such limited liability company or corporate action, as the case may be, in the opinion of its counsel, to be necessary to increase its authorized but unissued Units to such number of Units as shall be sufficient for such purposes. Notwithstanding any other provision hereof, if an exercise of any portion of this Warrant is to be made in connection with a public offering or a sale of the Company (pursuant to a merger, sale of stock, or otherwise), such exercise may at the election of the Holder be conditioned upon the consummation of such transaction, in which case such exercise shall not be deemed to be effective until immediately prior to the consummation of such transaction.

 

(c) No Impairment. Except and to the extent waived or consented to by the Holder or as otherwise permitted under the terms hereof, the Company will not, by amendment of its governing instruments or through any reorganization, transfer of assets, consolidation, merger, dissolution, issue or sale of securities, or any other voluntary action, avoid or seek to avoid the observance or performance of any of the terms to be observed or performed hereunder by the Company, but will at all times in good faith assist in the carrying out of all the provisions of this Warrant and in the taking of all such action as may be necessary or appropriate in order to protect the exercise rights of the Holder against impairment.

 

Exhibit C-5
 

 

6. Adjustment of Exercise Price and Number of Units.

 

(a) Stock Splits and Dividends. If outstanding Units shall be subdivided (by any stock split, recapitulation, or otherwise) into a greater number of Units or if the Company shall pay a dividend or may any other distribution upon the Units shall be payable in Units, the Exercise Price in effect immediately prior to such subdivision or at the record date of such dividend or distribution shall simultaneously with the effectiveness of such subdivision, dividend, or distribution be proportionately reduced, and the number of Units issuable upon exercise of this Warrant shall be proportionately increased. If outstanding Units shall be combined into a smaller number of Units, the Exercise Price in effect immediately prior to such combination shall, simultaneously with the effectiveness of such combination, be proportionately increased, and the number of Units issuable upon exercise of this Warrant shall be proportionately decreased. When any adjustment is required to be made in the Exercise Price, the number of Units purchasable upon the exercise of this Warrant shall be changed to the number determined by dividing (i) an amount equal to the number of Units issuable upon the exercise of this Warrant immediately prior to such adjustment, multiplied by the Exercise Price in effect immediately prior to such adjustment, by (ii) the Exercise Price in effect immediately after such adjustment.

 

(b) Reclassification, Etc. In case of any reclassification or change of the outstanding securities of the Company (or any other corporation the stock or securities of which are at the time receivable upon the exercise of this Warrant)), consolidation, or merger of the Company, sale of all or substantially all of its assets, or any similar corporate reorganization on or after the date hereof, then and in each such case the Holder, upon the exercise hereof at any time after the consummation of such reclassification, change, reorganization, merger, or conveyance, shall be entitled to receive, in lieu of the Units, stock, or other securities and property receivable upon the exercise hereof prior to such consummation, the Units, stock, or other securities or property to which such Holder would have been entitled upon such consummation if such Holder had exercised this Warrant immediately prior thereto, all subject to further adjustment as provided in Section 6; and in each such case, appropriate adjustment shall be made with respect to the Holder’s rights under this Warrant to ensure that the provisions of this Section 6 shall thereafter be applicable, as nearly as possible, to this Warrant in relation to any Units, shares of stock, securities, or assets thereafter acquirable upon exercise of this Warrant (including, in the case of any consolidation, merger, sale, or similar transaction in which the successor or purchasing party is other than the Company, an immediate adjustment in the Exercise Price to the value for the Units reflected by the terms of such consolidation, merger, sale, or similar transaction, and a corresponding immediate adjustment to the number of Units acquirable upon exercise of this Warrant without regard to any limitations or restrictions on exercise, if the value so reflected is less than the Exercise Price in effect immediately prior to such consolidation, merger, sale, or similar transaction), and the terms of this Section 6 shall be applicable to the Units or other securities properly receivable upon the exercise of this Warrant after such consummation.

 

Exhibit C-6
 

 

7. No Fractional Shares or Scrip. No fractional share or scrip representing fractional Units shall be issued upon the exercise of this Warrant, but in lieu of such fractional Units the Company shall make a cash payment therefor on the basis of the Exercise Price then in effect.

 

8. No Member Rights. Prior to exercise of this Warrant, the Holder shall not be entitled to any rights of a Member with respect to the Units underlying this Warrant, including (without limitation) the right to vote such Units, receive distributions thereon, Units or be notified of membership meetings.

 

9. Governing Law. This Warrant shall be governed by and construed under the laws of the state of Nevada as applied to agreements among Nevada residents, made and to be performed entirely within the state of Nevada.

 

10. Successors and Assigns. The terms and provisions of this Warrant shall inure to the benefit of, and be binding upon, the Company and the holders hereof and their respective successors and assigns.

 

11. Titles and Subtitles. The titles and subtitles used in this Warrant are used for convenience only and are not to be considered in construing or interpreting this Warrant.

 

12. Notices. All notices and other communications given or made pursuant hereto shall be in writing and shall be deemed effectively given: (a) upon personal delivery to the party to be notified, (b) when sent by confirmed electronic mail or facsimile if sent during normal business hours of the recipient, and if not so confirmed, then on the next business day, (c) five (5) days after having been sent by registered or certified mail, return receipt requested, postage prepaid, or (d) one (1) day after deposit with a nationally recognized overnight courier, specifying next day delivery, with written verification of receipt. All communications shall be sent to the respective parties at the following addresses (or at such other addresses as shall be specified by notice given in accordance with this Section 12):

 

If to the Company:

 

7377 E Doubletree Road

Suite 200

Scottsdale, AZ 85253

Attention: Mitchell A. Saltz

Fax: (480) 949-9747

Email: mas917@gmail.com

 

with a copy to:

 

Greenberg Traurig, LLP

2375 E Camelback Road, Suite 700

Phoenix, AZ 85016

Attention: Robert S. Kant

Fax: (602) 445-8100

Email: kantr@gtlaw.com

 

Exhibit C-7
 

 

If to Holder:

 

At the addresses shown on the signature pages hereto.

 

13. Amendments and Waivers. Any term of this Warrant may be amended or waived with the written consent of the Company and Holder.

 

14. Severability. If any provision of this Warrant is held to be unenforceable under applicable law, such provision shall be excluded from this Warrant and the balance of the Warrant shall be interpreted as if such provision were so excluded and shall be enforceable in accordance with its terms.

 

15. Transfer. Subject to applicable laws and the restriction on transfer set forth on the first page of this Warrant, this Warrant and all rights hereunder are transferable, by the Holder in person or by duly authorized attorney, upon delivery of this Warrant and the form of assignment attached hereto to any transferee designated by Holder. The transferee shall sign an investment letter in form and substance satisfactory to the Company.

 

Exhibit C-8
 

 

IN WITNESS WHEREOF, the parties have executed this Warrant as of the date first written above.

 

  MODERN ROUND, L.L.C.
     
  By: VIRTUAL MANAGEMENT, L.L.C.
     
    Barry Monheit

 

ACKNOWLEDGED AND AGREED:  
   
VITRA SYSTEMS, INC.  
     
By:    
     
Printed Name:    
     
Title:    
     
Address:    
     
     

 

SIGNATURE PAGE TO WARRANT TO PURCHASE UNITS

 

 
 

 

Schedule A

 

Schedule A-1
 

 

NOTICE OF EXERCISE

TO:

 

(1) [  ] The undersigned hereby elects to purchase Units (the “Exercise Units”) of Modern Round, L.L.C. (the “Company”) pursuant to the terms of the attached Warrant, and tenders herewith payment of the exercise price in full, together with all applicable transfer taxes, if any.

 

[  ] The undersigned hereby elects to purchase Units (the “Exercise Units”) of Modern Round, L.L.C. (the “Company”) pursuant to the terms of the net exercise provisions set forth in Section 4 of the attached Warrant, and shall tender payment of all applicable transfer taxes, if any.

 

(2) Please issue a certificate or certificates representing said Exercise Units in the name of the undersigned or in such other name as is specified below:

 

 

 
(Name)  
   

 

 

 

 
(Address)  

 

(3) The undersigned represents that (i) the aforesaid Exercise Units are being acquired for the account of the undersigned for investment and not with a view to, or for resale in connection with, the distribution thereof and that the undersigned has no present intention of distributing or reselling such Units; (ii) the undersigned is aware of the Company’s business affairs and financial condition and has acquired sufficient information about the Company to reach an informed and knowledgeable decision regarding its investment in the Company; (iii) the undersigned is experienced in making investments of this type and has such knowledge and background in financial and business matters that the undersigned is capable of evaluating the merits and risks of this investment and protecting the undersigned’s own interests; (iv) the undersigned understands that Exercise Units issuable upon exercise of this Warrant have not been registered under the Securities Act of 1933, as amended (the “Securities Act”), by reason of a specific exemption from the registration provisions of the Securities Act, which exemption depends upon, among other things, the bona fide nature of the investment intent as expressed herein, and, because such securities have not been registered under the Securities Act, they must be held indefinitely unless subsequently registered under the Securities Act or an exemption from such registration is available; (v) the undersigned is aware that the aforesaid Exercise Units may not be sold pursuant to Rule 144 adopted under the Securities Act unless certain conditions are met and until the undersigned has held the shares for the number of years prescribed by Rule 144, that among the conditions for use of the Rule is the availability of current information to the public about the Company and the Company has not made such information available and has no present plans to do so; and (vi) the undersigned agrees not to make any disposition of all or any part of the aforesaid shares of Exercise Units unless and until there is then in effect a registration statement under the Securities Act covering such proposed disposition of the Exercise Units and such disposition is made in accordance with said registration statement, or, if requested by the Company, the undersigned has provided the Company with an opinion of counsel satisfactory to the Company, stating that such registration is not required.

 

  1  
     

 

 

 

 

(Date)   (Signature)
     
   

 

    (Print name)

 

  2  
     

 

   

ASSIGNMENT FORM

 

(To assign the foregoing Warrant, execute this form and supply required information. Do not use this form to purchase shares.)

   

 

FOR VALUE RECEIVED, the foregoing Warrant and all rights evidenced thereby are hereby assigned to

 

Name:  

 

(Please Print)
   
Address:  

 

(Please Print)

 

       
Dated: , 20    
     
Holder’s Signature:  

 

 
     
Holder’s Address:  

 

 

 

NOTE: The signature to this Assignment Form must correspond with the name as it appears on the face of the Warrant, without alteration or enlargement or any change whatever. Officers of corporations and those acting in a fiduciary or other representative capacity should file proper evidence of authority to assign the foregoing Warrant.

 

 
 

 

Exhibit C

Gander Mountain Locations

 

Location   Opening Date

Lake Mary, FL #350

3750 Flagg Lane

Lake Mary, FL 32746

  Feb. 8, 2011
   

La Crosse, WI #115

1200 Crossing Meadows Drive

Onalaska, WI 54650

  April 28, 2011
   

Lakeville, MN #483

16861 Kenyon Avenue

Lakeville, MN 55044

  Aug. 5, 2011
   

Madison, WI #113

6199 Metro Dr.

De Forest, WI 53532

  Aug. 12, 2011
   

Spring, TX #403

19302 Interstate 45

Spring, TX 77373

  Sept. 30, 2011
   

Wichita, KS #370

605 S Wichita Street

Wichita, KS 67202

  Nov. 7, 2011

 

 
 

 

Exhibit D

Amended and Restated Operating Agreement

[See attached]

 

 
 

 

AMENDED AND RESTATED

OPERATING AGREEMENT

 

OF

 

MODERN ROUND, L.L.C.

F/K/A VIRTUAL SHOOTING RANGES OF AMERICA, L.L.C.

 

Dated as of January 15, 2015

 

THE UNITS CONTEMPLATED BY THIS AMENDED AND RESTATED LIMITED LIABILITY COMPANY AGREEMENT HAVE BEEN ACQUIRED FOR INVESTMENT AND HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, THE ARIZONA SECURITIES ACT OR UNDER ANY STATE SECURITIES ACT OR OTHER SIMILAR STATUTE IN RELIANCE UPON EXEMPTIONS UNDER THOSE ACTS. WITHOUT SUCH REGISTRATION, THE SALE, PLEDGE OR OTHER TRANSFER OF THE UNITS CONTEMPLATED BY THIS AMENDED AND RESTATED LIMITED LIABILITY COMPANY AGREEMENT IS RESTRICTED, EXCEPT UPON DELIVERY TO THE COMPANY OF AN OPINION OF COUNSEL, SATISFACTORY TO THE COMPANY AND ITS COUNSEL, THAT REGISTRATION IS NOT REQUIRED FOR THE TRANSFER, OR SUCH OTHER EVIDENCE SATISFACTORY TO THE COMPANY THAT THE TRANSFER IS NOT IN VIOLATION OF THE SECURITIES ACT OF 1933 OR ANY APPLICABLE STATE SECURITIES LAW. THE SALE, PLEDGE OR OTHER TRANSFER OF THE UNITS CONTEMPLATED BY THIS AMENDED AND RESTAED LIMITED LIABILITY COMPANY AGREEMENT IS ALSO SUBJECT TO THE RESTRICTIONS SET FORTH IN THIS AMENDED AND RESTATED LIMITED LIABILITY COMPANY AGREEMENT, WHICH MAY BE AMENDED OR RESTATED FROM TIME TO TIME.

 

 
 

 

TABLE OF CONTENTS

 

      Page
ARTICLE I DEFINED TERMS 3
     
Section 1.1.   Definitions 3
   
ARTICLE II CONTINUATION OF COMPANY AND TERM 7
     
Section 2.1.   Formation of Company 7
Section 2.2.   Name 7
Section 2.3.   Term 8
Section 2.4.   Registered Office; Registered Agent; Principal Office; Other Offices 8
Section 2.5.   No State Law Partnership 8
Section 2.6.   Qualification in Other Jurisdictions 8
Section 2.7.   Nevada Act Provisions 8
Section 2.8.   Conversion to Corporation 8
   
ARTICLE III PURPOSE AND POWERS OF THE COMPANY 10
     
Section 3.1.   Purpose 10
Section 3.2.   Powers of the Company 10
Section 3.3.   Principal Place of Business 11
Section 3.4.   Registration Agent and Office 11
   
ARTICLE IV CAPITAL CONTRIBUTIONS, MEMBER INTERESTS OR UNITS, CAPITAL ACCOUNTS 11
     
Section 4.1.   Capital Contributions 11
Section 4.2.   Member’s Interest 11
Section 4.3.   Status of Capital Contributions 12
Section 4.4.   Capital Accounts 12
Section 4.5.   Member Loans 13
Section 4.6.   Adjustments to Gross Asset Value 13
   
ARTICLE V MEMBERS, MEETINGS AND AMENDMENTS 13
     
Section 5.1.   Powers of Members 13
Section 5.2.   Resignation 13
Section 5.3.   Meetings or Other Approvals of the Members 13
Section 5.4.   Additional Members; Additional Units 13
Section 5.5.   Amendments 14
Section 5.6.   Confidentiality Obligations of Members 14
Section 5.7.   Drag-Along Right 14
   
ARTICLE VI MANAGEMENT 17
     
Section 6.1.   Management of the Company 17
Section 6.2.   Reliance by Third Parties 17
Section 6.3.   Officers 18
   
ARTICLE VII ASSIGNABILITY OF MEMBER INTERESTS OR UNITS 18
     
Section 7.1.   Assignability of Interest 18
Section 7.2.   Permitted Transfers 18

 

 
 

 

TABLE OF CONTENTS

 

      Page
Section 7.3.   Recognition of Assignment by Company or Other Members 19
Section 7.4.   Effective Date of Assignment 19
Section 7.5.   Limitations on Transfer 19
   
ARTICLE VIII DISTRIBUTIONS TO MEMBERS 19
     
Section 8.1.   Net Cash Flow 19
Section 8.2.   Tax Distributions 19
Section 8.3.   Withholding 20
Section 8.4.   Limitations on Distribution 20
   
ARTICLE IX TAX ALLOCATIONS 20
     
Section 9.1.   Allocations 20
Section 9.2.   Special Allocations 21
Section 9.3.   Allocations and Other Rules 23
   
ARTICLE X BOOKS AND RECORDS 24
     
Section 10.1.   Inspection Rights Pursuant to Law 24
Section 10.2.   Books and Records 24
Section 10.3.   Accounting Method 24
   
ARTICLE XI TAX MATTERS 24
     
Section 11.1.   Taxation as Partnership 24
Section 11.2.   Federal Tax Returns 24
Section 11.3.   Member Tax Return Information 24
Section 11.4.   Tax Matters Member 25
   
ARTICLE XII LIABILITY, EXCULPATION AND INDEMNIFICATION 25
     
Section 12.1.   Liability 25
Section 12.2.   Exculpation 25
Section 12.3.   Indemnification 26
Section 12.4.   Expenses 26
Section 12.5.   Insurance 26
Section 12.6.   Certain Liabilities 27
Section 12.7.   Attorneys’ Fees 27
Section 12.8.   Subordination of Other Rights to Indemnity 27
Section 12.9.   Survival of Indemnity Provisions 27
   
ARTICLE XIII DISSOLUTION, LIQUIDATION AND TERMINATION 27
     
Section 13.1.   No Dissolution 27
Section 13.2.   Events Causing Dissolution 27
Section 13.3.   Notice of Dissolution 27
Section 13.4.   Liquidation 28
Section 13.5.   Termination 28
Section 13.6.   Claims of the Members or Third Parties 28
Section 13.7.   Distributions In-Kind 28
   
ARTICLE XIV MISCELLANEOUS 29

 

 
 

 

TABLE OF CONTENTS

 

      Page
Section 14.1.   Notices 29
Section 14.2.   Failure to Pursue Remedies 29
Section 14.3.   Cumulative Remedies 29
Section 14.4.   Binding Effect 29
Section 14.5.   Interpretation 29
Section 14.6.   Severability 29
Section 14.7.   Counterparts 29
Section 14.8.   Integration 30
Section 14.9.   Governing Law 30
Section 14.10.   Partition of Property 30
Section 14.11.   Third Party Beneficiaries 30
Section 14.12.   Effect of Waiver or Consent 30
Section 14.13.   Jurisdiction and Venue 30
Section 14.14.   Waiver of Jury Trial 31
Section 14.15.   Legal Counsel 31

 

 
 

 

AMENDED AND RESTATED

OPERATING AGREEMENT OF

 

MODERN ROUND, L.L.C.

F/K/A VIRTUAL SHOOTING RANGES OF AMERICA, L.L.C.

 

THIS AMENDED AND RESTATED OPERATING AGREEMENT (hereafter the “Agreement) made effective this 15th day of January, 2015, by and among VSRA Holdings, L.L.C., a Nevada limited liability company (hereafter, ‘VSRA”); BK Entertainment, L.L.C., an Arizona limited liability company (hereafter, “BK”) (VSRA and BK shall sometimes be hereafter referred to as the “Member, “Members,” or “Member(s)”); Mitchell A. Saltz, an individual and Barry M. Monheit, an individual, and Ronald L. Miller, Jr., an individual (Mitchell A. Saltz, Barry M. Monheit, and Ronald L. Miller, Jr., shall sometimes be referred to as the “Current Manager” or the “Current Managers,” and Modern Round, L.L.C., a Nevada limited liability company (hereafter, the “Company”).

 

RECITALS

 

The parties to this Agreement are the current Members and Managers of the Company. The parties intend by this Agreement to define their rights and obligations with respect to the Company’s severance and financial affairs and to adopt regulations and procedures for the conduct of the Company’s activities. Accordingly, any Operating Agreement executed prior to the date of this Operating Agreement is hereby amended and restated in its entirety to read as follows.

 

NOW THEREFORE, in consideration of the agreements and obligations set forth herein and for other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the Members hereby agree as follows:

 

ARTICLE I

 

DEFINED TERMS

 

Section 1.1. Definitions. Unless the context otherwise requires, the terms defined in this Article 1 shall, for the purposes of this Agreement and the Schedules and Exhibits hereto, have the meanings herein specified or in the introductory paragraph of this Agreement or in Schedule A.

 

“Act” means: the Nevada Limited Liability Company Act, Nev. Rev. Stat. §86, as amended from time to time.

 

“Additional Members” shall have the meaning set forth in Section 5.2.

 

“Adjusted Capital Account Deficit” means a deficit balance in a Member’s Capital Account after giving effect to any amounts the Member is obligated to contribute or restore to the Company pursuant to the penultimate sentences of Treasury Regulations Sections 1.704-2(g)(1) and 1.704-2(i)(5), and subsequently such Member’s share of the items described in Treasury Regulation Section 1.704-1(b)(2)(ii)(d)(4), (5) and (6).

 

     
     

 

“Affiliate” means with respect to a Person, any other Person that, directly or indirectly, controls, is controlled by, or is under common control with, the specified Person. As used in this definition, the term “control” means the possession, directly or indirectly, of the power to direct or cause the direction of the management and policies of an entity, whether through ownership of voting securities, by contract or otherwise. Ownership of more than fifty percent (50%) of the beneficial interests of an entity shall be conclusive evidence that control exists. For purposes of this definition, “Affiliate” shall include, with respect to any natural Person, the spouse, parents, siblings, and children of such Person.

 

“Agreement” means this amended and restated operating agreement, as amended, modified, supplemented, or restated from time to time.

 

Articles” means the Articles of Organization of the Company and any and all amendments thereto and restatements thereof filed on behalf of the Company with the Nevada Secretary of State pursuant to the Act.

 

“Business” shall have the meaning set forth in Section 3.1(a).

 

“Business Day” means a day other than a Saturday, Sunday, or a legal holiday as recognized in the state of Nevada.

 

“Capital Account” means, with respect to any Member, the capital account maintained for such Member in accordance with the provisions of Article 4 hereof.

 

“Capital Contribution” means, with respect to any Member, the aggregate amount of money and the initial Gross Asset Value of any property (other than money) contributed to the Company pursuant to Article 4 hereof with respect to such Member’s Interest, reduced, in the case of a contribution of property, by the amount of any liabilities of such Member that are assumed by the Company in connection with such contribution or that are secured by any property contributed by such Member to the Company.

 

“Code” means the Internal Revenue Code of 1986, as amended from time to time, or any corresponding federal tax statute enacted after the date of this Agreement.

 

“Company” means Modern Round, L.L.C., a Nevada limited liability company.

 

“Company Minimum Gain” shall have the same meaning as the meaning of “partnership minimum gain” set forth in Treasury Regulations Sections 1.704-2(b)(2) and 1.704-2(d).

 

“Company Nonrecourse Liability” shall have the same meaning as the meaning of “partnership nonrecourse liability” set forth in Treasury Regulations Section 1.704-2(b)(3).

 

“Company Sale” shall have the meaning set forth in Section 5.7(a).

 

“Company Sale Notice” shall have the meaning set forth in Section 5.7(b).

 

“Confidential Information” means data and information relating to the Company and which has material value to the Company and is not generally known to its competitors.

 

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Confidential Information does not include any data or information that has been voluntarily disclosed to the public by the Company or that has been independently developed and disclosed by others, or that otherwise enters the public domain through lawful means.

 

“Corporate Conversion” shall have the meaning set forth in Section 2.8.

 

“Covered Person” means a Manager; a Member; any Affiliate of a Member; any officers, directors, shareholders, partners, employees, representatives, or agents of a Member or any Affiliate of a Member; any employee or agent of the Company or its Affiliates; any Tax Matters Member; or an officer of the Company that is not an employee.

 

“Damages” shall have the meaning set forth in Section 12.2(a).

 

“Depreciation” means, for each Fiscal Year or other period, an amount equal to the depreciation, amortization, or other cost recovery deduction allowable with respect to an asset for such Fiscal Year or other period; provided, however, that if the Gross Asset Value of an asset differs from its adjusted basis for federal income tax purposes at the beginning of such Fiscal Year or other period, Depreciation shall be an amount that bears the same ratio to such beginning Gross Asset Value as the federal income tax depreciation, amortization, or other cost recovery deduction with respect to such asset for such Fiscal Year or other period bears to such beginning adjusted tax basis; and provided further, that if the federal income tax depreciation, amortization, or other cost recovery deduction for such Fiscal Year or other period is zero, Depreciation shall be determined with reference to such beginning Gross Asset Value using any reasonable method selected by the Manager.

 

“Family Member” shall have the meaning given that term in Section 7.2(a).

 

“Fiscal Year” means (i) the period commencing upon the formation of the Company and ending on December 31, 2014 and (ii) any subsequent twelve (12) month period commencing on January 1 and ending on December 31.

 

“Gross Asset Value” means, with respect to any asset, such asset’s adjusted basis for federal income tax purposes, except as follows:

 

(a) the initial Gross Asset Value of any asset contributed by a Member to the Company shall be the gross fair market value of such asset, as agreed to by the contributing Member and the Manager;

 

(b) the Gross Asset Value of all Company assets shall be adjusted to equal their respective gross fair market values, as determined by the Manager, as of the following times: (i) the acquisition of an additional interest in the Company by any new or existing Member in exchange for more than a de minimis Capital Contribution or in exchange for services; (ii) the distribution by the Company to a Member of more than a de minimis amount of Company assets as consideration for an interest in the Company; and (iii) the liquidation of the Company within the meaning of Treasury Regulations Section 1.704-1(b)(2)(ii)(g); provided, however, that adjustments pursuant to Clause (i) and Clause (ii) of this sentence shall be made only if the Manager reasonably determines that such adjustments are necessary or appropriate to reflect the relative economic interests of the Members in the Company; and

 

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(c) the Gross Asset Value of any Company asset distributed to any Member shall be the gross fair market value of such asset on the date of distribution, as determined by the Manager.

 

(d) The Gross Asset Values of Company assets shall be adjusted to reflect any adjustments to the adjusted basis of such assets pursuant to Code Section 734(b) or Code Section 743(b), but only to the extent that such adjustments are taken into account in determining Capital Accounts pursuant to Treasury Regulations Section 1.704-1(b)(2)(iv)(m).

 

If the Gross Asset Value of an asset has been determined or adjusted pursuant to Paragraph (a) or Paragraph (b) above, such Gross Asset Value shall thereafter be adjusted by the Depreciation taken into account with respect to such asset for purposes of computing Profits and Losses.

 

“Gross Revenue” means the gross revenue of the Company for each Fiscal Year, or part thereof, arising from the Company’s business other than Capital Contributions and proceeds from loans.

 

“Indemnitee” shall have the meaning given that term in Section 12.7.

 

“Indemnitor” shall have the meaning given that term in Section 12.7.

 

“Interest” means, with respect to any Member, such Member’s: (i) interest in the Company’s capital, (ii) share of the Company’s net Profits and net Losses (and specially allocated items of income, gain, and deduction), and the right to receive distributions of Net Cash Flow from the Company, (iii) right to inspect the Company’s books and records, to the extent permitted by this Agreement, and (iv) right to participate, to the extent applicable, in the management of and vote on matters coming before the Members as provided in this Agreement.

 

“Interest Holder” shall have the meaning set forth in Section 7.2(a).

 

“Liquidating Trustee” shall have the meaning set forth in Section 13.4(a).

 

“Manager” has the meaning set forth in Article 6 hereof. Mitchell A. Saltz, Barry M. Monheit, and Ronald L. Miller, Jr. served as the Managers prior to the appointment of Virtual Management, L.L.C., a Nevada limited liability company as the Manager pursuant to this Agreement.

 

“Member” means any Person executing this Agreement and any Person admitted as a Substitute Member pursuant to the provisions of this Agreement, in such Person’s capacity as a Member of the Company, and “Members” means two (2) or more of such Persons when acting in their capacities as Members of the Company.

 

“Member Loans” shall mean loans to the Company by a Member.

 

“Member Nonrecourse Debt” has the meaning set forth for “partner nonrecourse debt” in Treasury Regulations Section 1.704-2(b)(4).

 

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“Member Nonrecourse Debt Minimum Gain” shall have the meaning set forth for “partner nonrecourse debt minimum gain” in Treasury Regulation Section 1.704-2(i)(2).

 

“Minimum Distributions” shall have the meaning set forth in Section 8.2.

 

“Net Cash Flow” means, for each calendar month, Fiscal Year or other period of the Company for which it must be determined, the Gross Revenue of the Company from all sources, less all Operating Expenditures, provided that Net Cash Flow shall not include unexpended Capital Contributions or loan proceeds unless determined by the Managing Member.

 

“Operating Expenditures” means the expenditures of the Company for each Fiscal Year, or part thereof, arising from the Company’s business, including, but not limited to, the following:

 

(e) general operating expenses, including, but not limited to, management, legal, accounting, and other professional fees, wages, salaries, and other compensation in connection with its business operations, and all fees, costs and expenses associated with entitlement, development, construction, and marketing with respect to property, monies expended to comply with and perform contractual and other obligations, and any other expenses expended on behalf of the Company in relation to its general administrative and management needs;

 

(f) payments of principal and interest upon any indebtedness of the Company (whether third-party indebtedness or loans made by Members to the Company pursuant to this Agreement);

 

(g) any other cash expended by the Company for business operations, including, without limitation, capital expenditures; and

 

(h) the establishment of appropriate reserves for debt service, to provide working capital or any other contingency of the Company as determined by the Manager.

 

“Percentage Interest” means, with respect to a Member, a percentage, the numerator of which is the number of Outstanding Units held by such Member, and the denominator of which is the total number of Outstanding Units. The Members’ respective initial Percentage Interests are as described in Schedule A, as amended from time to time.

 

“Permitted Action” shall have the meaning set forth in Section 3.1(b).

 

“Permitted Assignee” shall have the meaning given that term in Section 7.2(a).

 

“Person” includes any individual, corporation, association, partnership (general or limited), joint venture, trust, estate, limited liability company, or other legal entity or organization.

 

“Profits” or “Losses” means, for each Fiscal Year, an amount equal to the Company’s taxable income or loss for such Fiscal Year, determined in accordance with Section 703(a) of the Code (but including in taxable income or loss, for this purpose, all items of income, gain, loss, or deduction required to be stated separately pursuant to Section 703(a)(1) of the Code), with the following adjustments:

 

any income of the Company exempt from federal income tax and not otherwise taken into account in computing Profits or Losses pursuant to this definition shall be added to such taxable income or loss;

 

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(i) any expenditures of the Company described in Section 705(a)(2)(B) of the Code (or treated as expenditures described in Section 705(a)(2)(B) of the Code pursuant to Treasury Regulations Section 1.704-1(b)(2)(iv)(i)) and not otherwise taken into account in computing Profits or Losses pursuant to this definition shall be subtracted from such taxable income or loss;

 

(j) in the event the Gross Asset Value of any Company asset is adjusted in accordance with Paragraph (b) or Paragraph (c) of the definition of “Gross Asset Value” above, the amount of such adjustment shall be taken into account as gain or loss from the disposition of such asset for purposes of computing Profits or Losses;

 

(k) gain or loss resulting from any disposition of any asset of the Company with respect to which gain or loss is recognized for federal income tax purposes shall be computed by reference to the Gross Asset Value of the asset disposed of, notwithstanding that the adjusted tax basis of such asset differs from its Gross Asset Value;

 

(l) in lieu of the depreciation, amortization and other cost recovery deductions taken into account in computing such taxable income or loss, there shall be taken into account Depreciation for such Fiscal Year or other period, computed in accordance with the definition of “Depreciation” above; and

 

(m) notwithstanding any other provisions of this definition, any items which are specially allocated pursuant to Section 9.2 hereof shall not be taken into account in computing Profits or Losses.

 

“Public Offering” means a public offering for any of the Company’s equity securities registered under the Securities Act of 1933, as amended.

 

“Regulatory Allocations” shall have the same meaning given that term in Section 9.2(j).

 

“Sale of the Company” shall have the same meaning given that term in Section 5.7(a).

 

“Tax Matters Member” shall have the meaning set forth in Section 11.4(a), hereof.

 

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“Transfer” means any transfer, assignment, sale, conveyance, hypothecation, license, lease, partition, pledge, grant of an option, or grant of a security interest in a Member’s Interest in the Company, and includes any “involuntary transfer” such as a sale of any part of the Interest therein in connection with any bankruptcy or similar insolvency proceedings, or any other disposition or encumbrance of a Member’s Interest. For purposes of this Agreement, any transfer, exchange, or series of transfers (or exchanges), directly or indirectly, of the stock, partnership, member or other ownership interests of any Member that is a business organization or an entity (or any combination of such transfers or exchanges, whether direct or in connection with a merger, acquisition, sale, or similar reorganization or transaction, including issues of new stock or other ownership interests, or the exercise of options, warrants, debentures, or other convertible instruments, or a redemption of other interests in the Member, and any similar transactions involving the stock or other ownership interests of such Member), the effect of which is that the Persons who owned more than fifty (50%) of the outstanding stock or other ownership interests in such Member at the time this Agreement is signed, no longer own more than fifty percent (50%) of such stock or other ownership interests, then a Transfer shall also be deemed to have occurred with regard to the Interest owned by such Member.

 

“Transferring Member” shall have the same meaning given that term in Section 5.7(a).

 

“Treasury Regulations” means the income tax regulations, including temporary regulations, promulgated under the Code, as such regulations may be amended from time to time (including corresponding provisions of succeeding regulations).

 

“Unitholder” means a Member.

 

“Unitholders” means the Members.

 

“Units” means units representing an ownership interest in the Company.

 

ARTICLE II

 

CONTINUATION OF COMPANY AND TERM

 

Section 2.1. Formation of Company.

 

(a) The Members hereby agree to continue the Company as a limited liability company pursuant to the provisions of the Act and agree that the rights, duties, and liabilities of the Members shall be as provided in the Act, except as otherwise provided herein.

 

(b) The name and mailing address of each Member, the total amount contributed to the capital of the Company, and Capital Accounts of the Members as of the date of this Agreement are listed on Schedule A attached hereto. The Manager shall update Schedule A, from time to time, as may be necessary to accurately reflect the agreements of the Members with respect to the information therein. Any amendment or revision to Schedule A made in accordance with this Agreement shall not be deemed an amendment to this Agreement. Any reference in this Agreement to Schedule A shall be deemed to be a reference to Schedule A, as amended and in effect from time to time.

 

Section 2.2. Name. The business and affairs of the Company shall be conducted under the name “Modern Round, L.L.C.” unless the Manager determines to use a different name. The Company’s officers shall execute such assumed or fictitious name certificates as may be desirable or required by law to be filed in connection with the formation of the Company and shall cause such certificates to be filed in all appropriate public records.

 

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Section 2.3. Term. The term of the Company commenced on the date the Articles were filed and shall continue as provided in Section 13.2, unless the Company is dissolved in accordance with the provisions of this Agreement.

 

Section 2.4. Registered Office; Registered Agent; Principal Office; Other Offices. The registered office of the Company required by the Act to be maintained in the state of Nevada shall be the office of the initial registered agent named in the Articles or such other office (which need not be a place of business of the Company) as the Manager may designate from time to time in the manner provided by law. The registered agent of the Company in the state of Nevada shall be the initial registered agent named in the Articles or such other Person or Persons as the Manager may designate from time to time in the manner provided by law. The principal office of the Company shall be at such place as the Manager may designate from time to time, which need not be in the state of Nevada, and the Company shall maintain records there. The Company may have such other offices as the Manager may designate from time to time.

 

Section 2.5. No State Law Partnership. The Company is a Nevada limited liability company that will be treated as a partnership only for federal income tax purposes, and if applicable, state tax purposes, and no Member shall be deemed to be a partner or joint venturer of any other Member for any purposes other than federal income tax purposes and, if applicable, state tax purposes, and this Agreement shall not be construed to suggest otherwise. The Members intend that the Company shall be treated as a partnership for federal and, if applicable, state income tax purposes, and each Member and the Company shall file all tax returns and shall otherwise take all tax and financial reporting positions in a manner consistent with such treatment.

 

Section 2.6. Qualification in Other Jurisdictions. The Manager shall cause the Company to be qualified, formed, or registered under assumed or fictitious name statutes or similar laws in any jurisdiction in which the Company transacts business. The officers of the Company shall execute, deliver, and file any certificates (and any amendments and/or restatements thereof) necessary for the Company to qualify to do business in a jurisdiction in which the Company may wish to conduct business.

 

Section 2.7. Nevada Act Provisions. The Members hereby agree that, during the term of the Company, the rights, powers, and obligations of the Members with respect to the Company will be determined in accordance with the terms and conditions of this Agreement.

 

Section 2.8. Conversion to Corporation. The Manager may cause the Company to convert to corporate form through one or more structures (as determined by such resolution), including, without limitation, by merger, conversion, formation of a holding corporation, or otherwise (each, a “Corporate Conversion”), without any further act, vote or approval of any Member, officer of the Company, or any other Person notwithstanding any other provision of this Agreement or the Act, as follows:

 

(a) If the Manager causes a Corporate Conversion, it shall notify the Members, and the Members hereby agree that they shall (i) cooperate with the Manager in all respects in such Corporate Conversion and enter into any transaction required to effect such Corporate Conversion, (ii) vote their Interests in favor of any such transaction required to consummate such Corporate Conversion, if requested by the Manager, (iii) not attempt to prohibit or delay such Corporate Conversion and (iv) execute all agreements, documents, and instruments reasonably required by the Manager and consistent with this Section 2.8.

 

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(b) Immediately prior to a Corporate Conversion in connection with a Public Offering, the Manager shall determine in good faith the then aggregate value of the Interests. Such valuation will be based on the price per share at which shares of common stock of the Company or any successor to the Company resulting from a Corporate Conversion are to be sold to the public in the Public Offering. The Interests held by each Member shall be converted or exchanged in connection with the Corporate Conversion into a number of shares of common stock of the Company or any successor to the Company resulting from a Corporate Conversion determined by dividing (i) the amount that would be distributed to such Member upon a dissolution of the Company for cash in accordance with Section 13.4 at the aggregate value determined by resolution of the Manager, by (ii) a value per share of common stock of the Company or any successor to the Company resulting from a Corporate Conversion selected by resolution of the Manager; provided, however, that any Interests that do not have a positive value shall be canceled in connection with the Corporate Conversion and the Company shall have no further obligations with respect thereto.

 

(c) If the Corporate Conversion does not occur in connection with a Public Offering, each class, series, or type of Interest will be converted or exchanged in connection with the Corporate Conversion into shares of capital stock or options, warrants, or other stock equivalents, as the case may be, of the Company or any successor to the Company resulting from a Corporate Conversion having rights that are equivalent in all material respects to the rights of such Interest (other than as to matters that reflect inherent differences between corporate and limited liability company form).

 

(d) If the Corporate Conversion occurs in connection with a Public Offering, each Member agrees that upon the request of the managing underwriter in such Public Offering or any subsequent Public Offering, such Member will not offer, sell, contract to sell, grant any option or right for the purchase of, or otherwise dispose of any of the Company or any successor to the Company resulting from a Corporate Conversion securities held by such Member (other than those included in such registration) or engage in any swap or derivative transactions involving securities of the Company or any successor to the Company resulting from a Corporate Conversion, in each case without the prior written consent of such underwriter, for such period of time as may be requested by such underwriter (commencing as of the date of such Public Offering and ending no later than (i) 180 days thereafter (subject to extension by the managing underwriter to the extent required to comply with FINRA rules), in the case of the initial public offering of the common stock of the Company or any successor to the Company resulting from a Corporate Conversion or (ii) ninety (90) days thereafter, in the case of any other registration.

 

(e) Upon Corporate Conversion pursuant to this Section 2.8, the Members will, if requested by the Manager, enter into a stockholders agreement containing operative terms that are substantially similar to the corresponding terms of this Agreement (but only to the extent such terms are consistent with the other provisions of this Section 2.8).

 

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ARTICLE III

 

PURPOSE AND POWERS OF THE COMPANY

 

Section 3.1. Purpose.

 

(a) The Company may engage in any lawful business for which limited liability companies may be organized under the laws of the state of Nevada and engage in any other activities reasonably related thereto (the “Business”). The Company may pursue any other purpose permitted by law and approved by the majority of the Members.

 

(b) In no event shall this Agreement be held or construed to imply the existence of a general partnership or joint venture among the Members with regard to matters, trades or businesses or enterprises, and no Member shall have any power or authority under this Agreement to act as the agent or representative of the Company or any other Member with regard to any matter, or as the agent or representative of any other Member on any matter. Without limiting the foregoing, and notwithstanding any other provision of this Agreement, the Members specifically acknowledge and agree that (i) the Manager shall only be required to spend such time on the affairs of the Company as is reasonably necessary to perform its duties and obligations hereunder and shall not be required to manage the Company as its sole and exclusive function and may engage in other business and investment activities, and (ii) neither the Company nor any Member shall have any right, solely by virtue of this Agreement or its relationship to the other Members, the Manager or the Company, to share or participate in any such other investments or activities of the Members, the Manager, or their respective Affiliates or to the income or proceeds derived therefrom (each, a “Permitted Action”), including, without limitation, any other entertainment venue or activity. The provisions of this Section 3.1(b), to the extent that they limit or restrict the duties and/or liabilities of a Member or Manager otherwise existing at law or in equity, are agreed by the Members to replace such other duties and/or liabilities to the fullest extent permitted by applicable law.

 

Section 3.2. Powers of the Company. The Company shall have the power and authority to do all things that limited liability companies are permitted to do under the Act and to take any and all actions necessary, appropriate, proper, advisable, incidental or convenient to or for the furtherance of the purpose set forth in Section 3.1, including, but not limited to, the power:

 

(a) to conduct the business of the Company, carry on its operations and have and exercise the powers granted to a limited liability company by the Act in any state, territory, district or possession of the United States, or in any foreign country that may be necessary, convenient or incidental to the accomplishment of the purpose of the Company;

 

(b) to acquire by purchase, lease, contribution of property, or otherwise, own, hold, operate, maintain, finance, improve, lease, sell, convey, pledge, mortgage, transfer, demolish, or dispose of any real or personal property that may be necessary, convenient, or incidental to the accomplishment of the purpose of the Company;

 

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(c) to enter into, perform, and carry out contracts of any kind, including contracts with any Member or Affiliate thereof, necessary to the accomplishment of the purpose of the Company;

 

(d) to sue and be sued, make claims and defend, and participate in administrative or other proceedings, in its name;

 

(e) to appoint agents of the Company and define their duties and fix their compensation;

 

(f) subject to the provisions of Article 12, to indemnify certain Persons in accordance with the Act and to obtain any and all types of insurance;

 

(g) to borrow money and issue evidences of indebtedness, including loans from any Member or Affiliate thereof, and to secure any of the same by a deed of trust, mortgage, pledge, or other lien on the assets of the Company;

 

(h) to pay, collect, compromise, litigate, arbitrate, or otherwise adjust or settle any and all other claims or demands of or against the Company or to hold such proceeds against the payment of contingent liabilities; and

 

(i) to make, execute, acknowledge, and file any and all documents or instruments necessary, convenient or incidental to the accomplishment of the purpose of the Company.

 

Section 3.3. Principal Place of Business. The address of the Company’s principal place of business shall be 7377 East Doubletree Ranch Road, Suite 200, Scottsdale, Arizona 85258. The Manager may change the Company’s principal place of business from time to time upon reasonable notice to the Members.

 

Section 3.4. Registration Agent and Office. The Company’s registered agent and registered office shall be as set forth in the Articles of Organization. The Company may change its registered agent and office from time to time by decision of the Manager. The Manager shall file such instrument as required by the state of Nevada to reflect the change.

 

ARTICLE IV

 

CAPITAL CONTRIBUTIONS, MEMBER INTERESTS OR UNITS,

CAPITAL ACCOUNTS

 

Section 4.1. Capital Contributions. Each Member has made the Capital Contributions set forth next to his or her name on Schedule A. No additional Capital Contributions shall be required by any Member.

 

Section 4.2. Member’s Interest. A Member’s Units shall for all purposes be personal property. A Member has no interest in specific property, unless and until distributed to such Member.

 

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Section 4.3. Status of Capital Contributions.

 

(a) Except as otherwise provided in this Agreement, no Member, or the successor or assign of a Member, may demand a return of its Capital Contributions, in whole or in part.

 

(b) No Member or Affiliate thereof shall receive any interest, return, compensation, or drawing with respect to its Capital Contributions or its Capital Account or for services rendered or resources provided on behalf of the Company, except as otherwise specifically provided in this Agreement.

 

(c) No Member shall have any personal liability for the repayment of any other Member’s Capital Contribution.

 

Section 4.4. Capital Accounts.

 

(a) A separate Capital Account shall be established and maintained for each Member. The original Capital Account established for any Member that acquires Units by virtue of an assignment in accordance with the terms of this Agreement shall be in the same amount as and shall replace the Capital Account of the assignor of such Units, and, for purposes of this Agreement, such Member shall be deemed to have made the Capital Contributions made by the assignor of such Units (or made by such assignor’s predecessor in interest). To the extent such Member acquires less than all of the Units of the assignor of the Units so acquired by such Member, the original Capital Account of such Member and its Capital Contributions shall be in proportion to the Units it acquires, and the Capital Account of the assignor who retains Units, and the amount of its Capital Contributions, shall be reduced in proportion to the Units it retains.

 

(b) The Capital Account of each Member shall be maintained in accordance with the following provisions:

 

(i) to such Member’s Capital Account there shall be credited such Member’s Capital Contributions, such Member’s distributive share of Profits, special allocations of income and gain, and the net amount of any Company liabilities that are assumed by such Member or that are secured by any Company assets distributed to such Member;

 

(ii) to such Member’s Capital Account there shall be debited the amount of cash and the Gross Asset Value of any Company assets distributed to such Member pursuant to any provision of this Agreement, such Member’s distributive share of Losses, special allocations of loss and deduction, and the net amount of any liabilities of such Member that are assumed by the Company or that are secured by any property contributed by such Member to the Company; and

 

(iii) in determining the amount of any liability for purposes of this Section 4.4(b), there shall be taken into account Section 752(c) of the Code and any other applicable provisions of the Code and the Treasury Regulations.

 

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Section 4.5. Member Loans. A Member may, at his sole discretion, make Member Loans to the Company. Member Loans shall bear interest at a rate and be on such other terms as reasonably determined by the Manager.

 

Section 4.6. Adjustments to Gross Asset Value. The Manager shall adjust the Gross Asset Value of the Company’s assets to fair market value in accordance with Treasury Regulation Section 1.704-1(b)(2)(iv)(f) upon the occurrence of any of the events set forth in Treasury Regulation Section 1.704-1(b)(2)(iv)(f)(v) and as of the following times: (a) immediately prior to the issuance of Equity Securities in the Company; (b) immediately after the acquisition of an interest in the Company through the exercise of a noncompensatory option (as defined in Treasury Regulation 1.721-2(g)); (c) in connection with the Distribution by the Company to a Member of more than a deminimis amount of Company assets, including cash, as consideration for an interest in the Company; (d) the liquidation of the Company within the meaning of Treasury Regulation Section 1.704-1(b)(2)(ii)(g); and (e) immediately prior to the incorporation of the Company in connection with a Public Offering.

 

ARTICLE V

 

MEMBERS, MEETINGS AND AMENDMENTS

 

Section 5.1. Powers of Members. The Members shall have the power to exercise any and all rights or powers granted to the Members pursuant to the express terms of this Agreement.

 

Section 5.2. Resignation. Except as expressly provided in this Agreement, a Member may not resign from the Company prior to the dissolution and winding up of the Company. If a Member resigns or withdraws in violation of the foregoing prohibition, such Member shall not be entitled to receive any compensation, shall not be able to exercise any of the rights granted to such Member under this Agreement, shall not be relieved of any obligations under this Agreement, and shall not receive any distribution from the Company.

 

Section 5.3. Meetings or Other Approvals of the Members. There shall be no meetings of the Members.

 

Section 5.4. Additional Members; Additional Units.

 

(a) The Company is authorized to admit any Person as an additional member of the Company (each, an “Additional Member” and collectively, the “Additional Members”) or to issue additional Units to an existing Member. Each such Person shall be admitted as an Additional Member at the time such Person (i) executes a signature page, agreeing to be bound by this Agreement, and (ii) is designated as a Member (with a corresponding Percentage Interest) on an amended or supplemental Schedule A hereto. The Manager may issue Units to an existing Member or to an Additional Member in exchange for cash, property, or services or any combination thereof, at the sole discretion of the Manager. So as to be free from doubt, such new Additional Members, such additional Classes of Units or Units issued to existing Members shall (i) be entitled to such distributions pursuant to Article 8 and allocations pursuant to Article 9 of this Agreement as the Manager determines, including, without limitation, distributions and allocations that are senior to one or more Classes of Units outstanding at the time of the issuance of such Units and (ii) shall dilute the existing Members’ Percentage Interests proportionately.

 

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(b) Additional Members shall not be entitled to any retroactive allocation of the Company’s income, gains, losses, deductions, credits, or other items; provided, however, that, subject to the restrictions of Section 706(d) of the Code, Additional Members shall be entitled to their respective share of the Company’s income, gains, losses, deductions, credits, and other items arising under contracts entered into before the effective date of the admission of any Additional Members to the extent that such income, gains, losses, deductions, credits, and other items arise after such effective date. To the extent consistent with Section 706(d) of the Code and Treasury Regulations promulgated thereunder, the Company’s books may be closed at the time Additional Members are admitted (as though the Company’s tax year had ended) or the Company may credit to the Additional Members pro rata allocations of the Company’s income, gains, losses, deductions, credits and items for that portion of the Company’s Fiscal Year after the effective date of the admission of the Additional Members.

 

Section 5.5. Amendments. Any amendment to this Agreement or the Articles shall be adopted by the Manager at its sole discretion. No amendment may be adopted that will effect a Member differently than other Members without the approval of such Member, except as specifically provided herein.

 

Section 5.6. Confidentiality Obligations of Members. Each Member expressly covenants and agrees that neither such Member nor any of its Affiliates (to the extent any such Affiliate has received Confidential Information) will disclose, divulge, furnish, or make accessible to anyone (other than the Company or any of its Affiliates or representatives) any Confidential Information, or in any way use any Confidential Information in the conduct of any business; provided, however, that nothing in this Section 5.6 will prohibit the disclosure of any Confidential Information (i) which is required to be disclosed by the Member or any such Affiliate in connection with any court action or any proceeding before any judicial or similar authority or under any applicable law or regulation; (ii) in connection with the enforcement of any of the rights of the Member hereunder; (iii) to the extent required by securities laws; (iv) in connection with the defense by the Member of any claim asserted against it hereunder; or (v) as necessary to conduct the Company’s business or to obtain loans for the Company; provided, however, that in the case of a disclosure contemplated by clause (i), to the extent reasonably practicable no disclosure shall be made until the Member shall give notice to the Company of the intention to disclose such Confidential Information so that the Company may contest the need for disclosure, and the Member will cooperate (and will cause its Affiliates and their respective representatives to cooperate) with the Company in connection with any such proceeding, all such cooperation at the expense of the Company.

 

Section 5.7. Drag-Along Right.

 

(a) In the event that the Manager approves (i) a transaction or series of related transactions in which a third-party, or a group of related third-parties, acquires from the Members of the Company Interests representing fifty percent or more of the outstanding voting power of the Company, (ii) any acquisition of the Company by means of merger, exchange, transfer, or other form of corporate reorganization or consolidation in one or a series of related transactions with or into another entity in which outstanding Interests of the Company are exchanged for securities or other consideration issued, or caused to be issued, by the other entity corporation or its subsidiary and, as a result of which transaction, the Members of the Company own fifty percent or less of the voting power of the surviving entity (other than a mere re-incorporation transaction), or (iii) a sale, transfer, lease, or other disposition (other than a pledge or grant of a security interest to a bona fide lender) of all or substantially all of the assets of the Company (other than to or by a wholly owned subsidiary or parent of the Company) (such events described in subsections (i), (ii), and (iii) are referred to in this Agreement as a “Sale of the Company”), then each Member hereby agrees with respect to the Interest that he holds and any other Company securities over which he otherwise exercises dispositive power:

 

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(i) If such Sale of the Company requires approval of the Members, with respect to all Interests that such Member owns or over which such Member otherwise exercises voting power, to vote (in person, by proxy, or by action by written consent, as applicable) all such Interest in favor of, and adopt, such Sale of the Company and to vote in opposition to any and all other proposals that could reasonably be expected to delay or impair the ability of the Company to consummate such Sale of the Company;

 

(ii) In the event that the Sale of the Company is to be effected by the sale of Interests held by the Members (the “Transferring Member”), each Member agrees to sell all his Interests of the Company beneficially held by such Member (or in the event that the Transferring Member is selling fewer than all of his Interest of the Company, Interests in the same proportion as the Transferring Member is selling) to the person to whom the Transferring Member proposes to sell his Interest, for an amount equal to the amount such Member would receive if the assets of the Company were sold on the same terms and conditions and at a price consistent with the price as the Transferring Member would receive from the proposed purchaser, and on the same terms and conditions as the Transferring Member, except that the other Member will not be required to sell his Interests unless the liability for indemnification, if any, of each Member in such Sale of the Company is several, not joint, and is pro rata in accordance with such Member’s relative ownership of the Company, and will not exceed the consideration payable to such Member, if any, in such transaction (except in the case of potential liability for fraud or willful misconduct by such Member);

 

(iii) To execute and deliver all related documentation and take such other action in support of such Sale of the Company as shall reasonably be requested by the Manager in order to carry out the terms and provisions of this Section, including, without limitation, executing and delivering instruments of conveyance and transfer, and any purchase agreement, merger agreement, indemnity agreement, escrow agreement, consent, waiver, governmental filing, share certificates duly endorsed for transfer (free and clear of impermissible liens, claims and encumbrances), and any similar or related documents;

 

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(iv) Not to deposit, and to cause any affiliates not to deposit, except as provided in this Agreement, any Interest of the Company owned by such party or affiliate in a voting trust or subject any Interest to any arrangement or agreement with respect to the voting of such Interest, unless specifically requested to do so by the acquiror in connection with the Sale of the Company; and

 

(v) To refrain from exercising any dissenters’ rights or rights of appraisal under applicable law at any time with respect to such Sale of the Company.

 

Each Member hereby appoints the secretary of the Company and the Manager as such Member’s proxy and attorney-in-fact with respect to all Interests held by such Member solely to vote such Interest in favor of a Sale of the Company, to the extent necessary to carry out the terms and provisions of this Section. The proxies granted in this section are proxies coupled with an interest and shall be irrevocable throughout the term of this Agreement.

 

The proceeds of any Sale of the Company received by any Unitholder in his capacity as such to which this Section 5.7 applies shall be allocated among the other Unitholders based upon the Classes of Units included or deemed to be included in such Sale of the Company by each of the Unitholders as if the proceeds of such Sale of the Company were paid to the Unitholders pursuant to Section 8.1 of this Agreement and the other Unitholders included or deemed to be included in such Sale of the Company were the only outstanding Units of the Company at the time of such Distribution. Any amount otherwise allocable to the other Unitholders under this Section 5.7(b) shall be subject to reduction for any tax or other amounts required to be withheld under the provisions of any documents executed in connection with the Sale of the Company or otherwise under applicable law. Notwithstanding anything to the contrary contained herein, in the Manager’s sole discretion, the proceeds with respect to a Sale of the Company may be withheld from any Unitholder pending the execution of the deliveries set forth in Section 5.7(a) or posting of such Unitholder’s pro rata share of any security as the Manager deems necessary to cover any purchase price adjustments, indemnification or such other obligations of the Company or a Unitholder as set forth in Section 5.7(a) and Section 5.7(c).

 

Notwithstanding anything herein to the contrary, the Unitholders shall be severally obligated to join on a pro rata basis in any indemnification obligation the Manager or other Unitholders have agreed to in connection with such Approved Sale (other than any such obligations that relate specifically to a particular Unitholder, such as indemnification with respect to representations and warranties given by a Unitholder regarding such Unitholder’s title to and ownership of Units); provided, however, that unless a prospective Transferee permits a Unitholder to give a guarantee, letter of credit, or other mechanism (which shall be dealt with on an individual basis), any escrow of proceeds of any such transaction shall be withheld on a pro rata basis among all Unitholders. Each Unitholder shall pay its share (determined on a pro rata basis) of the third-party expenses incurred by the Unitholders pursuant to an Approved Sale to the extent such expenses are incurred for the benefit of all Unitholders (as determined by the Manager). Expenses incurred by any Unitholder on its own behalf (including the fees and disbursements of counsel, advisors, and other Persons retained by such holder in connection with the Approved Sale) will not be considered costs incurred for the benefit of all Unitholders and, to the extent not paid by the Company, will be the responsibility of such Unitholder. Each Unitholder shall enter into any other agreement that the Manager approves. Without limiting the immediately prior sentence, each Unitholder shall enter into any indemnification, contribution, or Unitholder representative agreement requested by the Manager to ensure compliance with this Section 5.7(c) and the provisions of this Section 5.7(c) requiring several liability shall be deemed complied with if such requirement is addressed through such agreement, even if the purchase and sale agreement or merger agreement related to the Sale of the Company provides for joint and several liability.

 

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ARTICLE VI

 

MANAGEMENT

 

Section 6.1. Management of the Company.

 

(a) The Company shall be managed by one or more Managers. The initial Managers were Mitchell A. Saltz, Barry M. Monheit, and Ronald L. Miller, Jr. The Members hereby appoint Virtual Management, L.L.C., a Nevada limited liability company as the successor Manager effective on the date of this Agreement. Such Manager shall serve until its resignation or dissolution. Except as described in this Agreement or as authorized by further action of the Manager under the provisions of this Agreement, no Person other than the Manager, and the duly authorized, officers, employees and agents of the Company, if any, shall take part in the management, or the operation or control of the business and affairs of the Company or have any right, power or authority to transact any business in the name of the Company or to act for on behalf of or to bind the Company.

 

(b) The Manager shall have the power to do any and all acts necessary, convenient, or incidental to or for the furtherance of the purposes described herein, including all powers, statutory or otherwise, possessed by managers of a limited liability company under the Act.

 

(c) In the event of the resignation or dissolution, death, or disability of a Manager, a substitute Manager may be elected by persons holding a majority of the Units.

 

Section 6.2. Reliance by Third Parties. Any Person dealing with the Company or a Manager may rely upon a certificate signed by the Manager as to:

 

(a) the identity of the Manager;

 

(b) the existence or non-existence of any fact or facts which constitute a condition precedent to acts by the Manager in any other manner germane to the affairs of the Company;

 

(c) the Persons who are authorized to execute and deliver any instrument or document of or on behalf of the Company; or

 

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(d) any act or failure to act by the Company or as to any other matter whatsoever involving the Company.

 

Section 6.3. Officers. The Manager may, from time to time, designate one or more natural persons to be officers of the Company. No officer need be a resident of the state of Nevada, a Member, or a Manager. Any officers so designated shall have such authority and perform such duties as the Manager may, from time to time, delegate to such officer. The Manager may assign titles to particular officers. Unless the Manager otherwise decides, if the title is one commonly used for officers of a business corporation, the assignment of such title shall constitute the delegation to such officer of the authority and duties that are normally associated with that office subject to any specific delegation of authority and duties made to such officer by the Manager. Each officer shall hold office until his or her successor shall be duly designated and shall qualify or until his or her death or until he or she shall resign or shall have been removed in the manner hereinafter provided. Any number of offices may be held by the same individual. The salaries or other compensation, if any, of the officers and agents of the Company shall be fixed from time to time by the Manager.

 

ARTICLE VII

 

ASSIGNABILITY OF MEMBER INTERESTS OR UNITS

 

Section 7.1. Assignability of Interest. Except as otherwise provided in this Article 7, no Member may Transfer the whole or any part of his or her Interest or any fractional or beneficial interest therein. If a Member Transfers an Interest in accordance with this Article 7, such Transfer shall, nevertheless, not entitle the assignee to become a substitute Member or to be entitled to exercise or receive any of the rights, powers or benefits of a Member other than the right to receive distributions to which the assigning Member would be entitled, unless the Manager consents to the admission of such assignee as a Member; and provided further, that such assignee shall not become a substitute Member without having first executed an instrument reasonably satisfactory to the Manager that approved the Transfer, which shall at a minimum include an acceptance and agreement by the substitute Member to abide by all the terms and conditions of this Agreement.

 

Section 7.2. Permitted Transfers. Notwithstanding the foregoing, a Member shall be permitted to assign, at any time and from time to time, all or any part of an Interest to a Permitted Assignee and a holder of a direct or indirect interest in a Member (an “Interest Holder”) shall be permitted to assign, at any time and from time to time, all or any part of its interest in such Member to a Permitted Assignee. For this purpose “Permitted Assignee” means with respect to a particular Member or an Interest Holder, a Person that is (i) a spouse, natural or adoptive lineal ancestor or descendant of such Member or Interest Holder (a “Family Member”); (ii) a trust, estate, guardianship, or custodianship, including those established under any of the Uniform Gifts to Minors Act of any state, established for such Member or Interest Holder, or one or more Family Members or other Permitted Assignees of such Member or Interest Holder; (iii) a Person that is under the control of or in common control with such Member or another Permitted Assignee of such Member; (iv) a partnership, limited liability company, trust, or other entity that is owned directly or indirectly by any Person that is an Interest Holder of a Member as of the date of the Agreement and the Family Members or other Permitted Assignees of such Interest Holder; and (v) a Person succeeding to the interest of a Member or of any Interest Holder of a Member as the result of the death of any other Person by will or intestacy or distribution from a trust without any payment of consideration by such Person. The subsequent Transfer of any Interest by a Permitted Assignee shall be subject to the same restrictions of this Article 7 in the same manner as if the Interest to be Transferred was still owned by the Member from whom such Permitted Assignee acquired such Interest; and for this purpose references herein to a Transfer by a Member (or a specific Member), shall include any Transfer by the Permitted Assignee(s) that acquired such Member’s Interest, and references to a specific Member by name shall include its Permitted Assignees.

 

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Section 7.3. Recognition of Assignment by Company or Other Members. No Transfer of Interest that is in violation of this Article 7 shall be valid or effective, and the Company shall not recognize the same for any purpose of this Agreement, including the purpose of making distributions of Net Cash Flow pursuant to this Agreement with respect to such Interest or part thereof. No liability shall be incurred as a result of refusing to make any such distributions to the assignee of any such invalid assignment.

 

Section 7.4. Effective Date of Assignment. Any valid Transfer of a Member’s Interest, or part thereof, pursuant to the provisions of this Article 7 shall be effective as of the close of business on the day preceding the closing of the transaction evidencing the Transfer. The Company shall, from the effective date of such Transfer, thereafter pay all further distributions on account of the Interest (or part thereof), so assigned, to the assignee of such Interest, or part thereof. As between any Member and its assignee, the profits and losses of the Company for federal, state and local income tax purposes for the Fiscal Year of the Company in which such assignment occurs shall be apportioned for federal income tax purposes in accordance with any convention permitted under Section 706(d) of the Code and selected by the Manager.

 

Section 7.5. Limitations on Transfer. No Transfer of Interest may be effectuated unless in the opinion of the Company’s counsel the Transfer (a) would not result in the close of the Company’s tax year or the termination of the Company within the meaning of Section 708(b) of the Code; (b) would comply with the Securities Act of 1933 and applicable securities laws of any other jurisdiction; (c) would not cause the Company to be a publicly traded limited partnership as defined in Section 7104 of the Code and (c) would not violate any other applicable laws, provided that the provisions of this Section 7.5 may be waived by the Manager.

 

ARTICLE VIII

 

DISTRIBUTIONS TO MEMBERS

 

Section 8.1. Net Cash Flow. Distributions of Net Cash Flow shall be made at the sole discretion of the Manger. Except as otherwise provided in this Article 8, all distributions of Net Cash Flow, other than upon a liquidation of the Company, shall be made to the Members in accordance with their respective Percentage Interests:

 

Section 8.2. Tax Distributions. Notwithstanding the foregoing, and subject to any agreements to which the Company is subject, to the extent Net Cash Flow is available, the total distributions (“Minimum Distributions”) to a Member for each Fiscal Year (and the 90-day period following such Fiscal Year) shall not be less than an amount equal to the product of (x) the Company’s net taxable income allocated to such Member for such Fiscal Year and all prior Fiscal Years for federal income tax purposes, multiplied by (y) the highest federal tax rate (including after taking into account the Net Investment Income tax) an individual ordinary income or capital gain, as the case may be, plus the rate of income tax for residents of Arizona, after taking into account the federal income tax deduction for such taxes, reduced by all prior distributions pursuant to Section 8.1, regardless of the actual federal tax rates or Arizona tax rates applicable to the Members. The Company will use reasonable best efforts to cause such distributions to be made in a manner which permits such Member to use the proceeds of such distributions to make on a timely basis all required estimated payments of income taxes in respect of the taxable income so allocated to them (including as soon as is reasonably feasible following the end of each calendar quarter, but in no event later than January 10, April 10, June 10 and September 10 of each calendar year). To the extent that such Minimum Distributions requirement increases the amount of distributions beyond the amount to which a Member would be entitled in the absence thereof, the excess portion shall be considered a prepayment of future distributions allocable to such Member; provided, however, that adjustments to any such future distributions to that Member shall not decrease his aggregate distributions below an amount necessary to meet the Minimum Distribution requirement for such Member for subsequent Fiscal Years. The Manager, at his its discretion, may increase Minimum Distributions to take into account taxes imposed by states other than Arizona.

 

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Section 8.3. Withholding. All amounts withheld pursuant to the Code or any provision of any foreign, state, or local tax law or treaty with respect to any payment, distribution, or allocation to the Company or the Members shall be treated as amounts distributed to the Members pursuant to this Article 8 for all purposes of this Agreement. The Company is authorized to withhold from distributions, or with respect to allocations, to the Members and to pay over to any federal, foreign, state or local government any amounts required to be so withheld pursuant to the Code or any provision of any other federal, foreign, state, or local law or treaty and shall allocate such amounts to those Members with respect to which such amounts were withheld.

 

Section 8.4. Limitations on Distribution. Except as provided in this Agreement, no Member shall be entitled to any distribution of cash or other property from the Company. Notwithstanding any provision to the contrary contained in this Agreement, the Company shall not make a distribution to any Member on account of its Interest in the Company if such distribution would violate the Act or other applicable law.

 

ARTICLE IX

 

TAX ALLOCATIONS

 

Section 9.1. Allocations.

 

(a) For each Fiscal Year of the Company, after adjusting each Member’s Capital Account for all Capital Contributions and distributions during such Fiscal Year and all special allocations pursuant to Section 9.2 with respect to such Fiscal Year, all Profits and Losses (other than Profits and Losses specially allocated pursuant to Section 9.2) and if necessary, individual items of gross income or loss, as determined by the Manager shall be allocated to the Members’ Capital Accounts in a manner such that, as of the end of such Fiscal Year, the Capital Account of each Member (which may be either a positive or negative balance) shall be equal to (a) the amount which would be distributed to such Member, determined as if the Company were to sell all of its assets for the Gross Asset Value thereof, pay all liabilities allocable to such assets according to their terms (limited, with respect to each nonrecourse liability, to the Gross Asset Value of the assets securing such liability) and distribute the proceeds thereof pursuant to Section 13.4, hereof, minus (b) the sum of (i) such Member’s share of Company Minimum Gain (as determined according to Treasury Regulation Section 1.704-2(d) and (g)(3)) and Member Nonrecourse Debt Minimum Gain (as determined according to Treasury Regulation Section 1.704-2(i)) and (ii) the amount, if any, which such Member is obligated to contribute to the capital of the Company as of the last day of such Fiscal Year.

 

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(b) Notwithstanding anything to the contrary in this Section 9.1, the amount of items of Company expense and loss allocated pursuant to this Section 9.1 to any Member shall not exceed the maximum amount of such items that can be so allocated without causing such Member to have an Adjusted Capital Account Deficit at the end of any taxable year. All such items in excess of the limitation set forth in this Section 9.1 (b) shall be allocated first to Members who would not have an Adjusted Capital Account Deficit, prorata in proportion to their Capital Account balances as adjusted in accordance with the definition of Adjusted Capital Account Deficit.

 

Section 9.2. Special Allocations. The following special allocations shall be made in the following order:

 

(a) If there is a net decrease in Company Minimum Gain during a Company fiscal year so that an allocation is required by Treasury Regulations Section 1.704-2(f), then each Member shall be specially allocated items of income and gain for such year (and, if necessary, subsequent fiscal years) equal to such Member’s share of the net decrease in Company Minimum Gain as determined by Treasury Regulations Section 1.704-2(g). Such allocations shall be made in a manner and at a time which will satisfy the minimum gain chargeback requirements of Treasury Regulations Section 1.704-2(f) and this Section shall be interpreted consistently therewith.

 

(b) If there is a net decrease in the Member Nonrecourse Debt Minimum Gain during any Company fiscal year, any Member who has a share of such Member Nonrecourse Debt Minimum Gain (as determined in the same manner as partner nonrecourse debt minimum gain under Treasury Regulations Section 1.704-2(i)(5)) shall be specially allocated items of income or gain for such year (and, if necessary, subsequent fiscal years) equal to such Member’s share of the net decrease in the Member Nonrecourse Debt Minimum Gain in the manner and to the extent required by Treasury Regulations Section 1.704-2(i)(4). This Section shall be interpreted in a manner consistent with such Treasury Regulations.

 

(c) If a Member unexpectedly receives an adjustment, allocation, or distribution described in Treasury Regulations Sections 1.704-1(b)(2)(ii)(d)(4), (5) or (6), any of which causes or increases an Adjusted Capital Account Deficit in such Member’s Capital Account, then such Member will be specially allocated items of income and gain in an amount and manner sufficient to eliminate such deficit balance created or increased by such adjustment, allocation, or distribution as quickly as possible; provided, however, an allocation pursuant to this Section 9.2(c) will be made if and only to the extent that such Member would have an Adjusted Capital Account Deficit after all other allocations provided for in this Article 9 have been tentatively made as if this Section 9.2(c) were not in the Agreement.

 

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(d) Deductions attributable to any Company Nonrecourse Liability, as defined in accordance with Section 1.704-2(b)(3) of the Treasury Regulations shall be allocated among the Members in proportion to their respective Percentage Interests.

 

(e) Deductions attributable to any Member Nonrecourse Debt shall be allocated to the Member who bears the economic risk of loss with respect to the Member Nonrecourse Debt to which such deductions are attributable in accordance with Treasury Regulations Section 1.704-2(i).

 

(f) To the extent an adjustment to the adjusted tax basis of any Company asset pursuant to Code Section 734(b) or Code Section 743(b) is required, pursuant to Treasury Regulations Section 1.704-1(b)(2)(iv)(m), to be taken into account in determining Capital Accounts, the amount of such adjustment to the Capital Accounts shall be treated as an item of gain (if such gain or loss increases the basis of the asset) or loss (if the adjustment decreases such basis) and such gain or loss shall be specially allocated to the Members in a manner consistent with the manner in which their Capital Accounts are required to be adjusted pursuant to such Section of the Treasury Regulations.

 

(g) If any Member makes a loan to the Company, or the Company makes a loan to any Member, and interest in excess of the amount actually payable is imputed under Code Sections 7872, 483, or 1271 through 1288 or corresponding provisions of subsequent Federal income tax law, then any item of income or expense attributable to any such imputed interest shall be allocated solely to the Member who made or received the loan and shall be credited or charged to its Capital Account, as appropriate.

 

(h) In the event that a guaranteed payment to a Member is ultimately recharacterized (as the result of an audit of the Company’s return or otherwise) as a distribution for federal income tax purposes, and if such recharacterization has the effect of disallowing a deduction or reducing the adjusted basis of any asset of the Company or a Member, then an amount of Company gross income equal to such disallowance or reduction shall be allocated to the recipient of such payment. In the event that a distribution to a Member is ultimately recharacterized (as a result of an audit of the Company’s return or otherwise) as a guaranteed payment for federal income tax purposes, and if any such recharacterization gives rise to a deduction, such deduction shall be allocated to the recipient of the distribution.

 

(i) For purposes of calculating a Member’s share of “excess nonrecourse liabilities” of the Company (within the meaning of Treasury Regulation Section 1.752-3(a)(3)), the Class A Members intend that they be considered as sharing profits of the Company in proportion to their respective Percentage Interests.

 

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(j) In the event an interest in the Company is acquired through the exercise of a noncompensatory option (within the meaning of Proposed Treasury Regulation Section 1.721-1(d)), the Company shall comply with the rules of Treasury Regulation Section 1.704-1(b)(2)(iv)(s). In the event that capital is reallocated among the Members pursuant to Treasury Regulation Section 1.704-1(b)(2)(iv)(s)(3), the Manager shall cause to be made corrective allocations within the meaning of Treasury Regulation Section 1.704-1(b)(4)(x), so as to take into account such capital reallocation.

 

(k) The allocations set forth in this Section 9.2 (collectively the “Regulatory Allocations”) are intended to comply with certain requirements of Treasury Regulations Section 1.704-1 and Section 1.704-2. Notwithstanding any other provisions of this Article 9 (other than the Regulatory Allocations), the Members shall, with the advice and assistance of the Company’s tax accountants, take the Regulatory Allocations into account in allocating other Profits, Losses, and items of income, gain, loss, deduction and Code Section 705(a)(2)(B) expenditures among the Members so that, to the extent possible, the net amount of such allocations of other Profits, Losses, and other items and the Regulatory Allocations to each Member shall be equal to the net amount that would have been allocated to each such Member if the Regulatory Allocations had not occurred.

 

Section 9.3. Allocations and Other Rules.

 

(a) In the event Members are admitted to the Company pursuant to this Agreement on different dates, the Profits (or Losses) allocated to the Members for each Fiscal Year during which Members are so admitted shall be allocated among the Members in proportion to their Interests during such Fiscal Year in accordance with Section 706 of the Code, using any convention permitted by law and selected by the Manager.

 

(b) For purposes of determining the Profits, Losses or any other items allocable to any period, Profits, Losses and any such other items shall be determined on a daily, monthly or other basis, as determined by the Manager using any method that is permissible under Section 706 of the Code and the Treasury Regulations thereunder.

 

(c) Except as otherwise provided in this Agreement, all items of Company income, gain, loss, deduction and any other allocations not otherwise provided for shall be divided among the Members in the same proportions as they share Profits and Losses for the Fiscal Year in question.

 

(d) Income, gain, loss, or deduction with respect to any property contributed by a Member shall, solely for tax purposes, be allocated among the Members, to the extent required by Code Section 704(c) and the related Treasury Regulations under Code Sections 704(b) and 704(c), to take account of the variation between the adjusted tax basis of such property and its Gross Asset Value at the time of its contribution to the Company. If the Gross Asset Value of any Company property is adjusted, as provided in Treasury Regulations Section 1.704-1(b)(2)(iv), then subsequent allocations of income, gain, loss and deduction shall be as provided in Code Section 704(c) and the related Treasury Regulations. Allocations under this Section 9.3(d) shall be made in accordance with the traditional method set forth in Treasury Regulation Section 1.704-3(b) and are solely for purposes of federal, state and local taxes and shall not affect, or in any way be taken into account in computing, any Member’s Capital Account or share of Profits, Losses, or other items or distributions under any provision of this Agreement.

 

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(e) All other tax elections required or permitted by law or Treasury Regulation or similar state or local rule or regulation shall be made by the Manager. The Members are aware of the income tax consequences of the allocations made by this Article 9 and hereby agree to be bound by the provisions of this Article 9 in reporting their shares of Company income and loss for income tax purposes.

 

ARTICLE X

 

BOOKS AND RECORDS

 

Section 10.1. Inspection Rights Pursuant to Law. The Company shall have obligations to the Members as set forth in this Article 10 respecting books, records, and financial statements of the Company.

 

Section 10.2. Books and Records. At all times during the continuance of the Company, the Company shall maintain at its registered office and principal place of business all records and materials the Company it is required to maintain at such location

 

Section 10.3. Accounting Method. For both financial and tax reporting purposes and for purposes of determining Profits and Losses, the books and records of the Company shall be kept on the method of accounting as determined by the Manager and shall reflect all Company transactions and be appropriate and adequate for the Company’s business.

 

ARTICLE XI

 

TAX MATTERS

 

Section 11.1. Taxation as Partnership. The Company shall be treated as a partnership for U.S. federal income tax purposes. The Members intend that the Company not be operated or treated as a “partnership” for purposes of Section 303 of the Federal Bankruptcy Code.

 

Section 11.2. Federal Tax Returns. The Company shall cause the Company’s independent public accountants to prepare, at the expense of the Company, for each Fiscal Year (or part thereof), Federal tax returns in compliance with the provisions of the Code and any required state and local tax returns.

 

Section 11.3. Member Tax Return Information. The Company, at its expense, shall cause to be delivered to each Member not later than April 1 of the subsequent year such information as shall be necessary (including a statement for that year of each Member’s share of net income, net losses and other items of the Company) for the preparation by the Members of their Federal, state and local income and other tax returns.

 

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Section 11.4. Tax Matters Member.

 

(a) The “Tax Matters Member” of the Company for purposes of Section 6231(a)(7) of the Code shall be the Mitchell A. Saltz. The Members shall direct the Tax Matters Member with respect to any administrative proceeding at the Company level with the Internal Revenue Service relating to the determination of any item of Company income, gain, loss, deduction or credit for federal income tax purposes. The Tax Matters Member may settle any controversies with the Internal Revenue Service.

 

(b) The Tax Matters Member shall, within five (5) business days of the receipt of any notice from the Internal Revenue Service in any administrative proceeding at the Company level relating to the determination of any Company item of income, gain, loss, deduction or credit, mail a copy of such notice to each Member.

 

ARTICLE XII

 

LIABILITY, EXCULPATION AND INDEMNIFICATION

 

Section 12.1. Liability.

 

(a) Except as otherwise provided by the Act, any other provision of this Agreement, the debts, obligations and liabilities of the Company, whether arising in contract, tort or otherwise, shall be solely the debts, obligations and liabilities of the Company, and no Covered Person shall be obligated personally for any such debt, obligation or liability of the Company solely by reason of being a Covered Person.

 

(b) Except as otherwise expressly required by law, a Member, in its capacity as Member, shall have no liability in excess of (i) the amount of its Capital Contributions; (ii) its share of any assets and undistributed profits of the Company; (iii) its obligation to make other payments expressly provided for in this Agreement; and (iv) the amount of any distributions wrongfully distributed to it.

 

Section 12.2. Exculpation.

 

(a) No Covered Person shall, to the fullest extent permitted by law, be liable to the Company or any other Covered Person for any loss, damage, claim, liability, demand, action, suit, proceeding or right of action (collectively “Damages”) incurred by reason of any act or omission performed or omitted by such Covered Person, except that a Covered Person shall be liable for any Damages incurred by reason of such Covered Person’s (i) breach of the duty of loyalty solely in his or her capacity as a Manager or officer of the Company, (ii) acts or omissions not in good faith or which involve intentional misconduct or a knowing violation of law, or (iii) for any transaction from which such Covered Person derived an improper personal benefit solely in his or her capacity as a Manager or officer of the Company, in each case as described in clauses (i) through (iii), other than in connection with or as a result of a Permitted Action (each, a “Non-Exculpated Action”). A Covered Person shall be fully protected in relying in good faith upon the records of the Company and upon such information, opinions, reports or statements presented to the Company by any Person as to matters the Covered Person reasonably believes are within such other Person’s professional or expert competence and who has been selected with reasonable care by or on behalf of the Company, including information, opinions, reports or statements as to the value and amount of the assets, liabilities, Profits or Losses or Net Cash Flow or any other facts pertinent to the existence and amount of assets from which distributions to Members might properly be paid.

 

25
 

 

(b) To the fullest extent permitted by law, a Covered Person shall be fully protected in relying in good faith upon the records of the Company and upon such information, opinions, reports or statements presented to the Company by any Covered Person as to matters the Covered Person reasonably believes are within such other Person’s professional or expert competence and who has been selected with reasonable care by or on behalf of the Company, including information, opinions, reports or statements as to the value and amount of the assets, liabilities, Profits or Losses or Net Cash Flow or any other facts pertinent to the existence and amount of assets from which distributions to Members might properly be paid.

 

(c) The provisions of this Section 12.2, to the extent that they eliminate or restrict the duties and/or liabilities of a Covered Person otherwise existing at law or in equity, are agreed by the Members to replace such other duties and/or liabilities of such Covered Person to the fullest extent permitted by applicable law.

 

Section 12.3. Indemnification. All Covered Persons shall be entitled to indemnification from the Company for any Damages incurred by such Person by reason of any act or omission performed or omitted by such Person provided that: (i) any such action was undertaken in good faith on behalf of the Company and in a manner reasonably believed to be in, or not opposed to, the best interests of the Company; (ii) any such action was reasonably believed to be within the scope of authority conferred on such Person by this Agreement; and (iii) with respect to any criminal action or proceeding, such Person had no reasonable cause to believe his action or omission was unlawful, except that no Person shall be entitled to be indemnified in respect of any Damages incurred by such Person by reason of fraud, gross negligence or willful misconduct with respect to such acts or omissions or for any Damages for which it has obligations to indemnify under Section 12.7; provided, however, that any indemnity under this Section 12.3 shall be provided out of and to the extent of Company assets only (including the proceeds of any insurance policy obtained pursuant to Section 12.5 hereof), and no Person shall have any personal liability on account thereof, including without limitation, any obligation to contribute money or other property to the Company.

 

Section 12.4. Expenses. To the fullest extent permitted by applicable law, expenses (including legal fees) incurred by a Person described in Section 12.3 in defending any against any claim, demand, action, suit or proceeding that would result in Damages shall, from time to time, be advanced by the Company prior to the final disposition of such claim for Damages upon receipt by the Company of an undertaking by or on behalf of the Covered Person to repay such amount if it shall be determined that the Covered Person is not entitled to be indemnified as authorized in Section 12.3 hereof.

 

Section 12.5. Insurance. The Company may purchase and maintain insurance on behalf of Covered Persons and such other Persons against any Damages that may be asserted against or that may be incurred by any such Person in connection with the activities of the Company or such indemnities, regardless of whether the Company would have the power to indemnify such Person against such Damages under the provisions of this Agreement. The Company may enter into indemnity contracts with Covered Persons and such other Persons and adopt written procedures pursuant to which arrangements are made for the advancement of expenses and the funding of obligations under Section 12.4 hereof and containing such other procedures regarding indemnification as are appropriate.

 

26
 

 

Section 12.6. Certain Liabilities. Each Member agrees to be liable for the Capital Contributions required to be made Liability of Members to Company. Unless otherwise provided in this Agreement, no Member shall be liable to any other Member or to the Company by reason of such Member’s actions in connection with the Company.

 

Section 12.7. Attorneys’ Fees. All of the indemnities provided in this Agreement shall include reasonable attorneys’ fees, including appellate attorneys’ fees and litigation expenses, and court costs.

 

Section 12.8. Subordination of Other Rights to Indemnity. The interests of the Members in any proceeds of the Company by way of repayment of loans, return of any Capital Contributions, or any distributions from the Company, shall be subordinated to the right of Member to the indemnities provided by this Article 12.

 

Section 12.9. Survival of Indemnity Provisions. Except as otherwise specifically provided herein, all of the indemnity provisions contained in this Agreement shall survive a Member’s ceasing to be a Member of the Company.

 

ARTICLE XIII

 

DISSOLUTION, LIQUIDATION AND TERMINATION

 

Section 13.1. No Dissolution. The Company shall not be dissolved by the admission of additional Members or substitute Members in accordance with the terms of this Agreement, or the withdrawal of a Member.

 

Section 13.2. Events Causing Dissolution. The Company shall be dissolved and its affairs shall be wound up upon the occurrence of any of the following events:

 

(a) the determination of the Manager to the dissolution of the Company;
   
(b) at such time as there are no Members;
   
(c) the entry of a decree of judicial dissolution under the Act; or
   
(d) upon the sale of all or substantially all of the assets of the Company and a distribution of all of the proceeds of such sale.

 

Section 13.3. Notice of Dissolution. Upon the dissolution of the Company, the Members shall be notified of such dissolution.

 

27
 

 

Section 13.4. Liquidation. Upon dissolution of the Company, the Manager (in such capacity, the “Liquidating Trustee”) shall carry out the winding up of the Company and shall immediately commence to wind up the Company’s affairs; provided, however, that a reasonable time shall be allowed for the orderly liquidation of the assets of the Company and the satisfaction of liabilities to creditors so as to enable the Members to minimize the normal losses attendant upon a liquidation. During the period of winding up all of the provisions of this Agreement shall remain in full force and effect, other than those provisions that are clearly inconsistent with the winding up process. No Member may take any action during the winding up period not otherwise permitted by this Agreement. The proceeds of liquidation shall be distributed in the following order and priority:

 

(a) first, to payment of all expenses and debts of the Company and purchasing insurance policies that will provide for any contingent liabilities or obligations of the Company, the amount of such insurance to be based on the experience of the Company for such liabilities and obligations; provided, however, that the unpaid principal of and interest on any loans made to the Company by Members (and their Affiliates), shall be distributed pro rata to the Members (and their Affiliates) who made such loans, in proportion to the total amount of principal and interest payable on such loans, such distributions being treated first as a payment of accrued interest on such loans and next as in payment of principal on such loans; and

 

(b) second, the balance to the Members in accordance with the provisions of Section 8.1.

 

Section 13.5. Termination. The Company shall terminate when all of the assets of the Company, after payment of or due provision for all debts, liabilities and obligations of the Company, shall have been distributed to the Members in the manner provided for in this Article 13 and the Articles shall have been canceled in the manner required by the Act.

 

Section 13.6. Claims of the Members or Third Parties. The Members and former Members shall look solely to the Company’s assets for the return of their Capital Contributions, and if the assets of the Company remaining after payment of or due provision for all debts, liabilities and obligations of the Company are insufficient to return such Capital Contributions, the Members and former Members shall have no recourse against the Company or any other Member; provided, however, that nothing contained herein shall be deemed to limit the rights of a Member under applicable law. In the event any Member has a deficit balance in its Capital Account at the time of the Company’s dissolution, it shall not be required to restore such account to a positive balance or otherwise make any payments to the Company or its creditors or other third parties in respect of such deficiency.

 

Section 13.7. Distributions In-Kind. If any assets of the Company shall be distributed in kind, such assets shall be distributed to the Member(s) entitled thereto as tenants-in-common in the same proportions as such Member(s) would have been entitled to cash distributions if (i) such assets had been sold for cash by the Company at the fair market value of such property (taking Code Section 7701(g) into account) on the date of distribution; (ii) any unrealized income, gain, loss and deduction inherent in such property (that has not been reflected in the Capital Accounts previously) that would be realized by the Company from such sale were allocated among the Member(s); and (iii) the cash proceeds were distributed to the Member(s) in accordance with this Article 13. The Capital Accounts of the Member(s) shall be increased by the amount of any unrealized income or gain inherent in such property or decreased by the amount of any loss or deduction inherent in such property that would be allocable to them, and shall be reduced by the fair market value of the assets distributed to them under the preceding sentence.

 

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ARTICLE XIV

 

MISCELLANEOUS

 

Section 14.1. Notices. All notices provided for in this Agreement shall be in writing, duly signed by the party giving such notice, and shall be delivered, telecopied or mailed by registered or certified mail or by recognized overnight delivery or courier service (e.g., Federal Express), as follows:

 

(i) if given to the Company at the principal place of business of the Company set forth in Section 2.5 hereof.

 

(ii) if given to any Member, at such address as set forth in Schedule A or at such address as such Member may hereafter designate by written notice to the Company.

 

Section 14.2. Failure to Pursue Remedies. The failure of any party to seek redress for violation of, or to insist upon the strict performance of, any provision of this Agreement shall not prevent a subsequent act, which would have originally constituted a violation, from having the effect of an original violation.

 

Section 14.3. Cumulative Remedies. The rights and remedies provided by this Agreement are cumulative and the use of any one right or remedy by any party shall not preclude or waive its right to use any or all other remedies. Said rights and remedies are given in addition to any other rights the parties may have by law, statute, ordinance or otherwise.

 

Section 14.4. Binding Effect. This Agreement shall be binding upon and inure to the benefit of all of the parties and, to the extent permitted by this Agreement, their successors, legal representatives and assigns.

 

Section 14.5. Interpretation. Throughout this Agreement, nouns, pronouns and verbs shall be construed as masculine, feminine, neuter, singular or plural, whichever shall be applicable. All references herein to “Articles,” “Sections” and “Paragraphs” shall refer to corresponding provisions of this Agreement.

 

Section 14.6. Severability. The invalidity or unenforceability of any particular provision of this Agreement shall not affect the other provisions hereof, and this Agreement shall be construed in all respects as if such invalid or unenforceable provision were omitted.

 

Section 14.7. Counterparts. This Agreement may be executed in any number of counterparts with the same effect as if all parties hereto had signed the same document. All counterparts shall be construed together and shall constitute one instrument.

 

29
 

 

Section 14.8. Integration. This Agreement and the Schedule to the Agreement constitutes the entire agreement among the parties hereto pertaining to the subject matter hereof and supersedes all prior agreements and understandings pertaining thereto.

 

Section 14.9. Governing Law. This Agreement and the rights of the parties hereunder shall be interpreted in accordance with the laws of the state of Nevada and all rights and remedies shall be governed by such laws without regard to principles of conflict of laws.

 

Section 14.10. Partition of Property. Each Member agrees that it shall have no right to partition the property of the Company, or any portion thereof, and each Member agrees that it shall not make application to any court or authority having jurisdiction in the matter to commence or prosecute any action or proceeding for partition of the property, or any portion thereof. Upon the breach of this Section by any Member, the other Member, in addition to all other rights and remedies in law and equity, shall be entitled to a decree or order dismissing application, action or proceeding.

 

Section 14.11. Third Party Beneficiaries. Nothing expressed or implied in this Agreement is intended or shall be construed, to confer upon or give any person, firm, or corporation other than the parties hereto, any rights, remedies, obligations or liabilities under or by reason of this Agreement, or result in their being deemed a third party beneficiary of this Agreement.

 

Section 14.12. Effect of Waiver or Consent. A waiver or consent, express or implied, to or of any breach or default by any Person in the performance by that Person of its obligations with respect to the Company is not a consent or waiver to or of any other breach or default in the performance by that Person of the same or any other obligations of that Person with respect to the Company. Failure on the part of a Person to complain of any act of any Person or to declare any Person in default with respect to the Company, irrespective of how long that failure continues, does not constitute a waiver by that Person of its rights with respect to that default until the applicable statute-of-limitations period has run.

 

Section 14.13. Jurisdiction and Venue. Each Member, Manager, or officer of the Company agrees, to the fullest extent permitted by law, that any action, suit, or proceeding arising out of or relating to this Agreement or the breach or threatened breach of this Agreement shall be commenced and prosecuted in the state or federal courts located in Maricopa County, Arizona. Each Member, Manager or officer of the Company consents and submits, to the fullest extent permitted by law, to the exclusive personal jurisdiction of any such court in respect of any such action, suit or proceeding. Each Member, Manager or officer of the Company consents to service of process upon it with respect to any such action, suit or proceeding by registered mail, return receipt requested (i) if given to a Manager or officer of the Company, at the principal place of business of the Company set forth in Section 2.4 hereof, and (ii) if given to any Member, at such address as set forth in Schedule A or at such address as such Member may hereafter designate by written notice to the Company, and by any other means permitted by applicable law. Each Member, Manager or officer of the Company waives, to the fullest extent permitted by law, any objection that it may now or hereafter have to the laying of venue of any such action, suit or proceeding in any such court and any claim that it may now or hereafter have that any such action, suit or proceeding in any such court has been brought in an inconvenient forum.

 

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Section 14.14. Waiver of Jury Trial. NO PARTY TO THIS AGREEMENT OR ANY ASSIGNEE, SUCCESSOR, HEIR OR PERSONAL REPRESENTATIVE OF A PARTY SHALL SEEK A JURY TRIAL IN ANY LAWSUIT, PROCEEDING, COUNTERCLAIM OR ANY OTHER LITIGATION PROCEDURE BASED UPON OR ARISING OUT OF THIS AGREEMENT OR ANY OF THE OTHER AGREEMENTS OR THE DEALINGS OR THE RELATIONSHIP BETWEEN THE PARTIES. NO PARTY WILL SEEK TO CONSOLIDATE ANY SUCH ACTION, IN WHICH A JURY TRIAL HAS BEEN WAIVED, WITH ANY OTHER ACTION IN WHICH A JURY TRIAL CANNOT OR HAS NOT BEEN WAIVED. THE PROVISIONS OF THIS SECTION HAVE BEEN FULLY DISCUSSED BY THE PARTIES HERETO, AND THESE PROVISIONS SHALL BE SUBJECT TO NO EXCEPTIONS. NO PARTY HERETO HAS IN ANY WAY AGREED WITH OR REPRESENTED TO ANY OTHER PARTY HERETO THAT THE PROVISIONS OF THIS SECTION WILL NOT BE FULLY ENFORCED IN ALL INSTANCES.

 

Section 14.15. Legal Counsel. Legal counsel for a Member or one of its Affiliates may represent the Company in connection with legal work or issues arising in connection with the Company. Each Member recognizes and acknowledges that any such counsel will be acting as legal counsel for the Company with respect to each such matter and shall not be acting as the legal counsel of any individual Member. Each Member further recognizes and accepts that its interest with respect to any such matter may be adverse to the interests of the other Members and of the Company. Each Member nevertheless consents to the representation of the Company by such counsel with respect to each such matter and waives for the benefit of each other Member and of such counsel any potential or actual conflict of interest between or among such Members and between any such Members and the Company. Each Member acknowledges that in the event of any future dispute or litigation between or among the Members and/or between any of the Members and the Company, such counsel may continue to represent its Member client, notwithstanding any such dispute and its prior representation of the Company.

 

[Remainder of Page Intentionally Left Blank]

 

[Signature blocks on next pages]

 

31
 

 

SIGNATURE AND DATES

 

IN WITNESS of their acceptance of the terms and conditions of this agreement, the parties, by themselves or by their duly authorized representatives, have duly signed this Agreement this 15th day of January, 2015, to be effective as of the Effective Date:

 

MEMBERS:  
 
VSRA HOLDINGS, L.L.C.     BK ENTERTAINMENT, L.L.C.
       
By:   By:
  Mitchell A. Saltz, on behalf of Black     Barry M. Monheit
  Powder Management Group, Manager   Its: Member/Manager
  Of Black Powder Management, L.L.C.      
Its: Manager      

 

MANAGERS AND MODERN ROUND, L.L.C.:    
     
 
Mitchell A. Saltz   Barry M. Monheit
     
     
Ronald L. Miller, Jr.    

 

VIRTUAL MANAGEMENT, L.L.C.
   
By:   By:
  Mitchell A. Saltz     Barry M. Monheit

 

 

32
 

 

SCHEDULE A

 

Member   Capital
Contribution
    Units     Percentage
Interest
 
VRSA Holdings L.L.C.
7377 E. Doubletree Ranch Road
Suite 200
Scottsdale, AZ 85258
  $ 2,000,000       20,000,000       80 %
                         
BK Entertainment, L.L.C.
6130 E. Mockingbird Lane
Paradise Valley, AZ 85253
  $ 500,000       5,000,000       20 %
                         
Total   $ 2,500,000       25,000,000       100 %

 

33
 

 

AMENDMENT NO. 1

TO

AMENDED AND RESTATED

OPERATING AGREEMENT

OF

MODERN ROUND, L.L.C.

F/K/A VIRTUAL SHOOTING RANGES OF AMERICA, L.L.C.

 

THIS AMENDMENT NO. 1 TO AMENDED AND RESTATED OPERATING AGREEMENT (hereafter, the “Operating Agreement”) is dated the 15th day of January, 2015, by and among VSRA Holdings, L.L.C., a Nevada limited liability company (hereafter, “VSRA”); Barricade Enterprises Limited Partnership, an Alaska limited partnership (hereafter, “BELP”); BK Entertainment, L.L.C., an Arizona limited liability company (hereafter, “BK”) (VSRA, BELP, and BK shall hereafter be referred to as the “Members”); and MODERN ROUND, L.L.C., a Nevada limited liability company (hereafter, the “Company”).

 

NOW, THEREFORE, it is agreed as follows:

 

  1. The clause starting with provided, however, in Section 2.8(b)(ii) of the Operating Agreement be and it hereby is deleted and of no effect.
     
  2. “Outstanding Units” mean the number of Units that have been issued by the Company and are currently held by the Members.

 

[Remainder of Page Intentionally Left Blank]

 

 
 

 

IN WITNESS WHEREOF, the parties, by themselves or by their duly authorized representatives, have duly signed this Amendment No. 1 this 15th day of January, 2015:

 

  MEMBERS:
   
  VSRA HOLDINGS, L.L.C.
     
  By: Black Powder Management, L.L.C.
  Its: Manager
     
  By: Black Powder Management Group
  Its: Manager
     
  By:
  Name: Mitchell A. Saltz
  Its: Manager
     
  BK ENTERTAINMENT, L.L.C.
   
  By: The Monheit Family Trust
  Its: Member/Manager
     
  By:
  Name:  Barry Monheit
  Its: Trustee
     
  BARRICADE ENTERPRISES LIMITED PARTNERSHIP
   
  By: Black Powder Management, L.L.C.
  Its: Manager
     
  By: Black Powder Management Group
  Its: Manager
     
  By:
    Mitchell A. Saltz, Manager
     
  THE COMPANY:
   
  MODERN ROUND, L.L.C.
     
  By: Virtual Management, L.L.C.
  Its: Manager
     
  By:
  Name: Ronald L. Miller, Jr.
  Its: Manager

 

 
 

 

NOTE: PORTIONS OF THIS EXHIBIT INDICATED BY “[****]” ARE SUBJECT TO A CONFIDENTIAL TREATMENT REQUEST AND HAVE BEEN OMITTED FROM THIS EXHIBIT. COMPLETE, UNREDACTED COPIES OF THIS EXHIBIT HAVE BEEN FILED WITH THE SECURITIES AND EXCHANGE COMMISSION AS PART OF THIS COMPANY’S CONFIDENTIAL TREATMENT REQUEST.

 

Exhibit H

Scenarios

 

VirTra to list all licenses and obligations to third parties with respect to any Scenarios and VirTra Technology.

 

[****]

 

 
 

 

VIRTRA, INC.

 

2017 EQUITY INCENTIVE PLAN

 

TABLE OF CONTENTS

 

1. Establishment, Purpose and Term of Plan 3
  1.1 Establishment 3
  1.2 Purpose 3
  1.3 Term of Plan 3
2. Definitions and Construction 3
  2.1 Definitions 3
  2.2 Construction 6
3. Administration 6
  3.1 Administration by the Committee 6
  3.2 Authority of Officers 7
  3.3 Administration with Respect to Insiders 7
  3.4 Committee Complying with Section 162(m) 7
  3.5 Powers of the Committee 7
  3.6 Option or SAR Repricing 7
  3.7 Indemnification 7
4. Shares Subject to Plan 8
  4.1 Maximum Number of Shares Issuable 8
  4.2 Annual Increase in Maximum Number of Shares Issuable 8
  4.3 Share Counting 8
  4.4 Adjustments for Changes in Capital Structure 8
  4.5 Assumption or Substitution of Awards 8
5. Eligibility, Participation and Award Limitations 8
  5.1 Persons Eligible for Awards 8
  5.2 Participation in the Plan 8
  5.3 Incentive Stock Option Limitations 8
  5.4 Nonemployee Director Award Limit 9
6. Stock Options 9
  6.1 Exercise Price 9
  6.2 Exercisability and Term of Options 9
  6.3 Payment of Exercise Price 9
  6.4 Effect of Termination of Service 10
  6.5 Transferability of Options 10
7. Stock Appreciation Rights 10
  7.1 Types of SARs Authorized 10
  7.2 Exercise Price 10
  7.3 Exercisability and Term of SARs 10
  7.4 Exercise of SARs 11
  7.5 Deemed Exercise of SARs 11
  7.6 Effect of Termination of Service 11
  7.7 Transferability of SARs 11
8. Restricted Stock Awards 11
  8.1 Types of Restricted Stock Awards Authorized 11
  8.2 Purchase Price 11
  8.3 Purchase Period 11
  8.4 Payment of Purchase Price 11
  8.5 Vesting and Restrictions on Transfer 11
  8.6 Voting Rights; Dividends and Distributions 12
  8.7 Effect of Termination of Service 12
  8.8 Nontransferability of Restricted Stock Award Rights 12
9. Restricted Stock Units 12
  9.1 Grant of Restricted Stock Unit Awards 12
  9.2 Purchase Price 12
  9.3 Vesting 12
  9.4 Voting Rights, Dividend Equivalent Rights and Distributions 12
  9.5 Effect of Termination of Service 13
  9.6 Settlement of Restricted Stock Unit Awards 13
  9.7 Nontransferability of Restricted Stock Unit Awards 13
10. Performance Awards 13
  10.1 Types of Performance Awards Authorized 13
  10.2 Initial Value of Performance Shares and Performance Units 13
  10.3 Establishment of Performance Period, Performance Goals and Performance Award Formula 13
  10.4 Measurement of Performance Goals 13
  10.5 Settlement of Performance Awards 14
  10.6 Voting Rights; Dividend Equivalent Rights and Distributions 15
  10.7 Effect of Termination of Service 15
  10.8 Nontransferability of Performance Awards 16
11. Cash-Based Awards and Other Stock-Based Awards 16
  11.1 Grant of Cash-Based Awards 16
  11.2 Grant of Other Stock-Based Awards 16
  11.3 Value of Cash-Based and Other Stock-Based Awards 16

 

  - 1 -  
     

 

  11.4 Payment or Settlement of Cash-Based Awards and Other Stock-Based Awards 16
  11.5 Voting Rights; Dividend Equivalent Rights and Distributions 16
  11.6 Effect of Termination of Service 16
  11.7 Nontransferability of Cash-Based Awards and Other Stock-Based Awards 16
12. Standard Forms of Award Agreement 17
  12.1 Award Agreements 17
  12.2 Authority to Vary Terms 17
13. Change in Control 17
  13.1 Effect of Change in Control on Awards 17
  13.2 Effect of Change in Control on Nonemployee Director Awards 17
  13.3 Federal Excise Tax Under Section 4999 of the Code 17
14. Compliance with Securities Law 18
15. Compliance with Section 409A 18
  15.1 Awards Subject to Section 409A.The Company intends that Awards granted pursuant to the Plan shall either be exempt from or comply with Section 409A, and the Plan shall be so construed 18
  15.2 Deferral and/or Distribution Elections 18
  15.3 Subsequent Elections 18
  15.4 Payment of Section 409A Deferred Compensation 19
16. Tax Withholding 20
  16.1 Tax Withholding in General 20
  16.2 Withholding in or Directed Sale of Shares 20
17. Amendment, Suspension or Termination of Plan 20
18. Miscellaneous Provisions 20
  18.1 Repurchase Rights 20
  18.2 Forfeiture Events 20
  18.3 Provision of Information 20
  18.4 Rights as Employee, Consultant or Director 20
  18.5 Rights as a Stockholder 20
  18.6 Delivery of Title to Shares 21
  18.7 Fractional Shares 21
  18.8 Retirement and Welfare Plans 21
  18.9 Beneficiary Designation 21
  18.10 Severability 21
  18.11 No Constraint on Corporate Action 21
  18.12 Unfunded Obligation 21
  18.13 Choice of Law 21

 

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VirTra, Inc.

2017 Equity Incentive Plan

 

1. ESTABLISHMENT, PURPOSE AND TERM OF PLAN.

 

1.1 Establishment. The VirTra, Inc. 2017 Equity Incentive Plan (the Plan) is hereby established effective as of [  ], 2017, the date of its approval by the stockholders of the Company (the Effective Date).

 

1.2 Purpose. The purpose of the Plan is to advance the interests of the Participating Company Group and its stockholders by providing an incentive to attract, retain and reward persons performing services for the Participating Company Group and by motivating such persons to contribute to the growth and profitability of the Participating Company Group. The Plan seeks to achieve this purpose by providing for Awards in the form of Options, Stock Appreciation Rights, Restricted Stock Awards, Restricted Stock Units, Performance Shares, Performance Units, Cash-Based Awards and Other Stock-Based Awards.

 

1.3 Term of Plan. The Plan shall continue in effect until its termination by the Committee; provided, however, that all Awards shall be granted, if at all, within ten (10) years from the Effective Date.

 

2. DEFINITIONS AND CONSTRUCTION.

 

2.1 Definitions. Whenever used herein, the following terms shall have their respective meanings set forth below:

 

(a) Affiliate means (i) a parent entity, other than a Parent Corporation, that directly, or indirectly through one or more intermediary entities, controls the Company or (ii) a subsidiary entity, other than a Subsidiary Corporation, that is controlled by the Company directly or indirectly through one or more intermediary entities. For this purpose, the terms “parent,” “subsidiary,” “control” and “controlled by” shall have the meanings assigned such terms for the purposes of registration of securities on Form S-8 under the Securities Act.

 

(b) Award means any Option, Stock Appreciation Right, Restricted Stock Purchase Right, Restricted Stock Bonus, Restricted Stock Unit, Performance Share, Performance Unit, Cash-Based Award or Other Stock-Based Award granted under the Plan.

 

(c) Award Agreement means a written or electronic agreement between the Company and a Participant setting forth the terms, conditions and restrictions applicable to an Award.

 

(d) Board means the Board of Directors of the Company.

 

(e) Cash-Based Award means an Award denominated in cash and granted pursuant to Section 11.

 

(f) “Cashless Exercise means a Cashless Exercise as defined in Section 6.3(b)(i).

 

(g) Cause means, unless such term or an equivalent term is otherwise defined by the applicable Award Agreement or other written agreement between a Participant and a Participating Company applicable to an Award, any of the following: (i) the Participant’s theft, dishonesty, willful misconduct, breach of fiduciary duty for personal profit, or falsification of any Participating Company documents or records; (ii) the Participant’s material failure to abide by a Participating Company’s code of conduct or other policies (including, without limitation, policies relating to confidentiality and reasonable workplace conduct); (iii) the Participant’s unauthorized use, misappropriation, destruction or diversion of any tangible or intangible asset or corporate opportunity of a Participating Company (including, without limitation, the Participant’s improper use or disclosure of a Participating Company’s confidential or proprietary information); (iv) any intentional act by the Participant which has a material detrimental effect on a Participating Company’s reputation or business; (v) the Participant’s repeated failure to perform any reasonable assigned duties after written notice from a Participating Company of, and a reasonable opportunity to cure, such failure; (vi) any material breach by the Participant of any employment, service, non-disclosure, non-competition, non-solicitation or other similar agreement between the Participant and a Participating Company, which breach is not cured pursuant to the terms of such agreement; or (vii) the Participant’s conviction (including any plea of guilty or nolo contendere) of any criminal act involving fraud, dishonesty, misappropriation or moral turpitude, or which impairs the Participant’s ability to perform his or her duties with a Participating Company.

 

(h) Change in Control means, unless such term or an equivalent term is otherwise defined by the applicable Award Agreement or other written agreement between the Participant and a Participating Company applicable to an Award, the occurrence of any one or a combination of the following:

 

(i) any “person” (as such term is used in Sections 13(d) and 14(d) of the Exchange Act) becomes the “beneficial owner” (as such term is defined in Rule 13d-3 under the Exchange Act), directly or indirectly, of securities of the Company representing more than fifty percent (50%) of the total Fair Market Value or total combined voting power of the Company’s then-outstanding securities entitled to vote generally in the election of Directors; provided, however, that a Change in Control shall not be deemed to have occurred if such degree of beneficial ownership results from any of the following: (A) an acquisition by any person who on the Effective Date is the beneficial owner of more than fifty percent (50%) of such voting power, (B) any acquisition directly from the Company, including, without limitation, pursuant to or in connection with a public offering of securities, (C) any acquisition by the Company, (D) any acquisition by a trustee or other fiduciary under an employee benefit plan of a Participating Company or (E) any acquisition by an entity owned directly or indirectly by the stockholders of the Company in substantially the same proportions as their ownership of the voting securities of the Company; or

 

(ii) an Ownership Change Event or series of related Ownership Change Events (collectively, a Transaction) in which the stockholders of the Company immediately before the Transaction do not retain immediately after the Transaction direct or indirect beneficial ownership of more than fifty percent (50%) of the total combined voting power of the outstanding securities entitled to vote generally in the election of Directors or, in the case of an Ownership Change Event described in Section 2.1(ee)(iii), the entity to which the assets of the Company were transferred (the Transferee), as the case may be; or

 

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(iii) a date specified by the Committee following approval by the stockholders of a plan of complete liquidation or dissolution of the Company; provided, however, that a Change in Control shall be deemed not to include a transaction described in subsections (i) or (ii) of this Section 2.1(h) in which a majority of the members of the board of directors of the continuing, surviving or successor entity, or parent thereof, immediately after such transaction is comprised of Incumbent Directors.

 

For purposes of the preceding sentence, indirect beneficial ownership shall include, without limitation, an interest resulting from ownership of the voting securities of one or more corporations or other business entities which own the Company or the Transferee, as the case may be, either directly or through one or more subsidiary corporations or other business entities. The Committee shall determine whether multiple events described in subsections (i), (ii) and (iii) of this Section 2.1(h) are related and to be treated in the aggregate as a single Change in Control, and its determination shall be final, binding and conclusive.

 

(i) Code means the Internal Revenue Code of 1986, as amended, and any applicable regulations and administrative guidelines promulgated thereunder.

 

(j) Committee means the Compensation Committee and such other committee or subcommittee of the Board, if any, duly appointed to administer the Plan and having such powers in each instance as shall be specified by the Board. If, at any time, there is no committee of the Board then authorized or properly constituted to administer the Plan, the Board shall exercise all of the powers of the Committee granted herein, and, in any event, the Board may in its discretion exercise any or all of such powers.

 

(k) Company means VirTra, Inc., a Nevada corporation, and any successor corporation thereto.

 

(l) Consultant means a person engaged to provide consulting or advisory services (other than as an Employee or a Director) to a Participating Company, provided that the identity of such person, the nature of such services or the entity to which such services are provided would not preclude the Company from offering or selling securities to such person pursuant to the Plan in reliance on registration on Form S-8 under the Securities Act.

 

(m) “Covered Employee means, at any time the Plan is subject to Section 162(m), any Employee who is or may reasonably be expected to become a “covered employee” as defined in Section 162(m), or any successor statute, and who, with respect to a Performance Award, is designated, either as an individual Employee or a member of a class of Employees, by the Committee no later than the earlier of (i) the date that is ninety (90) days after the beginning of the Performance Period, or (ii) the date on which twenty-five percent (25%) of the Performance Period has elapsed, as a “Covered Employee” under this Plan for such applicable Performance Period.

 

(n) Director means a member of the Board.

 

(o) Disability means, unless such term or an equivalent term is otherwise defined by the applicable Award Agreement or other written agreement between the Participant and a Participating Company applicable to an Award, the permanent and total disability of the Participant, within the meaning of Section 22(e)(3) of the Code.

 

(p) Dividend Equivalent Right means the right of a Participant, granted at the discretion of the Committee or as otherwise provided by the Plan, to receive a credit for the account of such Participant in an amount equal to the cash dividends paid on one share of Stock for each share of Stock represented by an Award held by such Participant.

 

(q) Employee means any person treated as an employee (including an Officer or a Director who is also treated as an employee) in the records of a Participating Company and, with respect to any Incentive Stock Option granted to such person, who is an employee for purposes of Section 422 of the Code; provided, however, that neither service as a Director nor payment of a Director’s fee shall be sufficient to constitute employment for purposes of the Plan. The Company shall determine in good faith and in the exercise of its discretion whether an individual has become or has ceased to be an Employee and the effective date of such individual’s employment or termination of employment, as the case may be. For purposes of an individual’s rights, if any, under the terms of the Plan as of the time of the Company’s determination of whether or not the individual is an Employee, all such determinations by the Company shall be final, binding and conclusive as to such rights, if any, notwithstanding that the Company or any court of law or governmental agency subsequently makes a contrary determination as to such individual’s status as an Employee.

 

(r) Exchange Act means the Securities Exchange Act of 1934, as amended.

 

(s) Fair Market Value means, as of any date, the value of a share of Stock or other property as determined by the Committee, in its discretion, or by the Company, in its discretion, if such determination is expressly allocated to the Company herein, subject to the following:

 

(i) Except as otherwise determined by the Committee, if, on such date, the Stock is listed or quoted on a national or regional securities exchange or quotation system, the Fair Market Value of a share of Stock shall be the closing price of a share of Stock as quoted on the national or regional securities exchange or quotation system constituting the primary market for the Stock, as reported in The Wall Street Journal or such other source as the Company deems reliable. If the relevant date does not fall on a day on which the Stock has traded on such securities exchange or quotation system, the date on which the Fair Market Value shall be established shall be the last day on which the Stock was so traded or quoted prior to the relevant date, or such other appropriate day as shall be determined by the Committee, in its discretion.

 

(ii) Notwithstanding the foregoing, the Committee may, in its discretion, determine the Fair Market Value of a share of Stock on the basis of the opening, closing, or average of the high and low sale prices of a share of Stock on such date or the preceding trading day, the actual sale price of a share of Stock received by a Participant, any other reasonable basis using actual transactions in the Stock as reported on a national or regional securities exchange or quotation system, or on any other basis consistent with the requirements of Section 409A. The Committee may also determine the Fair Market Value upon the average selling price of the Stock during a specified period that is within thirty (30) days before or thirty (30) days after such date, provided that, with respect to the grant of an Option or SAR, the commitment to grant such Award based on such valuation method must be irrevocable before the beginning of the specified period. The Committee may vary its method of determination of the Fair Market Value as provided in this Section for different purposes under the Plan to the extent consistent with the requirements of Section 409A.

 

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(iii) If, on such date, the Stock is not listed or quoted on a national or regional securities exchange or quotation system, the Fair Market Value of a share of Stock shall be as determined by the Committee in good faith without regard to any restriction other than a restriction which, by its terms, will never lapse, and in a manner consistent with the requirements of Section 409A.

 

(t) Full Value Award means any Award settled in Stock, other than (i) an Option, (ii) a Stock Appreciation Right, or (iii) a Restricted Stock Purchase Right or an Other Stock-Based Award under which the Company will receive monetary consideration equal to the Fair Market Value (determined on the effective date of grant) of the shares subject to such Award.

 

(u) Incentive Stock Option means an Option intended to be (as set forth in the Award Agreement) and which qualifies as an incentive stock option within the meaning of Section 422(b) of the Code.

 

(v) Incumbent Director means a director who either (i) is a member of the Board as of the Effective Date or (ii) is elected, or nominated for election, to the Board with the affirmative votes of at least a majority of the Incumbent Directors at the time of such election or nomination (but excluding a director who was elected or nominated in connection with an actual or threatened proxy contest relating to the election of directors of the Company).

 

(w) Insider means an Officer, a Director or other person whose transactions in Stock are subject to Section 16 of the Exchange Act.

 

(x) “Net Exercise means a Net Exercise as defined in Section 6.3(b)(iii).

 

(y) Nonemployee Director means a Director who is not an Employee.

 

(z) Nonemployee Director Award means any Award granted to a Nonemployee Director.

 

(aa) Nonstatutory Stock Option means an Option not intended to be (as set forth in the Award Agreement) or which does not qualify as an incentive stock option within the meaning of Section 422(b) of the Code.

 

(bb) Officer means any person designated by the Board as an officer of the Company.

 

(cc) Option means an Incentive Stock Option or a Nonstatutory Stock Option granted pursuant to the Plan.

 

(dd) Other Stock-Based Award means an Award denominated in shares of Stock and granted pursuant to Section 11.

 

(ee) Ownership Change Event means the occurrence of any of the following with respect to the Company: (i) the direct or indirect sale or exchange in a single or series of related transactions by the stockholders of the Company of securities of the Company representing more than fifty percent (50%) of the total combined voting power of the Company’s then outstanding securities entitled to vote generally in the election of Directors; (ii) a merger or consolidation in which the Company is a party; or (iii) the sale, exchange, or transfer of all or substantially all of the assets of the Company (other than a sale, exchange or transfer to one or more subsidiaries of the Company).

 

(ff) Parent Corporation means any present or future “parent corporation” of the Company, as defined in Section 424(e) of the Code.

 

(gg) Participant means any eligible person who has been granted one or more Awards.

 

(hh) Participating Company means the Company or any Parent Corporation, Subsidiary Corporation or Affiliate.

 

(ii) Participating Company Group means, at any point in time, the Company and all other entities collectively which are then Participating Companies.

 

(jj) Performance Award means an Award of Performance Shares or Performance Units.

 

(kk) Performance Award Formula means, for any Performance Award, a formula or table established by the Committee pursuant to Section 10.3 which provides the basis for computing the value of a Performance Award at one or more levels of attainment of the applicable Performance Goal(s) measured as of the end of the applicable Performance Period.

 

(ll) “Performance-Based Compensation” means compensation under an Award that satisfies the requirements of Section 162(m) for certain performance-based compensation paid to Covered Employees.

 

(mm) Performance Goal means a performance goal established by the Committee pursuant to Section 10.3.

 

(nn) Performance Period means a period established by the Committee pursuant to Section 10.3 at the end of which one or more Performance Goals are to be measured.

 

(oo) Performance Share means a right granted to a Participant pursuant to Section 10 to receive a payment equal to the value of a Performance Share, as determined by the Committee, based upon attainment of applicable Performance Goal(s).

 

(pp) Performance Unit means a right granted to a Participant pursuant to Section 10 to receive a payment equal to the value of a Performance Unit, as determined by the Committee, based upon attainment of applicable Performance Goal(s).

 

(qq) Predecessor Plan means the Company’s 2012 Stock Option and Stock Incentive Plan.

 

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(rr) Restricted Stock Award means an Award of a Restricted Stock Bonus or a Restricted Stock Purchase Right.

 

(ss) Restricted Stock Bonus means Stock granted to a Participant pursuant to Section 8.

 

(tt) Restricted Stock Purchase Right means a right to purchase Stock granted to a Participant pursuant to Section 8.

 

(uu) Restricted Stock Unit means a right granted to a Participant pursuant to Section 9 to receive on a future date or occurrence of a future event a share of Stock or cash in lieu thereof, as determined by the Committee.

 

(vv) Rule 16b-3 means Rule 16b-3 under the Exchange Act, as amended from time to time, or any successor rule or regulation.

 

(ww) SAR or Stock Appreciation Right means a right granted to a Participant pursuant to Section 7 to receive payment, for each share of Stock subject to such Award, of an amount equal to the excess, if any, of the Fair Market Value of a share of Stock on the date of exercise of the Award over the exercise price thereof.

 

(xx) Section 162(m) means Section 162(m) of the Code.

 

(yy) Section 409A means Section 409A of the Code.

 

(zz) Section 409A Deferred Compensation means compensation provided pursuant to an Award that constitutes nonqualified deferred compensation within the meaning of Section 409A.

 

(aaa) Securities Act means the Securities Act of 1933, as amended.

 

(bbb) Service means a Participant’s employment or service with the Participating Company Group, whether as an Employee, a Director or a Consultant. Unless otherwise provided by the Committee, a Participant’s Service shall not be deemed to have terminated merely because of a change in the capacity in which the Participant renders Service or a change in the Participating Company for which the Participant renders Service, provided that there is no interruption or termination of the Participant’s Service. Furthermore, a Participant’s Service shall not be deemed to have been interrupted or terminated if the Participant takes any military leave, sick leave, or other bona fide leave of absence approved by the Company. However, unless otherwise provided by the Committee, if any such leave taken by a Participant exceeds ninety (90) days, then on the ninety-first (91st) day following the commencement of such leave the Participant’s Service shall be deemed to have terminated, unless the Participant’s right to return to Service is guaranteed by statute or contract. Notwithstanding the foregoing, unless otherwise designated by the Company or required by law, an unpaid leave of absence shall not be treated as Service for purposes of determining vesting under the Participant’s Award Agreement. A Participant’s Service shall be deemed to have terminated either upon an actual termination of Service or upon the business entity for which the Participant performs Service ceasing to be a Participating Company. Subject to the foregoing, the Company, in its discretion, shall determine whether the Participant’s Service has terminated and the effective date of and reason for such termination.

 

(ccc) Stock means the common stock of the Company, as adjusted from time to time in accordance with Section 4.4.

 

(ddd) Stock Tender Exercise means a Stock Tender Exercise as defined in Section 6.3(b)(ii).

 

(eee) Subsidiary Corporation means any present or future “subsidiary corporation” of the Company, as defined in Section 424(f) of the Code.

 

(fff) Ten Percent Owner means a Participant who, at the time an Option is granted to the Participant, owns stock possessing more than ten percent (10%) of the total combined voting power of all classes of stock of a Participating Company (other than an Affiliate) within the meaning of Section 422(b)(6) of the Code.

 

(ggg) Trading Compliance Policy means the written policy of the Company pertaining to the purchase, sale, transfer or other disposition of the Company’s equity securities by Directors, Officers, Employees or other service providers who may possess material, nonpublic information regarding the Company or its securities.

 

(hhh) Vesting Conditions mean those conditions established in accordance with the Plan prior to the satisfaction of which an Award or shares subject to an Award remain subject to forfeiture or a repurchase option in favor of the Company exercisable for the Participant’s monetary purchase price, if any, for such shares upon the Participant’s termination of Service or failure of a performance condition to be satisfied.

 

2.2 Construction. Captions and titles contained herein are for convenience only and shall not affect the meaning or interpretation of any provision of the Plan. Except when otherwise indicated by the context, the singular shall include the plural and the plural shall include the singular. Use of the term “or” is not intended to be exclusive, unless the context clearly requires otherwise.

 

3. ADMINISTRATION.

 

3.1 Administration by the Committee. The Plan shall be administered by the Committee. All questions of interpretation of the Plan, of any Award Agreement or of any other form of agreement or other document employed by the Company in the administration of the Plan or of any Award shall be determined by the Committee, and such determinations shall be final, binding and conclusive upon all persons having an interest in the Plan or such Award, unless fraudulent or made in bad faith. Any and all actions, decisions and determinations taken or made by the Committee in the exercise of its discretion pursuant to the Plan or Award Agreement or other agreement thereunder (other than determining questions of interpretation pursuant to the preceding sentence) shall be final, binding and conclusive upon all persons having an interest therein. All expenses incurred in connection with the administration of the Plan shall be paid by the Company.

 

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3.2 Authority of Officers. Any Officer shall have the authority to act on behalf of the Company with respect to any matter, right, obligation, determination or election that is the responsibility of or that is allocated to the Company herein, provided that the Officer has apparent authority with respect to such matter, right, obligation, determination or election. To the extent permitted by applicable law, the Committee may, in its discretion, delegate to a committee comprised of one or more Officers the authority to grant one or more Awards, without further approval of the Committee, to any Employee, other than a person who, at the time of such grant, is an Insider or a Covered Employee, and to exercise such other powers under the Plan as the Committee may determine; provided, however, that (a) the Committee shall fix the maximum number of shares subject to Awards that may be granted by such Officers, (b) each such Award shall be subject to the terms and conditions of the appropriate standard form of Award Agreement approved by the Board or the Committee and shall conform to the provisions of the Plan, and (c) each such Award shall conform to such other limits and guidelines as may be established from time to time by the Committee.

 

3.3 Administration with Respect to Insiders. With respect to participation by Insiders in the Plan, at any time that any class of equity security of the Company is registered pursuant to Section 12 of the Exchange Act, the Plan shall be administered in compliance with the requirements, if any, of Rule 16b-3.

 

3.4 Committee Complying with Section 162(m). If the Company is a “publicly held corporation” within the meaning of Section 162(m), the Board may establish a Committee of “outside directors” within the meaning of Section 162(m) to approve the grant of any Award intended to result in the payment of Performance-Based Compensation.

 

3.5 Powers of the Committee. In addition to any other powers set forth in the Plan and subject to the provisions of the Plan, the Committee shall have the full and final power and authority, in its discretion:

 

(a) to determine the persons to whom, and the time or times at which, Awards shall be granted and the number of shares of Stock, units or monetary value to be subject to each Award;

 

(b) to determine the type of Award granted;

 

(c) to determine whether an Award granted to a Covered Employee shall be intended to result in Performance-Based Compensation;

 

(d) to determine the Fair Market Value of shares of Stock or other property;

 

(e) to determine the terms, conditions and restrictions applicable to each Award (which need not be identical) and any shares acquired pursuant thereto, including, without limitation, (i) the exercise or purchase price of shares pursuant to any Award, (ii) the method of payment for shares purchased pursuant to any Award, (iii) the method for satisfaction of any tax withholding obligation arising in connection with any Award, including by the withholding or delivery of shares of Stock, (iv) the timing, terms and conditions of the exercisability or vesting of any Award or any shares acquired pursuant thereto, (v) the Performance Measures, Performance Period, Performance Award Formula and Performance Goals applicable to any Award and the extent to which such Performance Goals have been attained, (vi) the time of expiration of any Award, (vii) the effect of any Participant’s termination of Service on any of the foregoing, and (viii) all other terms, conditions and restrictions applicable to any Award or shares acquired pursuant thereto not inconsistent with the terms of the Plan;

 

(f) to determine whether an Award will be settled in shares of Stock, cash, other property or in any combination thereof;

 

(g) to approve one or more forms of Award Agreement;

 

(h) to amend, modify, extend, cancel or renew any Award or to waive any restrictions or conditions applicable to any Award or any shares acquired pursuant thereto;

 

(i) to accelerate, continue, extend or defer the exercisability or vesting of any Award or any shares acquired pursuant thereto, including with respect to the period following a Participant’s termination of Service;

 

(j) to prescribe, amend or rescind rules, guidelines and policies relating to the Plan, or to adopt sub-plans or supplements to, or alternative versions of, the Plan, including, without limitation, as the Committee deems necessary or desirable to comply with the laws of, or to accommodate the tax policy, accounting principles or custom of, foreign jurisdictions whose residents may be granted Awards; and

 

(k) to correct any defect, supply any omission or reconcile any inconsistency in the Plan or any Award Agreement and to make all other determinations and take such other actions with respect to the Plan or any Award as the Committee may deem advisable to the extent not inconsistent with the provisions of the Plan or applicable law.

 

3.6 Option or SAR Repricing. The Committee shall have the authority, without additional approval by the stockholders of the Company, to approve a program providing for either (a) the cancellation of outstanding Options or SARs having exercise prices per share greater than the then Fair Market Value of a share of Stock (Underwater Awards) and the grant in substitution therefor of new Options or SARs covering the same or a different number of shares but with an exercise price per share equal to the Fair Market Value per share on the new grant date, Full Value Awards, or payments in cash, or (b) the amendment of outstanding Underwater Awards to reduce the exercise price thereof to the Fair Market Value per share on the date of amendment.

 

3.7 Indemnification. In addition to such other rights of indemnification as they may have as members of the Board or the Committee or as officers or employees of the Participating Company Group, to the extent permitted by applicable law, members of the Board or the Committee and any officers or employees of the Participating Company Group to whom authority to act for the Board, the Committee or the Company is delegated shall be indemnified by the Company against all reasonable expenses, including attorneys’ fees, actually and necessarily incurred in connection with the defense of any action, suit or proceeding, or in connection with any appeal therein, to which they or any of them may be a party by reason of any action taken or failure to act under or in connection with the Plan, or any right granted hereunder, and against all amounts paid by them in settlement thereof (provided such settlement is approved by independent legal counsel selected by the Company) or paid by them in satisfaction of a judgment in any such action, suit or proceeding, except in relation to matters as to which it shall be adjudged in such action, suit or proceeding that such person is liable for gross negligence, bad faith or intentional misconduct in duties; provided, however, that within sixty (60) days after the institution of such action, suit or proceeding, such person shall offer to the Company, in writing, the opportunity at its own expense to handle and defend the same.

 

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4. SHARES SUBJECT TO PLAN.

 

4.1 Maximum Number of Shares Issuable. Subject to adjustment as provided in Sections 4.2, 4.3 and 4.4, the maximum aggregate number of shares of Stock that may be issued under the Plan shall be equal to 3,500,000 shares, and such shares shall consist of authorized but unissued or reacquired shares of Stock or any combination thereof.

 

4.2 Annual Increase in Maximum Number of Shares Issuable. Subject to adjustment as provided in Section 4.4, the maximum aggregate number of shares of Stock that may be issued under the Plan as set forth in Section 4.1 shall be cumulatively increased on January 1, 2018 and on each subsequent January 1 through and including January 1, 2027, by a number of shares (the “Annual Increase”) equal to the smaller of (a) three percent (3%) of the number of shares of Stock issued and outstanding on the immediately preceding December 31, or (b) an amount determined by the Board.

 

4.3 Share Counting. If an outstanding Award for any reason expires or is terminated or canceled without having been exercised or settled in full, or if shares of Stock acquired pursuant to an Award subject to forfeiture or repurchase are forfeited or repurchased by the Company for an amount not greater than the Participant’s purchase price, the shares of Stock allocable to the terminated portion of such Award or such forfeited or repurchased shares of Stock shall again be available for issuance under the Plan. Shares of Stock shall not be deemed to have been issued pursuant to the Plan with respect to any portion of an Award that is settled in cash or to the extent that shares are withheld or reacquired by the Company in satisfaction of tax withholding obligations pursuant to Section 16.2. Upon payment in shares of Stock pursuant to the exercise of an SAR, the number of shares available for issuance under the Plan shall be reduced only by the number of shares actually issued in such payment. If the exercise price of an Option is paid by tender to the Company, or attestation to the ownership, of shares of Stock owned by the Participant, or by means of a Net Exercise, the number of shares available for issuance under the Plan shall be reduced by the net number of shares for which the Option is exercised.

 

4.4 Adjustments for Changes in Capital Structure. Subject to any required action by the stockholders of the Company and the requirements of Sections 409A and 424 of the Code to the extent applicable, in the event of any change in the Stock effected without receipt of consideration by the Company, whether through merger, consolidation, reorganization, reincorporation, recapitalization, reclassification, stock dividend, stock split, reverse stock split, split-up, split-off, spin-off, combination of shares, exchange of shares, or similar change in the capital structure of the Company, or in the event of payment of a dividend or distribution to the stockholders of the Company in a form other than Stock (excepting regular, periodic cash dividends) that has a material effect on the Fair Market Value of shares of Stock, appropriate and proportionate adjustments shall be made in the number and kind of shares subject to the Plan and to any outstanding Awards, the Annual Increase, the Award limits set forth in Section 5.3, and in the exercise or purchase price per share under any outstanding Award in order to prevent dilution or enlargement of Participants’ rights under the Plan. For purposes of the foregoing, conversion of any convertible securities of the Company shall not be treated as “effected without receipt of consideration by the Company.” If a majority of the shares which are of the same class as the shares that are subject to outstanding Awards are exchanged for, converted into, or otherwise become (whether or not pursuant to an Ownership Change Event) shares of another corporation (the New Shares), the Committee may unilaterally amend the outstanding Awards to provide that such Awards are for New Shares. In the event of any such amendment, the number of shares subject to, and the exercise or purchase price per share of, the outstanding Awards shall be adjusted in a fair and equitable manner as determined by the Committee, in its discretion. Any fractional share resulting from an adjustment pursuant to this Section shall be rounded down to the nearest whole number and the exercise or purchase price per share shall be rounded up to the nearest whole cent. In no event may the exercise or purchase price, if any, under any Award be decreased to an amount less than the par value, if any, of the stock subject to such Award. The Committee in its discretion, may also make such adjustments in the terms of any Award to reflect, or related to, such changes in the capital structure of the Company or distributions as it deems appropriate, including modification of Performance Goals, Performance Award Formulas and Performance Periods. The adjustments determined by the Committee pursuant to this Section shall be final, binding and conclusive.

 

4.5 Assumption or Substitution of Awards. The Committee may, without affecting the number of shares of Stock reserved or available hereunder, authorize the issuance or assumption of benefits under this Plan in connection with any merger, consolidation, acquisition of property or stock, or reorganization upon such terms and conditions as it may deem appropriate, subject to compliance with Section 409A and any other applicable provisions of the Code.

 

5. ELIGIBILITY, PARTICIPATION AND AWARD LIMITATIONS.

 

5.1 Persons Eligible for Awards. Awards may be granted only to Employees, Consultants and Directors.

 

5.2 Participation in the Plan. Awards are granted solely at the discretion of the Committee. Eligible persons may be granted more than one Award. However, eligibility in accordance with this Section shall not entitle any person to be granted an Award, or, having been granted an Award, to be granted an additional Award.

 

5.3 Incentive Stock Option Limitations.

 

(a) Maximum Number of Shares Issuable Pursuant to Incentive Stock Options. The maximum aggregate number of shares of Stock that may be issued under the Plan pursuant to all Awards including Incentive Stock Options shall be the number of shares determined in accordance with Section 4.1, subject to adjustment as provided in Sections 4.2, 4.3 and 4.4.

 

(b) Persons Eligible. An Incentive Stock Option may be granted only to a person who, on the effective date of grant, is an Employee of the Company, a Parent Corporation or a Subsidiary Corporation (each being an ISO-Qualifying Corporation). Any person who is not an Employee of an ISO-Qualifying Corporation on the effective date of the grant of an Option to such person may be granted only a Nonstatutory Stock Option.

 

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(c) Fair Market Value Limitation. To the extent that options designated as Incentive Stock Options (granted under all stock plans of the Participating Company Group, including the Plan) become exercisable by a Participant for the first time during any calendar year for stock having a Fair Market Value greater than $100,000, the portion of such options which exceeds such amount shall be treated as Nonstatutory Stock Options. For purposes of this Section, options designated as Incentive Stock Options shall be taken into account in the order in which they were granted, and the Fair Market Value of stock shall be determined as of the time the option with respect to such stock is granted. If the Code is amended to provide for a limitation different from that set forth in this Section, such different limitation shall be deemed incorporated herein effective as of the date and with respect to such Options as required or permitted by such amendment to the Code. If an Option is treated as an Incentive Stock Option in part and as a Nonstatutory Stock Option in part by reason of the limitation set forth in this Section, the Participant may designate which portion of such Option the Participant is exercising. In the absence of such designation, the Participant shall be deemed to have exercised the Incentive Stock Option portion of the Option first. Upon exercise of the Option, shares issued pursuant to each such portion shall be separately identified.

 

5.4 Nonemployee Director Award Limit. Notwithstanding any other provision of the Plan to the contrary, the aggregate grant date fair value (computed as of the date of grant in accordance with generally accepted accounting principles in the United States) of all Awards granted to any Nonemployee Director during any fiscal year of the Company, taken together with any cash compensation paid to such Nonemployee Director during such fiscal year, shall not exceed $300,000.

 

6. STOCK OPTIONS.

 

Options shall be evidenced by Award Agreements specifying the number of shares of Stock covered thereby, in such form as the Committee shall establish. Such Award Agreements may incorporate all or any of the terms of the Plan by reference and shall comply with and be subject to the following terms and conditions:

 

6.1 Exercise Price. The exercise price for each Option shall be established in the discretion of the Committee; provided, however, that (a) the exercise price per share shall be not less than the Fair Market Value of a share of Stock on the effective date of grant of the Option and (b) no Incentive Stock Option granted to a Ten Percent Owner shall have an exercise price per share less than one hundred ten percent (110%) of the Fair Market Value of a share of Stock on the effective date of grant of the Option. Notwithstanding the foregoing, an Option (whether an Incentive Stock Option or a Nonstatutory Stock Option) may be granted with an exercise price less than the minimum exercise price set forth above if such Option is granted pursuant to an assumption or substitution for another option in a manner that would qualify under the provisions of Section 409A or Section 424(a) of the Code.

 

6.2 Exercisability and Term of Options. Options shall be exercisable at such time or times, or upon such event or events, and subject to such terms, conditions, performance criteria and restrictions as shall be determined by the Committee and set forth in the Award Agreement evidencing such Option; provided, however, that (a) no Option shall be exercisable after the expiration of ten (10) years after the effective date of grant of such Option, (b) no Incentive Stock Option granted to a Ten Percent Owner shall be exercisable after the expiration of five (5) years after the effective date of grant of such Option and (c) no Option granted to an Employee who is a non-exempt employee for purposes of the Fair Labor Standards Act of 1938, as amended, shall be first exercisable until at least six (6) months following the date of grant of such Option (except in the event of such Employee’s death, disability or retirement, upon a Change in Control, or as otherwise permitted by the Worker Economic Opportunity Act). Subject to the foregoing, unless otherwise specified by the Committee in the grant of an Option, each Option shall terminate ten (10) years after the effective date of grant of the Option, unless earlier terminated in accordance with its provisions.

 

6.3 Payment of Exercise Price.

 

(a) Forms of Consideration Authorized. Except as otherwise provided below, payment of the exercise price for the number of shares of Stock being purchased pursuant to any Option shall be made (i) in cash, by check or in cash equivalent; (ii) if permitted by the Committee and subject to the limitations contained in Section 6.3(b), by means of (1) a Cashless Exercise, (2) a Stock Tender Exercise or (3) a Net Exercise; (iii) by such other consideration as may be approved by the Committee from time to time to the extent permitted by applicable law, or (iv) by any combination thereof. The Committee may at any time or from time to time grant Options which do not permit all of the foregoing forms of consideration to be used in payment of the exercise price or which otherwise restrict one or more forms of consideration.

 

(b) Limitations on Forms of Consideration.

 

(i) Cashless Exercise. A Cashless Exercise means the delivery of a properly executed notice of exercise together with irrevocable instructions to a broker providing for the assignment to the Company of the proceeds of a sale or loan with respect to some or all of the shares being acquired upon the exercise of the Option (including, without limitation, through an exercise complying with the provisions of Regulation T as promulgated from time to time by the Board of Governors of the Federal Reserve System). The Company reserves, at any and all times, the right, in the Company’s sole and absolute discretion, to establish, decline to approve or terminate any program or procedures for the exercise of Options by means of a Cashless Exercise, including with respect to one or more Participants specified by the Company notwithstanding that such program or procedures may be available to other Participants.

 

(ii) Stock Tender Exercise. A Stock Tender Exercise means the delivery of a properly executed exercise notice accompanied by a Participant’s tender to the Company, or attestation to the ownership, in a form acceptable to the Company of whole shares of Stock owned by the Participant having a Fair Market Value that does not exceed the aggregate exercise price for the shares with respect to which the Option is exercised. A Stock Tender Exercise shall not be permitted if it would constitute a violation of the provisions of any law, regulation or agreement restricting the redemption of the Company’s stock. If required by the Company, an Option may not be exercised by tender to the Company, or attestation to the ownership, of shares of Stock unless such shares either have been owned by the Participant for a period of time required by the Company (and not used for another option exercise by attestation during such period) or were not acquired, directly or indirectly, from the Company.

 

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(iii) Net Exercise. A Net Exercise means the delivery of a properly executed exercise notice followed by a procedure pursuant to which (1) the Company will reduce the number of shares otherwise issuable to a Participant upon the exercise of an Option by the largest whole number of shares having a Fair Market Value that does not exceed the aggregate exercise price for the shares with respect to which the Option is exercised, and (2) the Participant shall pay to the Company in cash the remaining balance of such aggregate exercise price not satisfied by such reduction in the number of whole shares to be issued.

 

6.4 Effect of Termination of Service.

 

(a) Option Exercisability. Subject to earlier termination of the Option as otherwise provided by this Plan and unless otherwise provided by the Committee, an Option shall terminate immediately upon the Participant’s termination of Service to the extent that it is then unvested and shall be exercisable after the Participant’s termination of Service to the extent it is then vested only during the applicable time period determined in accordance with this Section and thereafter shall terminate.

 

(i) Disability. If the Participant’s Service terminates because of the Disability of the Participant, the Option, to the extent unexercised and exercisable for vested shares on the date on which the Participant’s Service terminated, may be exercised by the Participant (or the Participant’s guardian or legal representative) at any time prior to the expiration of twelve (12) months (or such longer or shorter period provided by the Award Agreement) after the date on which the Participant’s Service terminated, but in any event no later than the date of expiration of the Option’s term as set forth in the Award Agreement evidencing such Option (the Option Expiration Date).

 

(ii) Death. If the Participant’s Service terminates because of the death of the Participant, the Option, to the extent unexercised and exercisable for vested shares on the date on which the Participant’s Service terminated, may be exercised by the Participant’s legal representative or other person who acquired the right to exercise the Option by reason of the Participant’s death at any time prior to the expiration of twelve (12) months (or such longer or shorter period provided by the Award Agreement) after the date on which the Participant’s Service terminated, but in any event no later than the Option Expiration Date. The Participant’s Service shall be deemed to have terminated on account of death if the Participant dies within three (3) months (or such longer or shorter period provided by the Award Agreement) after the Participant’s termination of Service.

 

(iii) Termination for Cause. Notwithstanding any other provision of the Plan to the contrary, if the Participant’s Service is terminated for Cause or if, following the Participant’s termination of Service and during any period in which the Option otherwise would remain exercisable, the Participant engages in any act that would constitute Cause, the Option shall terminate in its entirety and cease to be exercisable immediately upon such termination of Service or act.

 

(iv) Other Termination of Service. If the Participant’s Service terminates for any reason, except Disability, death or Cause, the Option, to the extent unexercised and exercisable for vested shares on the date on which the Participant’s Service terminated, may be exercised by the Participant at any time prior to the expiration of three (3) months (or such longer or shorter period provided by the Award Agreement) after the date on which the Participant’s Service terminated, but in any event no later than the Option Expiration Date.

 

(b) Extension if Exercise Prevented by Law. Notwithstanding the foregoing, other than termination of Service for Cause, if the exercise of an Option within the applicable time periods set forth in Section 6.4(a) is prevented by the provisions of Section 14 below, the Option shall remain exercisable until the later of (i) thirty (30) days after the date such exercise first would no longer be prevented by such provisions or (ii) the end of the applicable time period under Section 6.4(a), but in any event no later than the Option Expiration Date.

 

6.5 Transferability of Options. During the lifetime of the Participant, an Option shall be exercisable only by the Participant or the Participant’s guardian or legal representative. An Option shall not be subject in any manner to anticipation, alienation, sale, exchange, transfer, assignment, pledge, encumbrance, or garnishment by creditors of the Participant or the Participant’s beneficiary, except transfer by will or by the laws of descent and distribution. Notwithstanding the foregoing, to the extent permitted by the Committee, in its discretion, and set forth in the Award Agreement evidencing such Option, an Option shall be assignable or transferable subject to the applicable limitations, if any, described in the General Instructions to Form S-8 under the Securities Act or, in the case of an Incentive Stock Option, only as permitted by applicable regulations under Section 421 of the Code in a manner that does not disqualify such Option as an Incentive Stock Option.

 

7. STOCK APPRECIATION RIGHTS.

 

Stock Appreciation Rights shall be evidenced by Award Agreements specifying the number of shares of Stock subject to the Award, in such form as the Committee shall establish. Such Award Agreements may incorporate all or any of the terms of the Plan by reference and shall comply with and be subject to the following terms and conditions:

 

7.1 Types of SARs Authorized. SARs may be granted in tandem with all or any portion of a related Option (a Tandem SAR) or may be granted independently of any Option (a Freestanding SAR). A Tandem SAR may only be granted concurrently with the grant of the related Option.

 

7.2 Exercise Price. The exercise price for each SAR shall be established in the discretion of the Committee; provided, however, that (a) the exercise price per share subject to a Tandem SAR shall be the exercise price per share under the related Option and (b) the exercise price per share subject to a Freestanding SAR shall be not less than the Fair Market Value of a share of Stock on the effective date of grant of the SAR. Notwithstanding the foregoing, an SAR may be granted with an exercise price lower than the minimum exercise price set forth above if such SAR is granted pursuant to an assumption or substitution for another stock appreciation right in a manner that would qualify under the provisions of Section 409A of the Code.

 

7.3 Exercisability and Term of SARs.

 

(a) Tandem SARs. Tandem SARs shall be exercisable only at the time and to the extent, and only to the extent, that the related Option is exercisable, subject to such provisions as the Committee may specify where the Tandem SAR is granted with respect to less than the full number of shares of Stock subject to the related Option. The Committee may, in its discretion, provide in any Award Agreement evidencing a Tandem SAR that such SAR may not be exercised without the advance approval of the Company and, if such approval is not given, then the Option shall nevertheless remain exercisable in accordance with its terms. A Tandem SAR shall terminate and cease to be exercisable no later than the date on which the related Option expires or is terminated or canceled. Upon the exercise of a Tandem SAR with respect to some or all of the shares subject to such SAR, the related Option shall be canceled automatically as to the number of shares with respect to which the Tandem SAR was exercised. Upon the exercise of an Option related to a Tandem SAR as to some or all of the shares subject to such Option, the related Tandem SAR shall be canceled automatically as to the number of shares with respect to which the related Option was exercised.

 

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(b) Freestanding SARs. Freestanding SARs shall be exercisable at such time or times, or upon such event or events, and subject to such terms, conditions, performance criteria and restrictions as shall be determined by the Committee and set forth in the Award Agreement evidencing such SAR; provided, however, that (i) no Freestanding SAR shall be exercisable after the expiration of ten (10) years after the effective date of grant of such SAR and (ii) no Freestanding SAR granted to an Employee who is a non-exempt employee for purposes of the Fair Labor Standards Act of 1938, as amended, shall be first exercisable until at least six (6) months following the date of grant of such SAR (except in the event of such Employee’s death, disability or retirement, upon a Change in Control, or as otherwise permitted by the Worker Economic Opportunity Act). Subject to the foregoing, unless otherwise specified by the Committee in the grant of a Freestanding SAR, each Freestanding SAR shall terminate ten (10) years after the effective date of grant of the SAR, unless earlier terminated in accordance with its provisions.

 

7.4 Exercise of SARs. Upon the exercise (or deemed exercise pursuant to Section 7.5) of an SAR, the Participant (or the Participant’s legal representative or other person who acquired the right to exercise the SAR by reason of the Participant’s death) shall be entitled to receive payment of an amount for each share with respect to which the SAR is exercised equal to the excess, if any, of the Fair Market Value of a share of Stock on the date of exercise of the SAR over the exercise price. Payment of such amount shall be made (a) in the case of a Tandem SAR, solely in shares of Stock in a lump sum upon the date of exercise of the SAR and (b) in the case of a Freestanding SAR, in cash, shares of Stock, or any combination thereof as determined by the Committee, in a lump sum upon the date of exercise of the SAR. When payment is to be made in shares of Stock, the number of shares to be issued shall be determined on the basis of the Fair Market Value of a share of Stock on the date of exercise of the SAR. For purposes of Section 7, an SAR shall be deemed exercised on the date on which the Company receives notice of exercise from the Participant or as otherwise provided in Section 7.5.

 

7.5 Deemed Exercise of SARs. If, on the date on which an SAR would otherwise terminate or expire, the SAR by its terms remains exercisable immediately prior to such termination or expiration and, if so exercised, would result in a payment to the holder of such SAR, then any portion of such SAR which has not previously been exercised shall automatically be deemed to be exercised as of such date with respect to such portion.

 

7.6 Effect of Termination of Service. Subject to earlier termination of the SAR as otherwise provided herein and unless otherwise provided by the Committee, an SAR shall be exercisable after a Participant’s termination of Service only to the extent and during the applicable time period determined in accordance with Section 6.4 (treating the SAR as if it were an Option) and thereafter shall terminate.

 

7.7 Transferability of SARs. During the lifetime of the Participant, an SAR shall be exercisable only by the Participant or the Participant’s guardian or legal representative. An SAR shall not be subject in any manner to anticipation, alienation, sale, exchange, transfer, assignment, pledge, encumbrance, or garnishment by creditors of the Participant or the Participant’s beneficiary, except transfer by will or by the laws of descent and distribution. Notwithstanding the foregoing, to the extent permitted by the Committee, in its discretion, and set forth in the Award Agreement evidencing such Award, a Tandem SAR related to a Nonstatutory Stock Option or a Freestanding SAR shall be assignable or transferable subject to the applicable limitations, if any, described in the General Instructions to Form S-8 under the Securities Act.

 

8. RESTRICTED STOCK AWARDS.

 

Restricted Stock Awards shall be evidenced by Award Agreements specifying whether the Award is a Restricted Stock Bonus or a Restricted Stock Purchase Right and the number of shares of Stock subject to the Award, in such form as the Committee shall establish. Such Award Agreements may incorporate all or any of the terms of the Plan by reference and shall comply with and be subject to the following terms and conditions:

 

8.1 Types of Restricted Stock Awards Authorized. Restricted Stock Awards may be granted in the form of either a Restricted Stock Bonus or a Restricted Stock Purchase Right. Restricted Stock Awards may be granted upon such conditions as the Committee shall determine, including, without limitation, upon the attainment of one or more Performance Goals described in Section 10.4. If either the grant of or satisfaction of Vesting Conditions applicable to a Restricted Stock Award is to be contingent upon the attainment of one or more Performance Goals, the Committee shall follow procedures substantially equivalent to those set forth in Sections 10.3 through 10.5(a).

 

8.2 Purchase Price. The purchase price for shares of Stock issuable under each Restricted Stock Purchase Right shall be established by the Committee in its discretion. No monetary payment (other than applicable tax withholding) shall be required as a condition of receiving shares of Stock pursuant to a Restricted Stock Bonus, the consideration for which shall be services actually rendered to a Participating Company or for its benefit. Notwithstanding the foregoing, if required by applicable state corporate law, the Participant shall furnish consideration in the form of cash or past services rendered to a Participating Company or for its benefit having a value not less than the par value of the shares of Stock subject to a Restricted Stock Award.

 

8.3 Purchase Period. A Restricted Stock Purchase Right shall be exercisable within a period established by the Committee, which shall in no event exceed thirty (30) days from the effective date of the grant of the Restricted Stock Purchase Right.

 

8.4 Payment of Purchase Price. Except as otherwise provided below, payment of the purchase price for the number of shares of Stock being purchased pursuant to any Restricted Stock Purchase Right shall be made (a) in cash, by check or in cash equivalent, (b) by such other consideration as may be approved by the Committee from time to time to the extent permitted by applicable law, or (c) by any combination thereof.

 

8.5 Vesting and Restrictions on Transfer. Shares issued pursuant to any Restricted Stock Award may (but need not) be made subject to Vesting Conditions based upon the satisfaction of such Service requirements, conditions, restrictions or performance criteria, including, without limitation, Performance Goals as described in Section 10.4, as shall be established by the Committee and set forth in the Award Agreement evidencing such Award. During any period in which shares acquired pursuant to a Restricted Stock Award remain subject to Vesting Conditions, such shares may not be sold, exchanged, transferred, pledged, assigned or otherwise disposed of other than pursuant to an Ownership Change Event or as provided in Section 8.8. The Committee, in its discretion, may provide in any Award Agreement evidencing a Restricted Stock Award that, if the satisfaction of Vesting Conditions with respect to any shares subject to such Restricted Stock Award would otherwise occur on a day on which the sale of such shares would violate the provisions of the Trading Compliance Policy, then satisfaction of the Vesting Conditions automatically shall be determined on the next trading day on which the sale of such shares would not violate the Trading Compliance Policy. Upon request by the Company, each Participant shall execute any agreement evidencing such transfer restrictions prior to the receipt of shares of Stock hereunder and shall promptly present to the Company any and all certificates representing shares of Stock acquired hereunder for the placement on such certificates of appropriate legends evidencing any such transfer restrictions.

 

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8.6 Voting Rights; Dividends and Distributions. Except as provided in this Section, Section 8.5 and any Award Agreement, during any period in which shares acquired pursuant to a Restricted Stock Award remain subject to Vesting Conditions, the Participant shall have all of the rights of a stockholder of the Company holding shares of Stock, including the right to vote such shares and to receive all dividends and other distributions paid with respect to such shares; provided, however, that such dividends and distributions shall be subject to the same Vesting Conditions as the shares subject to the Restricted Stock Award with respect to which such dividends or distributions were paid. In the event of a dividend or distribution paid in shares of Stock or other property or any other adjustment made upon a change in the capital structure of the Company as described in Section 4.4, any and all new, substituted or additional securities or other property (other than regular, periodic cash dividends) to which the Participant is entitled by reason of the Participant’s Restricted Stock Award shall be immediately subject to the same Vesting Conditions as the shares subject to the Restricted Stock Award with respect to which such dividends or distributions were paid or adjustments were made.

 

8.7 Effect of Termination of Service. Unless otherwise provided by the Committee in the Award Agreement evidencing a Restricted Stock Award, if a Participant’s Service terminates for any reason, whether voluntary or involuntary (including the Participant’s death or disability), then (a) the Company shall have the option to repurchase for the purchase price paid by the Participant any shares acquired by the Participant pursuant to a Restricted Stock Purchase Right which remain subject to Vesting Conditions as of the date of the Participant’s termination of Service and (b) the Participant shall forfeit to the Company any shares acquired by the Participant pursuant to a Restricted Stock Bonus which remain subject to Vesting Conditions as of the date of the Participant’s termination of Service. The Company shall have the right to assign at any time any repurchase right it may have, whether or not such right is then exercisable, to one or more persons as may be selected by the Company.

 

8.8 Nontransferability of Restricted Stock Award Rights. Rights to acquire shares of Stock pursuant to a Restricted Stock Award shall not be subject in any manner to anticipation, alienation, sale, exchange, transfer, assignment, pledge, encumbrance or garnishment by creditors of the Participant or the Participant’s beneficiary, except transfer by will or the laws of descent and distribution. All rights with respect to a Restricted Stock Award granted to a Participant hereunder shall be exercisable during his or her lifetime only by such Participant or the Participant’s guardian or legal representative.

 

9. RESTRICTED STOCK UNITS.

 

Restricted Stock Unit Awards shall be evidenced by Award Agreements specifying the number of Restricted Stock Units subject to the Award, in such form as the Committee shall establish. Such Award Agreements may incorporate all or any of the terms of the Plan by reference and shall comply with and be subject to the following terms and conditions:

 

9.1 Grant of Restricted Stock Unit Awards. Restricted Stock Unit Awards may be granted upon such conditions as the Committee shall determine, including, without limitation, upon the attainment of one or more Performance Goals described in Section 10.4. If either the grant of a Restricted Stock Unit Award or the Vesting Conditions with respect to such Award is to be contingent upon the attainment of one or more Performance Goals, the Committee shall follow procedures substantially equivalent to those set forth in Sections 10.3 through 10.5(a).

 

9.2 Purchase Price. No monetary payment (other than applicable tax withholding, if any) shall be required as a condition of receiving a Restricted Stock Unit Award, the consideration for which shall be services actually rendered to a Participating Company or for its benefit. Notwithstanding the foregoing, if required by applicable state corporate law, the Participant shall furnish consideration in the form of cash or past services rendered to a Participating Company or for its benefit having a value not less than the par value of the shares of Stock issued upon settlement of the Restricted Stock Unit Award.

 

9.3 Vesting. Restricted Stock Unit Awards may (but need not) be made subject to Vesting Conditions based upon the satisfaction of such Service requirements, conditions, restrictions or performance criteria, including, without limitation, Performance Goals as described in Section 10.4, as shall be established by the Committee and set forth in the Award Agreement evidencing such Award.

 

9.4 Voting Rights, Dividend Equivalent Rights and Distributions. Participants shall have no voting rights with respect to shares of Stock represented by Restricted Stock Units until the date of the issuance of such shares (as evidenced by the appropriate entry on the books of the Company or of a duly authorized transfer agent of the Company). However, the Committee, in its discretion, may provide in the Award Agreement evidencing any Restricted Stock Unit Award that the Participant shall be entitled to Dividend Equivalent Rights with respect to the payment of cash dividends on Stock during the period beginning on the date such Award is granted and ending, with respect to each share subject to the Award, on the earlier of the date the Award is settled or the date on which it is terminated. Dividend Equivalent Rights, if any, shall be paid by crediting the Participant with a cash amount or with additional whole Restricted Stock Units as of the date of payment of such cash dividends on Stock, as determined by the Committee. The number of additional Restricted Stock Units (rounded to the nearest whole number), if any, to be credited shall be determined by dividing (a) the amount of cash dividends paid on the dividend payment date with respect to the number of shares of Stock represented by the Restricted Stock Units previously credited to the Participant by (b) the Fair Market Value per share of Stock on such date. Such cash amount or additional Restricted Stock Units shall be subject to the same terms and conditions and shall be settled in the same manner and at the same time as the Restricted Stock Units originally subject to the Restricted Stock Unit Award. In the event of a dividend or distribution paid in shares of Stock or other property or any other adjustment made upon a change in the capital structure of the Company as described in Section 4.4, appropriate adjustments shall be made in the Participant’s Restricted Stock Unit Award so that it represents the right to receive upon settlement any and all new, substituted or additional securities or other property (other than regular, periodic cash dividends) to which the Participant would be entitled by reason of the shares of Stock issuable upon settlement of the Award, and all such new, substituted or additional securities or other property shall be immediately subject to the same Vesting Conditions as are applicable to the Award.

 

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9.5 Effect of Termination of Service. Unless otherwise provided by the Committee and set forth in the Award Agreement evidencing a Restricted Stock Unit Award, if a Participant’s Service terminates for any reason, whether voluntary or involuntary (including the Participant’s death or disability), then the Participant shall forfeit to the Company any Restricted Stock Units pursuant to the Award which remain subject to Vesting Conditions as of the date of the Participant’s termination of Service.

 

9.6 Settlement of Restricted Stock Unit Awards. The Company shall issue to a Participant on the date on which Restricted Stock Units subject to the Participant’s Restricted Stock Unit Award vest or on such other date determined by the Committee in compliance with Section 409A, if applicable, and set forth in the Award Agreement one (1) share of Stock (and/or any other new, substituted or additional securities or other property pursuant to an adjustment described in Section 9.4) for each Restricted Stock Unit then becoming vested or otherwise to be settled on such date, subject to the withholding of applicable taxes, if any. The Committee, in its discretion, may provide in any Award Agreement evidencing a Restricted Stock Unit Award that if the settlement date with respect to any shares issuable upon vesting of Restricted Stock Units would otherwise occur on a day on which the sale of such shares would violate the provisions of the Trading Compliance Policy, then the settlement date shall be deferred until the next trading day on which the sale of such shares would not violate the Trading Compliance Policy but in any event no later than the 15th day of the third calendar month following the year in which such Restricted Stock Units vest. If permitted by the Committee, the Participant may elect, consistent with the requirements of Section 409A, to defer receipt of all or any portion of the shares of Stock or other property otherwise issuable to the Participant pursuant to this Section, and such deferred issuance date(s) and amount(s) elected by the Participant shall be set forth in the Award Agreement. Notwithstanding the foregoing, the Committee, in its discretion, may provide for settlement of any Restricted Stock Unit Award by payment to the Participant in cash of an amount equal to the Fair Market Value on the payment date of the shares of Stock or other property otherwise issuable to the Participant pursuant to this Section.

 

9.7 Nontransferability of Restricted Stock Unit Awards. The right to receive shares pursuant to a Restricted Stock Unit Award shall not be subject in any manner to anticipation, alienation, sale, exchange, transfer, assignment, pledge, encumbrance, or garnishment by creditors of the Participant or the Participant’s beneficiary, except transfer by will or by the laws of descent and distribution. All rights with respect to a Restricted Stock Unit Award granted to a Participant hereunder shall be exercisable during his or her lifetime only by such Participant or the Participant’s guardian or legal representative.

 

10. PERFORMANCE AWARDS.

 

Performance Awards shall be evidenced by Award Agreements in such form as the Committee shall establish. Such Award Agreements may incorporate all or any of the terms of the Plan by reference and shall comply with and be subject to the following terms and conditions:

 

10.1 Types of Performance Awards Authorized. Performance Awards may be granted in the form of either Performance Shares or Performance Units. Each Award Agreement evidencing a Performance Award shall specify the number of Performance Shares or Performance Units subject thereto, the Performance Award Formula, the Performance Goal(s) and Performance Period applicable to the Award, and the other terms, conditions and restrictions of the Award.

 

10.2 Initial Value of Performance Shares and Performance Units. Unless otherwise provided by the Committee in granting a Performance Award, each Performance Share shall have an initial monetary value equal to the Fair Market Value of one (1) share of Stock, subject to adjustment as provided in Section 4.4, on the effective date of grant of the Performance Share, and each Performance Unit shall have an initial monetary value established by the Committee at the time of grant. The final value payable to the Participant in settlement of a Performance Award determined on the basis of the applicable Performance Award Formula will depend on the extent to which Performance Goals established by the Committee are attained within the applicable Performance Period established by the Committee.

 

10.3 Establishment of Performance Period, Performance Goals and Performance Award Formula. In granting each Performance Award, the Committee shall establish in writing the applicable Performance Period, Performance Award Formula and one or more Performance Goals which, when measured at the end of the Performance Period, shall determine on the basis of the Performance Award Formula the final value of the Performance Award to be paid to the Participant. Unless otherwise permitted in compliance with the requirements under Section 162(m) with respect to each Performance Award intended to result in the payment of Performance-Based Compensation, the Committee shall establish the Performance Goal(s) and Performance Award Formula applicable to each Performance Award no later than the earlier of (a) the date ninety (90) days after the commencement of the applicable Performance Period or (b) the date on which 25% of the Performance Period has elapsed, and, in any event, at a time when the outcome of the Performance Goals remains substantially uncertain. Once established, the Performance Goals and Performance Award Formula applicable to a Performance Award intended to result in the payment of Performance-Based Compensation to a Covered Employee shall not be changed during the Performance Period. The Company shall notify each Participant granted a Performance Award of the terms of such Award, including the Performance Period, Performance Goal(s) and Performance Award Formula.

 

10.4 Measurement of Performance Goals. Performance Goals shall be established by the Committee on the basis of targets to be attained (Performance Targets) with respect to one or more measures of business or financial performance (each, a Performance Measure), subject to the following:

 

(a) Performance Measures. Performance Measures shall be calculated in accordance with the Company’s financial statements, or, if such measures are not reported in the Company’s financial statements, they shall be calculated in accordance with generally accepted accounting principles, a method used generally in the Company’s industry, or in accordance with a methodology established by the Committee prior to the grant of the Performance Award. As specified by the Committee, Performance Measures may be calculated with respect to the Company and each Subsidiary Corporation consolidated therewith for financial reporting purposes, one or more Subsidiary Corporations or such division or other business unit of any of them selected by the Committee. Unless otherwise determined by the Committee prior to the grant of the Performance Award, the Performance Measures applicable to the Performance Award shall be calculated prior to the accrual of expense for any Performance Award for the same Performance Period and excluding the effect (whether positive or negative) on the Performance Measures of any change in accounting standards or any unusual or infrequently occurring event or transaction, as determined by the Committee, occurring after the establishment of the Performance Goals applicable to the Performance Award. Each such adjustment, if any, shall be made solely for the purpose of providing a consistent basis from period to period for the calculation of Performance Measures in order to prevent the dilution or enlargement of the Participant’s rights with respect to a Performance Award. Performance Measures may be based upon one or more of the following, as determined by the Committee:

 

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(i) revenue;

 

(ii) sales;

 

(iii) expenses;

 

(iv) operating income;

 

(v) gross margin;

 

(vi) operating margin;

 

(vii) earnings before any one or more of: stock-based compensation expense, interest, taxes, depreciation and amortization;

 

(viii) pre-tax profit;

 

(ix) net operating income;

 

(x) net income;

 

(xi) economic value added;

 

(xii) free cash flow;

 

(xiii) operating cash flow;

 

(xiv) balance of cash, cash equivalents and marketable securities;

 

(xv) stock price;

 

(xvi) earnings per share;

 

(xvii) return on stockholder equity;

 

(xviii) return on capital;

 

(xix) return on assets;

 

(xx) return on investment;

 

(xxi) total stockholder return;

 

(xxii) employee satisfaction;

 

(xxiii) employee retention;

 

(xxiv) market share;

 

(xxv) customer satisfaction;

 

(xxvi) product development;

 

(xxvii) research and development expenses;

 

(xxviii) completion of an identified special project; and

 

(xxix) completion of a joint venture or other corporate transaction.

 

(b) Performance Targets. Performance Targets may include a minimum, maximum, target level and intermediate levels of performance, with the final value of a Performance Award determined under the applicable Performance Award Formula by the Performance Target level attained during the applicable Performance Period. A Performance Target may be stated as an absolute value, an increase or decrease in a value, or as a value determined relative to an index, budget or other standard selected by the Committee.

 

10.5 Settlement of Performance Awards.

 

(a) Determination of Final Value. As soon as practicable following the completion of the Performance Period applicable to a Performance Award, the Committee shall certify in writing the extent to which the applicable Performance Goals have been attained and the resulting final value of the Award earned by the Participant and to be paid upon its settlement in accordance with the applicable Performance Award Formula.

 

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(b) Discretionary Adjustment of Award Formula. In its discretion, the Committee may, either at the time it grants a Performance Award or at any time thereafter, provide for the positive or negative adjustment of the Performance Award Formula applicable to a Performance Award granted to any Participant who is not a Covered Employee to reflect such Participant’s individual performance in his or her position with the Company or such other factors as the Committee may determine. If permitted under a Covered Employee’s Award Agreement, the Committee shall have the discretion, on the basis of such criteria as may be established by the Committee, to reduce some or all of the value of the Performance Award that would otherwise be paid to the Covered Employee upon its settlement notwithstanding the attainment of any Performance Goal and the resulting value of the Performance Award determined in accordance with the Performance Award Formula. No such reduction may result in an increase in the amount payable upon settlement of another Participant’s Performance Award that is intended to result in Performance-Based Compensation.

 

(c) Effect of Leaves of Absence. Unless otherwise required by law or a Participant’s Award Agreement, payment of the final value, if any, of a Performance Award held by a Participant who has taken in excess of thirty (30) days in unpaid leaves of absence during a Performance Period shall be prorated on the basis of the number of days of the Participant’s Service during the Performance Period during which the Participant was not on an unpaid leave of absence.

 

(d) Notice to Participants. As soon as practicable following the Committee’s determination and certification in accordance with Sections 10.5(a) and (b), the Company shall notify each Participant of the determination of the Committee.

 

(e) Payment in Settlement of Performance Awards. As soon as practicable following the Committee’s determination and certification in accordance with Sections 10.5(a) and (b), but in any event within the Short-Term Deferral Period described in Section 15.1 (except as otherwise provided below or consistent with the requirements of Section 409A), payment shall be made to each eligible Participant (or such Participant’s legal representative or other person who acquired the right to receive such payment by reason of the Participant’s death) of the final value of the Participant’s Performance Award. Payment of such amount shall be made in cash, shares of Stock, or a combination thereof as determined by the Committee. Unless otherwise provided in the Award Agreement evidencing a Performance Award, payment shall be made in a lump sum. If permitted by the Committee, the Participant may elect, consistent with the requirements of Section 409A, to defer receipt of all or any portion of the payment to be made to the Participant pursuant to this Section, and such deferred payment date(s) elected by the Participant shall be set forth in the Award Agreement. If any payment is to be made on a deferred basis, the Committee may, but shall not be obligated to, provide for the payment during the deferral period of Dividend Equivalent Rights or interest.

 

(f) Provisions Applicable to Payment in Shares. If payment is to be made in shares of Stock, the number of such shares shall be determined by dividing the final value of the Performance Award by the Fair Market Value of a share of Stock determined by the method specified in the Award Agreement. Shares of Stock issued in payment of any Performance Award may be fully vested and freely transferable shares or may be shares of Stock subject to Vesting Conditions as provided in Section 8.5. Any shares subject to Vesting Conditions shall be evidenced by an appropriate Award Agreement and shall be subject to the provisions of Sections 8.5 through 8.8 above.

 

10.6 Voting Rights; Dividend Equivalent Rights and Distributions. Participants shall have no voting rights with respect to shares of Stock represented by Performance Share Awards until the date of the issuance of such shares, if any (as evidenced by the appropriate entry on the books of the Company or of a duly authorized transfer agent of the Company). However, the Committee, in its discretion, may provide in the Award Agreement evidencing any Performance Share Award that the Participant shall be entitled to Dividend Equivalent Rights with respect to the payment of cash dividends on Stock during the period beginning on the date the Award is granted and ending, with respect to each share subject to the Award, on the earlier of the date on which the Performance Shares are settled or the date on which they are forfeited. Such Dividend Equivalent Rights, if any, shall be credited to the Participant either in cash or in the form of additional whole Performance Shares as of the date of payment of such cash dividends on Stock, as determined by the Committee. The number of additional Performance Shares (rounded to the nearest whole number), if any, to be so credited shall be determined by dividing (a) the amount of cash dividends paid on the dividend payment date with respect to the number of shares of Stock represented by the Performance Shares previously credited to the Participant by (b) the Fair Market Value per share of Stock on such date. Dividend Equivalent Rights, if any, shall be accumulated and paid to the extent that the related Performance Shares become nonforfeitable. Settlement of Dividend Equivalent Rights may be made in cash, shares of Stock, or a combination thereof as determined by the Committee, and may be paid on the same basis as settlement of the related Performance Share as provided in Section 10.5. Dividend Equivalent Rights shall not be paid with respect to Performance Units. In the event of a dividend or distribution paid in shares of Stock or other property or any other adjustment made upon a change in the capital structure of the Company as described in Section 4.4, appropriate adjustments shall be made in the Participant’s Performance Share Award so that it represents the right to receive upon settlement any and all new, substituted or additional securities or other property (other than regular, periodic cash dividends) to which the Participant would be entitled by reason of the shares of Stock issuable upon settlement of the Performance Share Award, and all such new, substituted or additional securities or other property shall be immediately subject to the same Performance Goals as are applicable to the Award.

 

10.7 Effect of Termination of Service. Unless otherwise provided by the Committee and set forth in the Award Agreement evidencing a Performance Award, the effect of a Participant’s termination of Service on the Performance Award shall be as follows:

 

(a) Death or Disability. If the Participant’s Service terminates because of the death or Disability of the Participant before the completion of the Performance Period applicable to the Performance Award, the final value of the Participant’s Performance Award shall be determined by the extent to which the applicable Performance Goals have been attained with respect to the entire Performance Period and shall be prorated based on the number of months of the Participant’s Service during the Performance Period. Payment shall be made following the end of the Performance Period in any manner permitted by Section 10.5.

 

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(b) Other Termination of Service. If the Participant’s Service terminates for any reason except death or Disability before the completion of the Performance Period applicable to the Performance Award, such Award shall be forfeited in its entirety; provided, however, that in the event of an involuntary termination of the Participant’s Service, the Committee, in its discretion, may waive the automatic forfeiture of all or any portion of any such Award and determine the final value of the Performance Award in the manner provided by Section 10.7(a). Payment of any amount pursuant to this Section shall be made following the end of the Performance Period in any manner permitted by Section 10.5.

 

10.8 Nontransferability of Performance Awards. Prior to settlement in accordance with the provisions of the Plan, no Performance Award shall be subject in any manner to anticipation, alienation, sale, exchange, transfer, assignment, pledge, encumbrance, or garnishment by creditors of the Participant or the Participant’s beneficiary, except transfer by will or by the laws of descent and distribution. All rights with respect to a Performance Award granted to a Participant hereunder shall be exercisable during his or her lifetime only by such Participant or the Participant’s guardian or legal representative.

 

11. CASH-BASED AWARDS AND OTHER STOCK-BASED AWARDS.

 

Cash-Based Awards and Other Stock-Based Awards shall be evidenced by Award Agreements in such form as the Committee shall establish. Such Award Agreements may incorporate all or any of the terms of the Plan by reference and shall comply with and be subject to the following terms and conditions:

 

11.1 Grant of Cash-Based Awards. Subject to the provisions of the Plan, the Committee, at any time and from time to time, may grant Cash-Based Awards to Participants in such amounts and upon such terms and conditions, including the achievement of performance criteria, as the Committee may determine.

 

11.2 Grant of Other Stock-Based Awards. The Committee may grant other types of equity-based or equity-related Awards not otherwise described by the terms of this Plan (including the grant or offer for sale of unrestricted securities, stock-equivalent units, stock appreciation units, securities or debentures convertible into common stock or other forms determined by the Committee) in such amounts and subject to such terms and conditions as the Committee shall determine. Other Stock-Based Awards may be made available as a form of payment in the settlement of other Awards or as payment in lieu of compensation to which a Participant is otherwise entitled. Other Stock-Based Awards may involve the transfer of actual shares of Stock to Participants, or payment in cash or otherwise of amounts based on the value of Stock and may include, without limitation, Awards designed to comply with or take advantage of the applicable local laws of jurisdictions other than the United States.

 

11.3 Value of Cash-Based and Other Stock-Based Awards. Each Cash-Based Award shall specify a monetary payment amount or payment range as determined by the Committee. Each Other Stock-Based Award shall be expressed in terms of shares of Stock or units based on such shares of Stock, as determined by the Committee. The Committee may require the satisfaction of such Service requirements, conditions, restrictions or performance criteria, including, without limitation, Performance Goals as described in Section 10.4, as shall be established by the Committee and set forth in the Award Agreement evidencing such Award. If the Committee exercises its discretion to establish performance criteria, the final value of Cash-Based Awards or Other Stock-Based Awards that will be paid to the Participant will depend on the extent to which the performance criteria are met. The establishment of performance criteria with respect to the grant or vesting of any Cash-Based Award or Other Stock-Based Award intended to result in Performance-Based Compensation shall follow procedures substantially equivalent to those applicable to Performance Awards set forth in Section 10.

 

11.4 Payment or Settlement of Cash-Based Awards and Other Stock-Based Awards. Payment or settlement, if any, with respect to a Cash-Based Award or an Other Stock-Based Award shall be made in accordance with the terms of the Award, in cash, shares of Stock or other securities or any combination thereof as the Committee determines. The determination and certification of the final value with respect to any Cash-Based Award or Other Stock-Based Award intended to result in Performance-Based Compensation shall comply with the requirements applicable to Performance Awards set forth in Section 10. To the extent applicable, payment or settlement with respect to each Cash-Based Award and Other Stock-Based Award shall be made in compliance with the requirements of Section 409A.

 

11.5 Voting Rights; Dividend Equivalent Rights and Distributions. Participants shall have no voting rights with respect to shares of Stock represented by Other Stock-Based Awards until the date of the issuance of such shares of Stock (as evidenced by the appropriate entry on the books of the Company or of a duly authorized transfer agent of the Company), if any, in settlement of such Award. However, the Committee, in its discretion, may provide in the Award Agreement evidencing any Other Stock-Based Award that the Participant shall be entitled to Dividend Equivalent Rights with respect to the payment of cash dividends on Stock during the period beginning on the date such Award is granted and ending, with respect to each share subject to the Award, on the earlier of the date the Award is settled or the date on which it is terminated. Such Dividend Equivalent Rights, if any, shall be paid in accordance with the provisions set forth in Section 9.4. Dividend Equivalent Rights shall not be granted with respect to Cash-Based Awards. In the event of a dividend or distribution paid in shares of Stock or other property or any other adjustment made upon a change in the capital structure of the Company as described in Section 4.4, appropriate adjustments shall be made in the Participant’s Other Stock-Based Award so that it represents the right to receive upon settlement any and all new, substituted or additional securities or other property (other than regular, periodic cash dividends) to which the Participant would be entitled by reason of the shares of Stock issuable upon settlement of such Award, and all such new, substituted or additional securities or other property shall be immediately subject to the same Vesting Conditions and performance criteria, if any, as are applicable to the Award.

 

11.6 Effect of Termination of Service. Each Award Agreement evidencing a Cash-Based Award or Other Stock-Based Award shall set forth the extent to which the Participant shall have the right to retain such Award following termination of the Participant’s Service. Such provisions shall be determined in the discretion of the Committee, need not be uniform among all Cash-Based Awards or Other Stock-Based Awards, and may reflect distinctions based on the reasons for termination, subject to the requirements of Section 409A, if applicable.

 

11.7 Nontransferability of Cash-Based Awards and Other Stock-Based Awards. Prior to the payment or settlement of a Cash-Based Award or Other Stock-Based Award, the Award shall not be subject in any manner to anticipation, alienation, sale, exchange, transfer, assignment, pledge, encumbrance, or garnishment by creditors of the Participant or the Participant’s beneficiary, except transfer by will or by the laws of descent and distribution. The Committee may impose such additional restrictions on any shares of Stock issued in settlement of Cash-Based Awards and Other Stock-Based Awards as it may deem advisable, including, without limitation, minimum holding period requirements, restrictions under applicable federal securities laws, under the requirements of any stock exchange or market upon which such shares of Stock are then listed and/or traded, or under any state securities laws or foreign law applicable to such shares of Stock.

 

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12. STANDARD FORMS OF AWARD AGREEMENT.

 

12.1 Award Agreements. Each Award shall comply with and be subject to the terms and conditions set forth in the appropriate form of Award Agreement approved by the Committee and as amended from time to time. No Award or purported Award shall be a valid and binding obligation of the Company unless evidenced by a fully executed Award Agreement, which execution may be evidenced by electronic means.

 

12.2 Authority to Vary Terms. The Committee shall have the authority from time to time to vary the terms of any standard form of Award Agreement either in connection with the grant or amendment of an individual Award or in connection with the authorization of a new standard form or forms; provided, however, that the terms and conditions of any such new, revised or amended standard form or forms of Award Agreement are not inconsistent with the terms of the Plan.

 

13. CHANGE IN CONTROL.

 

13.1 Effect of Change in Control on Awards. In the event of a Change in Control, outstanding Awards shall be subject to the definitive agreement entered into by the Company in connection with the Change in Control. Subject to the requirements and limitations of Section 409A, if applicable, the Committee may provide for any one or more of the following:

 

(a) Accelerated Vesting. In its discretion, the Committee may provide in the grant of any Award or at any other time may take such action as it deems appropriate to provide for acceleration of the exercisability, vesting and/or settlement in connection with a Change in Control of each or any outstanding Award or portion thereof and shares acquired pursuant thereto upon such conditions, including termination of the Participant’s Service prior to, upon, or following the Change in Control, and to such extent as the Committee determines.

 

(b) Assumption, Continuation or Substitution. In the event of a Change in Control, the surviving, continuing, successor, or purchasing corporation or other business entity or parent thereof, as the case may be (the Acquiror), may, without the consent of any Participant, assume or continue the Company’s rights and obligations under each or any Award or portion thereof outstanding immediately prior to the Change in Control or substitute for each or any such outstanding Award or portion thereof a substantially equivalent award with respect to the Acquiror’s stock, as applicable. For purposes of this Section, if so determined by the Committee in its discretion, an Award denominated in shares of Stock shall be deemed assumed if, following the Change in Control, the Award confers the right to receive, subject to the terms and conditions of the Plan and the applicable Award Agreement, for each share of Stock subject to the Award immediately prior to the Change in Control, the consideration (whether stock, cash, other securities or property or a combination thereof) to which a holder of a share of Stock on the effective date of the Change in Control was entitled (and if holders were offered a choice of consideration, the type of consideration chosen by the holders of a majority of the outstanding shares of Stock); provided, however, that if such consideration is not solely common stock of the Acquiror, the Committee may, with the consent of the Acquiror, provide for the consideration to be received upon the exercise or settlement of the Award, for each share of Stock subject to the Award, to consist solely of common stock of the Acquiror equal in Fair Market Value to the per share consideration received by holders of Stock pursuant to the Change in Control. Any Award or portion thereof which is neither assumed or continued by the Acquiror in connection with the Change in Control nor exercised or settled as of the time of consummation of the Change in Control shall terminate and cease to be outstanding effective as of the time of consummation of the Change in Control.

 

(c) Cash-Out of Outstanding Stock-Based Awards. The Committee may, in its discretion and without the consent of any Participant, determine that, upon the occurrence of a Change in Control, each or any Award denominated in shares of Stock or portion thereof outstanding immediately prior to the Change in Control and not previously exercised or settled shall be canceled in exchange for a payment with respect to each vested share (and each unvested share, if so determined by the Committee) of Stock subject to such canceled Award in (i) cash, (ii) stock of the Company or of a corporation or other business entity a party to the Change in Control, or (iii) other property which, in any such case, shall be in an amount having a Fair Market Value equal to the Fair Market Value of the consideration to be paid per share of Stock in the Change in Control, reduced (but not below zero) by the exercise or purchase price per share, if any, under such Award. In the event such determination is made by the Committee, an Award having an exercise or purchase price per share equal to or greater than the Fair Market Value of the consideration to be paid per share of Stock in the Change in Control may be canceled without payment of consideration to the holder thereof. Payment pursuant to this Section (reduced by applicable withholding taxes, if any) shall be made to Participants in respect of the vested portions of their canceled Awards as soon as practicable following the date of the Change in Control and in respect of the unvested portions of their canceled Awards in accordance with the vesting schedules applicable to such Awards.

 

13.2 Effect of Change in Control on Nonemployee Director Awards. Subject to the requirements and limitations of Section 409A, if applicable, including as provided by Section 15.4(f), in the event of a Change in Control, each outstanding Nonemployee Director Award shall become immediately exercisable and vested in full and, except to the extent assumed, continued or substituted for pursuant to Section 13.1(b), shall be settled effective immediately prior to the time of consummation of the Change in Control.

 

13.3 Federal Excise Tax Under Section 4999 of the Code.

 

(a) Excess Parachute Payment. If any acceleration of vesting pursuant to an Award and any other payment or benefit received or to be received by a Participant would subject the Participant to any excise tax pursuant to Section 4999 of the Code due to the characterization of such acceleration of vesting, payment or benefit as an “excess parachute payment” under Section 280G of the Code, then, provided such election would not subject the Participant to taxation under Section 409A, the Participant may elect to reduce the amount of any acceleration of vesting called for under the Award in order to avoid such characterization.

 

(b) Determination by Tax Firm. To aid the Participant in making any election called for under Section 13.3(a), no later than the date of the occurrence of any event that might reasonably be anticipated to result in an “excess parachute payment” to the Participant as described in Section 13.3(a), the Company shall request a determination in writing by the professional firm engaged by the Company for general tax purposes, or, if the tax firm so engaged by the Company is serving as accountant or auditor for the Acquiror, the Company will appoint a nationally recognized tax firm to make the determinations required by this Section (the “Tax Firm”). As soon as practicable thereafter, the Tax Firm shall determine and report to the Company and the Participant the amount of such acceleration of vesting, payments and benefits which would produce the greatest after-tax benefit to the Participant. For the purposes of such determination, the Tax Firm may rely on reasonable, good faith interpretations concerning the application of Sections 280G and 4999 of the Code. The Company and the Participant shall furnish to the Tax Firm such information and documents as the Tax Firm may reasonably request in order to make its required determination. The Company shall bear all fees and expenses the Tax Firm charges in connection with its services contemplated by this Section.

 

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14. COMPLIANCE WITH SECURITIES LAW.

 

The grant of Awards and the issuance of shares of Stock pursuant to any Award shall be subject to compliance with all applicable requirements of federal, state and foreign law with respect to such securities and the requirements of any stock exchange or market system upon which the Stock may then be listed. In addition, no Award may be exercised or shares issued pursuant to an Award unless (a) a registration statement under the Securities Act shall at the time of such exercise or issuance be in effect with respect to the shares issuable pursuant to the Award, or (b) in the opinion of legal counsel to the Company, the shares issuable pursuant to the Award may be issued in accordance with the terms of an applicable exemption from the registration requirements of the Securities Act. The inability of the Company to obtain from any regulatory body having jurisdiction the authority, if any, deemed by the Company’s legal counsel to be necessary to the lawful issuance and sale of any shares under the Plan shall relieve the Company of any liability in respect of the failure to issue or sell such shares as to which such requisite authority shall not have been obtained. As a condition to issuance of any Stock, the Company may require the Participant to satisfy any qualifications that may be necessary or appropriate, to evidence compliance with any applicable law or regulation and to make any representation or warranty with respect thereto as may be requested by the Company.

 

15. COMPLIANCE WITH SECTION 409A.

 

15.1 Awards Subject to Section 409A. The Company intends that Awards granted pursuant to the Plan shall either be exempt from or comply with Section 409A, and the Plan shall be so construed. The provisions of this Section 15 shall apply to any Award or portion thereof that constitutes or provides for payment of Section 409A Deferred Compensation. Such Awards may include, without limitation:

 

(a) A Nonstatutory Stock Option or SAR that includes any feature for the deferral of compensation other than the deferral of recognition of income until the later of (i) the exercise or disposition of the Award or (ii) the time the stock acquired pursuant to the exercise of the Award first becomes substantially vested.

 

(b) Any Restricted Stock Unit Award, Performance Award, Cash-Based Award or Other Stock-Based Award that either (i) provides by its terms for settlement of all or any portion of the Award at a time or upon an event that will or may occur later than the end of the Short-Term Deferral Period (as defined below) or (ii) permits the Participant granted the Award to elect one or more dates or events upon which the Award will be settled after the end of the Short-Term Deferral Period.

 

Subject to the provisions of Section 409A, the term “Short-Term Deferral Period means the 2 12 month period ending on the later of (i) the 15th day of the third month following the end of the Participant’s taxable year in which the right to payment under the applicable portion of the Award is no longer subject to a substantial risk of forfeiture or (ii) the 15th day of the third month following the end of the Company’s taxable year in which the right to payment under the applicable portion of the Award is no longer subject to a substantial risk of forfeiture. For this purpose, the term “substantial risk of forfeiture” shall have the meaning provided by Section 409A.

 

15.2 Deferral and/or Distribution Elections. Except as otherwise permitted or required by Section 409A, the following rules shall apply to any compensation deferral and/or payment elections (each, an “Election”) that may be permitted or required by the Committee pursuant to an Award providing Section 409A Deferred Compensation:

 

(a) Elections must be in writing and specify the amount of the payment in settlement of an Award being deferred, as well as the time and form of payment as permitted by this Plan.

 

(b) Elections shall be made by the end of the Participant’s taxable year prior to the year in which services commence for which an Award may be granted to the Participant.

 

(c) Elections shall continue in effect until a written revocation or change in Election is received by the Company, except that a written revocation or change in Election must be received by the Company prior to the last day for making the Election determined in accordance with paragraph (b) above or as permitted by Section 15.3.

 

15.3 Subsequent Elections. Except as otherwise permitted or required by Section 409A, any Award providing Section 409A Deferred Compensation which permits a subsequent Election to delay the payment or change the form of payment in settlement of such Award shall comply with the following requirements:

 

(a) No subsequent Election may take effect until at least twelve (12) months after the date on which the subsequent Election is made.

 

(b) Each subsequent Election related to a payment in settlement of an Award not described in Section 15.4(a)(ii), 15.4(a)(iii) or 15.4(a)(vi) must result in a delay of the payment for a period of not less than five (5) years from the date on which such payment would otherwise have been made.

 

(c) No subsequent Election related to a payment pursuant to Section 15.4(a)(iv) shall be made less than twelve (12) months before the date on which such payment would otherwise have been made.

 

(d) Subsequent Elections shall continue in effect until a written revocation or change in the subsequent Election is received by the Company, except that a written revocation or change in a subsequent Election must be received by the Company prior to the last day for making the subsequent Election determined in accordance the preceding paragraphs of this Section 15.3.

 

  - 18 -  
     

 

15.4 Payment of Section 409A Deferred Compensation.

 

(a) Permissible Payments. Except as otherwise permitted or required by Section 409A, an Award providing Section 409A Deferred Compensation must provide for payment in settlement of the Award only upon one or more of the following:

 

(i) The Participant’s “separation from service” (as defined by Section 409A);

 

(ii) The Participant’s becoming “disabled” (as defined by Section 409A);

 

(iii) The Participant’s death;

 

(iv) A time or fixed schedule that is either (i) specified by the Committee upon the grant of an Award and set forth in the Award Agreement evidencing such Award or (ii) specified by the Participant in an Election complying with the requirements of Section 15.2 or 15.3, as applicable;

 

(v) A change in the ownership or effective control or the Company or in the ownership of a substantial portion of the assets of the Company determined in accordance with Section 409A; or

 

(vi) The occurrence of an “unforeseeable emergency” (as defined by Section 409A).

 

(b) Installment Payments. It is the intent of this Plan that any right of a Participant to receive installment payments (within the meaning of Section 409A) shall, for all purposes of Section 409A, be treated as a right to a series of separate payments.

 

(c) Required Delay in Payment to Specified Employee Pursuant to Separation from Service. Notwithstanding any provision of the Plan or an Award Agreement to the contrary, except as otherwise permitted by Section 409A, no payment pursuant to Section 15.4(a)(i) in settlement of an Award providing for Section 409A Deferred Compensation may be made to a Participant who is a “specified employee” (as defined by Section 409A) as of the date of the Participant’s separation from service before the date (the Delayed Payment Date) that is six (6) months after the date of such Participant’s separation from service, or, if earlier, the date of the Participant’s death. All such amounts that would, but for this paragraph, become payable prior to the Delayed Payment Date shall be accumulated and paid on the Delayed Payment Date.

 

(d) Payment Upon Disability. All distributions of Section 409A Deferred Compensation payable pursuant to Section 15.4(a)(ii) by reason of a Participant becoming disabled shall be paid in a lump sum or in periodic installments as established by the Participant’s Election. If the Participant has made no Election with respect to distributions of Section 409A Deferred Compensation upon becoming disabled, all such distributions shall be paid in a lump sum upon the determination that the Participant has become disabled.

 

(e) Payment Upon Death. If a Participant dies before complete distribution of amounts payable upon settlement of an Award subject to Section 409A, such undistributed amounts shall be distributed to his or her beneficiary under the distribution method for death established by the Participant’s Election upon receipt by the Committee of satisfactory notice and confirmation of the Participant’s death. If the Participant has made no Election with respect to distributions of Section 409A Deferred Compensation upon death, all such distributions shall be paid in a lump sum upon receipt by the Committee of satisfactory notice and confirmation of the Participant’s death.

 

(f) Payment Upon Change in Control. Notwithstanding any provision of the Plan or an Award Agreement to the contrary, to the extent that any amount constituting Section 409A Deferred Compensation would become payable under this Plan by reason of a Change in Control, such amount shall become payable only if the event constituting a Change in Control would also constitute a change in ownership or effective control of the Company or a change in the ownership of a substantial portion of the assets of the Company within the meaning of Section 409A. Any Award which constitutes Section 409A Deferred Compensation and which would vest and otherwise become payable upon a Change in Control as a result of the failure of the Acquiror to assume, continue or substitute for such Award in accordance with Section 13.1(b) shall vest to the extent provided by such Award but shall be converted automatically at the effective time of such Change in Control into a right to receive, in cash on the date or dates such award would have been settled in accordance with its then existing settlement schedule (or as required by Section 15.4(c)), an amount or amounts equal in the aggregate to the intrinsic value of the Award at the time of the Change in Control.

 

(g) Payment Upon Unforeseeable Emergency. The Committee shall have the authority to provide in the Award Agreement evidencing any Award providing for Section 409A Deferred Compensation for payment pursuant to Section 15.4(a)(vi) in settlement of all or a portion of such Award in the event that a Participant establishes, to the satisfaction of the Committee, the occurrence of an unforeseeable emergency. In such event, the amount(s) distributed with respect to such unforeseeable emergency cannot exceed the amounts reasonably necessary to satisfy the emergency need plus amounts necessary to pay taxes reasonably anticipated as a result of such distribution(s), after taking into account the extent to which such emergency need is or may be relieved through reimbursement or compensation by insurance or otherwise, by liquidation of the Participant’s assets (to the extent the liquidation of such assets would not itself cause severe financial hardship) or by cessation of deferrals under the Award. All distributions with respect to an unforeseeable emergency shall be made in a lump sum upon the Committee’s determination that an unforeseeable emergency has occurred. The Committee’s decision with respect to whether an unforeseeable emergency has occurred and the manner in which, if at all, the payment in settlement of an Award shall be altered or modified, shall be final, conclusive, and not subject to approval or appeal.

 

(h) Prohibition of Acceleration of Payments. Notwithstanding any provision of the Plan or an Award Agreement to the contrary, this Plan does not permit the acceleration of the time or schedule of any payment under an Award providing Section 409A Deferred Compensation, except as permitted by Section 409A.

 

(i) No Representation Regarding Section 409A Compliance. Notwithstanding any other provision of the Plan, the Company makes no representation that Awards shall be exempt from or comply with Section 409A. No Participating Company shall be liable for any tax, penalty or interest imposed on a Participant by Section 409A.

 

  - 19 -  
     

 

16. TAX WITHHOLDING.

 

16.1 Tax Withholding in General. The Company shall have the right to deduct from any and all payments made under the Plan, or to require the Participant, through payroll withholding, cash payment or otherwise, to make adequate provision for, the federal, state, local and foreign taxes (including social insurance), if any, required by law to be withheld by any Participating Company with respect to an Award or the shares acquired pursuant thereto. The Company shall have no obligation to deliver shares of Stock, to release shares of Stock from an escrow established pursuant to an Award Agreement, or to make any payment in cash under the Plan until the Participating Company Group’s tax withholding obligations have been satisfied by the Participant.

 

16.2 Withholding in or Directed Sale of Shares. The Company shall have the right, but not the obligation, to deduct from the shares of Stock issuable to a Participant upon the exercise or settlement of an Award, or to accept from the Participant the tender of, a number of whole shares of Stock having a Fair Market Value, as determined by the Company, equal to all or any part of the tax withholding obligations of any Participating Company. The Fair Market Value of any shares of Stock withheld or tendered to satisfy any such tax withholding obligations shall not exceed the amount determined by the applicable minimum statutory withholding rates. The Company may require a Participant to direct a broker, upon the vesting, exercise or settlement of an Award, to sell a portion of the shares subject to the Award determined by the Company in its discretion to be sufficient to cover the tax withholding obligations of any Participating Company and to remit an amount equal to such tax withholding obligations to such Participating Company in cash.

 

17. AMENDMENT, SUSPENSION OR TERMINATION OF PLAN.

 

The Committee may amend, suspend or terminate the Plan at any time. However, without the approval of the Company’s stockholders, there shall be (a) no increase in the maximum aggregate number of shares of Stock that may be issued under the Plan (except by operation of the provisions of Sections 4.2, 4.3 and 4.4), (b) no change in the class of persons eligible to receive Incentive Stock Options, and (c) no other amendment of the Plan that would require approval of the Company’s stockholders under any applicable law, regulation or rule, including the rules of any stock exchange or quotation system upon which the Stock may then be listed or quoted. No amendment, suspension or termination of the Plan shall affect any then outstanding Award unless expressly provided by the Committee. Except as provided by the next sentence, no amendment, suspension or termination of the Plan may have a materially adverse effect on any then outstanding Award without the consent of the Participant. Notwithstanding any other provision of the Plan or any Award Agreement to the contrary, the Committee may, in its sole and absolute discretion and without the consent of any Participant, amend the Plan or any Award Agreement, to take effect retroactively or otherwise, as it deems necessary or advisable for the purpose of conforming the Plan or such Award Agreement to any present or future law, regulation or rule applicable to the Plan, including, but not limited to, Section 409A.

 

18. MISCELLANEOUS PROVISIONS.

 

18.1 Repurchase Rights. Shares issued under the Plan may be subject to one or more repurchase options, or other conditions and restrictions as determined by the Committee in its discretion at the time the Award is granted. The Company shall have the right to assign at any time any repurchase right it may have, whether or not such right is then exercisable, to one or more persons as may be selected by the Company. Upon request by the Company, each Participant shall execute any agreement evidencing such transfer restrictions prior to the receipt of shares of Stock hereunder and shall promptly present to the Company any and all certificates representing shares of Stock acquired hereunder for the placement on such certificates of appropriate legends evidencing any such transfer restrictions.

 

18.2 Forfeiture Events.

 

(a) The Committee may specify in an Award Agreement that the Participant’s rights, payments, and benefits with respect to an Award shall be subject to reduction, cancellation, forfeiture, or recoupment upon the occurrence of specified events, in addition to any otherwise applicable vesting or performance conditions of an Award. Such events may include, but shall not be limited to, termination of Service for Cause or any act by a Participant, whether before or after termination of Service, that would constitute Cause for termination of Service, or any accounting restatement due to material noncompliance of the Company with any financial reporting requirements of securities laws as a result of which, and to the extent that, such reduction, cancellation, forfeiture, or recoupment is required by applicable securities laws.

 

(b) If the Company is required to prepare an accounting restatement due to the material noncompliance of the Company, as a result of misconduct, with any financial reporting requirement under the securities laws, any Participant who knowingly or through gross negligence engaged in the misconduct, or who knowingly or through gross negligence failed to prevent the misconduct, and any Participant who is one of the individuals subject to automatic forfeiture under Section 304 of the Sarbanes-Oxley Act of 2002, shall reimburse the Company for (i) the amount of any payment in settlement of an Award received by such Participant during the twelve- (12-) month period following the first public issuance or filing with the United States Securities and Exchange Commission (whichever first occurred) of the financial document embodying such financial reporting requirement, and (ii) any profits realized by such Participant from the sale of securities of the Company during such twelve- (12-) month period.

 

18.3 Provision of Information. Each Participant shall be given access to information concerning the Company equivalent to that information generally made available to the Company’s common stockholders.

 

18.4 Rights as Employee, Consultant or Director. No person, even though eligible pursuant to Section 5, shall have a right to be selected as a Participant, or, having been so selected, to be selected again as a Participant. Nothing in the Plan or any Award granted under the Plan shall confer on any Participant a right to remain an Employee, Consultant or Director or interfere with or limit in any way any right of a Participating Company to terminate the Participant’s Service at any time. To the extent that an Employee of a Participating Company other than the Company receives an Award under the Plan, that Award shall in no event be understood or interpreted to mean that the Company is the Employee’s employer or that the Employee has an employment relationship with the Company.

 

18.5 Rights as a Stockholder. A Participant shall have no rights as a stockholder with respect to any shares covered by an Award until the date of the issuance of such shares (as evidenced by the appropriate entry on the books of the Company or of a duly authorized transfer agent of the Company). No adjustment shall be made for dividends, distributions or other rights for which the record date is prior to the date such shares are issued, except as provided in Section 4.4 or another provision of the Plan.

 

  - 20 -  
     

 

18.6 Delivery of Title to Shares. Subject to any governing rules or regulations, the Company shall issue or cause to be issued the shares of Stock acquired pursuant to an Award and shall deliver such shares to or for the benefit of the Participant by means of one or more of the following: (a) by delivering to the Participant evidence of book entry shares of Stock credited to the account of the Participant, (b) by depositing such shares of Stock for the benefit of the Participant with any broker with which the Participant has an account relationship, or (c) by delivering such shares of Stock to the Participant in certificate form.

 

18.7 Fractional Shares. The Company shall not be required to issue fractional shares upon the exercise or settlement of any Award.

 

18.8 Retirement and Welfare Plans. Neither Awards made under this Plan nor shares of Stock or cash paid pursuant to such Awards may be included as “compensation” for purposes of computing the benefits payable to any Participant under any Participating Company’s retirement plans (both qualified and non-qualified) or welfare benefit plans unless such other plan expressly provides that such compensation shall be taken into account in computing a Participant’s benefit.

 

18.9 Beneficiary Designation. Subject to local laws and procedures, each Participant may file with the Company a written designation of a beneficiary who is to receive any benefit under the Plan to which the Participant is entitled in the event of such Participant’s death before he or she receives any or all of such benefit. Each designation will revoke all prior designations by the same Participant, shall be in a form prescribed by the Company, and will be effective only when filed by the Participant in writing with the Company during the Participant’s lifetime. If a married Participant designates a beneficiary other than the Participant’s spouse, the effectiveness of such designation may be subject to the consent of the Participant’s spouse. If a Participant dies without an effective designation of a beneficiary who is living at the time of the Participant’s death, the Company will pay any remaining unpaid benefits to the Participant’s legal representative.

 

18.10 Severability. If any one or more of the provisions (or any part thereof) of this Plan shall be held invalid, illegal or unenforceable in any respect, such provision shall be modified so as to make it valid, legal and enforceable, and the validity, legality and enforceability of the remaining provisions (or any part thereof) of the Plan shall not in any way be affected or impaired thereby.

 

18.11 No Constraint on Corporate Action. Nothing in this Plan shall be construed to: (a) limit, impair, or otherwise affect the Company’s or another Participating Company’s right or power to make adjustments, reclassifications, reorganizations, or changes of its capital or business structure, or to merge or consolidate, or dissolve, liquidate, sell, or transfer all or any part of its business or assets; or (b) limit the right or power of the Company or another Participating Company to take any action which such entity deems to be necessary or appropriate.

 

18.12 Unfunded Obligation. Participants shall have the status of general unsecured creditors of the Company. Any amounts payable to Participants pursuant to the Plan shall be considered unfunded and unsecured obligations for all purposes, including, without limitation, Title I of the Employee Retirement Income Security Act of 1974. No Participating Company shall be required to segregate any monies from its general funds, or to create any trusts, or establish any special accounts with respect to such obligations. The Company shall retain at all times beneficial ownership of any investments, including trust investments, which the Company may make to fulfill its payment obligations hereunder. Any investments or the creation or maintenance of any trust or any Participant account shall not create or constitute a trust or fiduciary relationship between the Committee or any Participating Company and a Participant, or otherwise create any vested or beneficial interest in any Participant or the Participant’s creditors in any assets of any Participating Company. The Participants shall have no claim against any Participating Company for any changes in the value of any assets which may be invested or reinvested by the Company with respect to the Plan.

 

18.13 Choice of Law. Except to the extent governed by applicable federal law, the validity, interpretation, construction and performance of the Plan and each Award Agreement shall be governed by the laws of the State of California, without regard to its conflict of law rules.

 

IN WITNESS WHEREOF, the undersigned Secretary of the Company certifies that the foregoing sets forth the VirTra, Inc. 2017 Equity Incentive Plan as duly adopted by the Board on August ___, 2017.

 

  /s/
  , Secretary

 

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VIRTRA, INC.

STOCK OPTION AGREEMENT

(For U.S. Participants)

 

VirTra, Inc. (the Company) has granted to the Participant named in the Notice of Grant of Stock Option (the Grant Notice) to which this Stock Option Agreement (the Option Agreement) is attached an option (the Option) to purchase certain shares of Stock upon the terms and conditions set forth in the Grant Notice and this Option Agreement. The Option has been granted pursuant to and shall in all respects be subject to the terms and conditions of the VirTra, Inc. 2017 Equity Incentive Plan (the Plan), as amended to the Date of Grant, the provisions of which are incorporated herein by reference. By signing the Grant Notice, the Participant: (a) acknowledges receipt of, and represents that the Participant has read and is familiar with, the Grant Notice, this Option Agreement, the Plan and a prospectus for the Plan prepared in connection with the registration with the Securities and Exchange Commission of shares issuable pursuant to the Option (the Plan Prospectus), (b) accepts the Option subject to all of the terms and conditions of the Grant Notice, this Option Agreement and the Plan and (c) agrees to accept as binding, conclusive and final all decisions or interpretations of the Committee upon any questions arising under the Grant Notice, this Option Agreement or the Plan.

 

  1. DEFINITIONS AND CONSTRUCTION.

 

1.1 Definitions. Unless otherwise defined herein, capitalized terms shall have the meanings assigned to such terms in the Grant Notice or the Plan.

 

1.2 Construction. Captions and titles contained herein are for convenience only and shall not affect the meaning or interpretation of any provision of this Option Agreement. Except when otherwise indicated by the context, the singular shall include the plural and the plural shall include the singular. Use of the term “or” is not intended to be exclusive, unless the context clearly requires otherwise.

 

  2. TAX CONSEQUENCES.

 

2.1 Tax Status of Option. This Option is intended to have the tax status designated in the Grant Notice.

 

(a) Incentive Stock Option. If the Grant Notice so designates, this Option is intended to be an Incentive Stock Option within the meaning of Section 422(b) of the Code, but the Company does not represent or warrant that this Option qualifies as such. The Participant should consult with the Participant’s own tax advisor regarding the tax effects of this Option and the requirements necessary to obtain favorable income tax treatment under Section 422 of the Code, including, but not limited to, holding period requirements. (NOTE TO PARTICIPANT: If the Option is exercised more than three (3) months after the date on which you cease to be an Employee (other than by reason of your death or permanent and total disability as defined in Section 22(e)(3) of the Code), the Option will be treated as a Nonstatutory Stock Option and not as an Incentive Stock Option to the extent required by Section 422 of the Code.)

 

(b) Nonstatutory Stock Option. If the Grant Notice so designates, this Option is intended to be a Nonstatutory Stock Option and shall not be treated as an Incentive Stock Option within the meaning of Section 422(b) of the Code.

 

  - 1 -  
     

 

2.2 ISO Fair Market Value Limitation. If the Grant Notice designates this Option as an Incentive Stock Option, then to the extent that the Option (together with all Incentive Stock Options granted to the Participant under all stock option plans of the Participating Company Group, including the Plan) becomes exercisable for the first time during any calendar year for shares having a Fair Market Value greater than One Hundred Thousand Dollars ($100,000), the portion of such options which exceeds such amount will be treated as Nonstatutory Stock Options. For purposes of this Section 2.2, options designated as Incentive Stock Options are taken into account in the order in which they were granted, and the Fair Market Value of stock is determined as of the time the option with respect to such stock is granted. If the Code is amended to provide for a different limitation from that set forth in this Section 2.2, such different limitation shall be deemed incorporated herein effective as of the date required or permitted by such amendment to the Code. If the Option is treated as an Incentive Stock Option in part and as a Nonstatutory Stock Option in part by reason of the limitation set forth in this Section 2.2, the Participant may designate which portion of such Option the Participant is exercising. In the absence of such designation, the Participant shall be deemed to have exercised the Incentive Stock Option portion of the Option first. Separate certificates representing each such portion shall be issued upon the exercise of the Option. (NOTE TO PARTICIPANT: If the aggregate Exercise Price of the Option (that is, the Exercise Price multiplied by the Number of Option Shares) plus the aggregate exercise price of any other Incentive Stock Options you hold (whether granted pursuant to the Plan or any other stock option plan of the Participating Company Group) is greater than $100,000, you should contact the Chief Financial Officer of the Company to ascertain whether the entire Option qualifies as an Incentive Stock Option.)

 

  3. ADMINISTRATION.

 

All questions of interpretation concerning the Grant Notice, this Option Agreement, the Plan or any other form of agreement or other document employed by the Company in the administration of the Plan or the Option shall be determined by the Committee. All such determinations by the Committee shall be final, binding and conclusive upon all persons having an interest in the Option, unless fraudulent or made in bad faith. Any and all actions, decisions and determinations taken or made by the Committee in the exercise of its discretion pursuant to the Plan or the Option or other agreement thereunder (other than determining questions of interpretation pursuant to the preceding sentence) shall be final, binding and conclusive upon all persons having an interest in the Option. Any Officer shall have the authority to act on behalf of the Company with respect to any matter, right, obligation, or election which is the responsibility of or which is allocated to the Company herein, provided the Officer has apparent authority with respect to such matter, right, obligation, or election.

 

  4. EXERCISE OF THE OPTION.

 

4.1 Right to Exercise. Except as otherwise provided herein, the Option shall be exercisable on and after the Initial Vesting Date and prior to the termination of the Option (as provided in Section 6) in an amount not to exceed the number of Vested Shares less the number of shares previously acquired upon exercise of the Option. In no event shall the Option be exercisable for more shares than the Number of Option Shares, as adjusted pursuant to Section 9.

 

4.2 Method of Exercise. Exercise of the Option shall be by means of electronic or written notice (the Exercise Notice) in a form authorized by the Company. An electronic Exercise Notice must be digitally signed or authenticated by the Participant in such manner as required by the notice and transmitted to the Company or an authorized representative of the Company (including a third-party administrator designated by the Company). In the event that the Participant is not authorized or is unable to provide an electronic Exercise Notice, the Option shall be exercised by a written Exercise Notice addressed to the Company, which shall be signed by the Participant and delivered in person, by certified or registered mail, return receipt requested, by confirmed facsimile transmission, or by such other means as the Company may permit, to the Company, or an authorized representative of the Company (including a third-party administrator designated by the Company). Each Exercise Notice, whether electronic or written, must state the Participant’s election to exercise the Option, the number of whole shares of Stock for which the Option is being exercised and such other representations and agreements as to the Participant’s investment intent with respect to such shares as may be required pursuant to the provisions of this Option Agreement. Further, each Exercise Notice must be received by the Company prior to the termination of the Option as set forth in Section 6 and must be accompanied by full payment of the aggregate Exercise Price for the number of shares of Stock being purchased. The Option shall be deemed to be exercised upon receipt by the Company of such electronic or written Exercise Notice and the aggregate Exercise Price.

 

  - 2 -  
     

 

4.3 Payment of Exercise Price.

 

(a) Forms of Consideration Authorized. Except as otherwise provided below, payment of the aggregate Exercise Price for the number of shares of Stock for which the Option is being exercised shall be made (i) in cash, by check or in cash equivalent; (ii) if permitted by the Company and subject to the limitations contained in Section 4.3(b), by means of (1) a Cashless Exercise, (2) a Net-Exercise, or (3) a Stock Tender Exercise; or (iii) by any combination of the foregoing.

 

(b) Limitations on Forms of Consideration. The Company reserves, at any and all times, the right, in the Company’s sole and absolute discretion, to establish, decline to approve or terminate any program or procedure providing for payment of the Exercise Price through any of the means described below, including with respect to the Participant notwithstanding that such program or procedures may be available to others.

 

(i) Cashless Exercise. A Cashless Exercise means the delivery of a properly executed Exercise Notice together with irrevocable instructions to a broker in a form acceptable to the Company providing for the assignment to the Company of the proceeds of a sale or loan with respect to shares of Stock acquired upon the exercise of the Option in an amount not less than the aggregate Exercise Price for such shares (including, without limitation, through an exercise complying with the provisions of Regulation T as promulgated from time to time by the Board of Governors of the Federal Reserve System).

 

(ii) Net-Exercise. A Net-Exercise means the delivery of a properly executed Exercise Notice electing a procedure pursuant to which (1) the Company will reduce the number of shares otherwise issuable to the Participant upon the exercise of the Option by the largest whole number of shares having a Fair Market Value that does not exceed the aggregate Exercise Price for the shares with respect to which the Option is exercised, and (2) the Participant shall pay to the Company in cash the remaining balance of such aggregate Exercise Price not satisfied by such reduction in the number of whole shares to be issued. Following a Net-Exercise, the number of shares remaining subject to the Option, if any, shall be reduced by the sum of (1) the net number of shares issued to the Participant upon such exercise, and (2) the number of shares deducted by the Company for payment of the aggregate Exercise Price.

 

(iii) Stock Tender Exercise. A Stock Tender Exercise means the delivery of a properly executed Exercise Notice accompanied by (1) the Participant’s tender to the Company, or attestation to the ownership, in a form acceptable to the Company of whole shares of Stock having a Fair Market Value that does not exceed the aggregate Exercise Price for the shares with respect to which the Option is exercised, and (2) the Participant’s payment to the Company in cash of the remaining balance of such aggregate Exercise Price not satisfied by such shares’ Fair Market Value. A Stock Tender Exercise shall not be permitted if it would constitute a violation of the provisions of any law, regulation or agreement restricting the redemption of the Company’s stock. If required by the Company, the Option may not be exercised by tender to the Company, or attestation to the ownership, of shares of Stock unless such shares either have been owned by the Participant for a period of time required by the Company (and not used for another option exercise by attestation during such period) or were not acquired, directly or indirectly, from the Company.

 

  - 3 -  
     

 

4.4 Tax Withholding.

 

(a) In General. At the time the Option is exercised, in whole or in part, or at any time thereafter as requested by a Participating Company, the Participant hereby authorizes withholding from payroll and any other amounts payable to the Participant, and otherwise agrees to make adequate provision for (including by means of a Cashless Exercise to the extent permitted by the Company), any sums required to satisfy the federal, state, local and foreign tax (including any social insurance) withholding obligations of the Participating Company Group, if any, which arise in connection with the Option. The Company shall have no obligation to deliver shares of Stock until the tax withholding obligations of the Participating Company Group have been satisfied by the Participant.

 

(b) Withholding in Shares. The Company shall have the right, but not the obligation, to require the Participant to satisfy all or any portion of a Participating Company’s tax withholding obligations upon exercise of the Option by deducting from the shares of Stock otherwise issuable to the Participant upon such exercise a number of whole shares having a fair market value, as determined by the Company as of the date of exercise, not in excess of the amount of such tax withholding obligations determined by the applicable minimum statutory withholding rates if required to avoid liability classification of the Option under generally accepted accounting principles in the United States.

 

4.5 Beneficial Ownership of Shares; Certificate Registration. The Participant hereby authorizes the Company, in its sole discretion, to deposit for the benefit of the Participant with any broker with which the Participant has an account relationship of which the Company has notice any or all shares acquired by the Participant pursuant to the exercise of the Option. Except as provided by the preceding sentence, a certificate for the shares as to which the Option is exercised shall be registered in the name of the Participant, or, if applicable, in the names of the heirs of the Participant.

 

4.6 Restrictions on Grant of the Option and Issuance of Shares. The grant of the Option and the issuance of shares of Stock upon exercise of the Option shall be subject to compliance with all applicable requirements of federal, state or foreign law with respect to such securities. The Option may not be exercised if the issuance of shares of Stock upon exercise would constitute a violation of any applicable federal, state or foreign securities laws or other law or regulations or the requirements of any stock exchange or market system upon which the Stock may then be listed. In addition, the Option may not be exercised unless (i) a registration statement under the Securities Act shall at the time of exercise of the Option be in effect with respect to the shares issuable upon exercise of the Option or (ii) in the opinion of legal counsel to the Company, the shares issuable upon exercise of the Option may be issued in accordance with the terms of an applicable exemption from the registration requirements of the Securities Act. THE PARTICIPANT IS CAUTIONED THAT THE OPTION MAY NOT BE EXERCISED UNLESS THE FOREGOING CONDITIONS ARE SATISFIED. ACCORDINGLY, THE PARTICIPANT MAY NOT BE ABLE TO EXERCISE THE OPTION WHEN DESIRED EVEN THOUGH THE OPTION IS VESTED. The inability of the Company to obtain from any regulatory body having jurisdiction the authority, if any, deemed by the Company’s legal counsel to be necessary to the lawful issuance and sale of any shares subject to the Option shall relieve the Company of any liability in respect of the failure to issue or sell such shares as to which such requisite authority shall not have been obtained. As a condition to the exercise of the Option, the Company may require the Participant to satisfy any qualifications that may be necessary or appropriate, to evidence compliance with any applicable law or regulation and to make any representation or warranty with respect thereto as may be requested by the Company.

 

4.7 Fractional Shares. The Company shall not be required to issue fractional shares upon the exercise of the Option.

 

  5. NONTRANSFERABILITY OF THE OPTION.

 

During the lifetime of the Participant, the Option shall be exercisable only by the Participant or the Participant’s guardian or legal representative. The Option shall not be subject in any manner to anticipation, alienation, sale, exchange, transfer, assignment, pledge, encumbrance, or garnishment by creditors of the Participant or the Participant’s beneficiary, except transfer by will or by the laws of descent and distribution. Following the death of the Participant, the Option, to the extent provided in Section 7, may be exercised by the Participant’s legal representative or by any person empowered to do so under the deceased Participant’s will or under the then applicable laws of descent and distribution.

 

  - 4 -  
     

 

  6. TERMINATION OF THE OPTION.

 

The Option shall terminate and may no longer be exercised after the first to occur of (a) the close of business on the Option Expiration Date, (b) the close of business on the last date for exercising the Option following termination of the Participant’s Service as described in Section 7, or (c) a Change in Control to the extent provided in Section 8.

 

  7. EFFECT OF TERMINATION OF SERVICE.

 

7.1 Option Exercisability. The Option shall terminate immediately upon the Participant’s termination of Service to the extent that it is then unvested and shall be exercisable after the Participant’s termination of Service to the extent it is then vested only during the applicable time period as determined below and thereafter shall terminate.

 

(a) Disability. If the Participant’s Service terminates because of the Disability of the Participant, the Option, to the extent unexercised and exercisable for Vested Shares on the date on which the Participant’s Service terminated, may be exercised by the Participant (or the Participant’s guardian or legal representative) at any time prior to the expiration of twelve (12) months after the date on which the Participant’s Service terminated, but in any event no later than the Option Expiration Date.

 

(b) Death. If the Participant’s Service terminates because of the death of the Participant, the Option, to the extent unexercised and exercisable for Vested Shares on the date on which the Participant’s Service terminated, may be exercised by the Participant’s legal representative or other person who acquired the right to exercise the Option by reason of the Participant’s death at any time prior to the expiration of twelve (12) months after the date on which the Participant’s Service terminated, but in any event no later than the Option Expiration Date. The Participant’s Service shall be deemed to have terminated on account of death if the Participant dies within three (3) months after the Participant’s termination of Service.

 

(c) Termination for Cause. Notwithstanding any other provision of this Option Agreement to the contrary, if the Participant’s Service is terminated for Cause or if, following the Participant’s termination of Service and during any period in which the Option otherwise would remain exercisable, the Participant engages in any act that would constitute Cause, the Option shall terminate in its entirety and cease to be exercisable immediately upon such termination of Service or act.

 

(d) Other Termination of Service. If the Participant’s Service terminates for any reason, except Disability, death or Cause, the Option, to the extent unexercised and exercisable for Vested Shares by the Participant on the date on which the Participant’s Service terminated, may be exercised by the Participant at any time prior to the expiration of three (3) months after the date on which the Participant’s Service terminated, but in any event no later than the Option Expiration Date.

 

7.2 Extension if Exercise Prevented by Law. Notwithstanding the foregoing, other than termination of the Participant’s Service for Cause, if the exercise of the Option within the applicable time periods set forth in Section 7.1 is prevented by the provisions of Section 4.6, the Option shall remain exercisable until the later of (a) thirty (30) days after the date such exercise first would no longer be prevented by such provisions, or (b) the end of the applicable time period under Section 7.1, but in any event no later than the Option Expiration Date.

 

  - 5 -  
     

 

  8. EFFECT OF CHANGE IN CONTROL.

 

In the event of a Change in Control, the Option shall be subject to the definitive agreement entered into by the Company in connection with the Change in Control. Except to the extent that the Committee determines to cash out the Option in accordance with Section 13.1(c) of the Plan, the surviving, continuing, successor, or purchasing entity or parent thereof, as the case may be (the Acquiror), may, without the consent of the Participant, assume or continue in full force and effect the Company’s rights and obligations under all or any portion of the Option or substitute for all or any portion of the Option a substantially equivalent option for the Acquiror’s stock. For purposes of this Section, the Option or any portion thereof shall be deemed assumed if, following the Change in Control, the Option confers the right to receive, subject to the terms and conditions of the Plan and this Option Agreement, for each share of Stock subject to such portion of the Option immediately prior to the Change in Control, the consideration (whether stock, cash, other securities or property or a combination thereof) to which a holder of a share of Stock on the effective date of the Change in Control was entitled (and if holders were offered a choice of consideration, the type of consideration chosen by the holders of a majority of the outstanding shares of Stock); provided, however, that if such consideration is not solely common stock of the Acquiror, the Committee may, with the consent of the Acquiror, provide for the consideration to be received upon the exercise of the Option, for each share of Stock subject to the Option, to consist solely of common stock of the Acquiror equal in Fair Market Value to the per share consideration received by holders of Stock pursuant to the Change in Control. The Option shall terminate and cease to be outstanding effective as of the time of consummation of the Change in Control to the extent that the Option is neither assumed or continued by the Acquiror in connection with the Change in Control nor exercised as of the time of the Change in Control.

 

  9. ADJUSTMENTS FOR CHANGES IN CAPITAL STRUCTURE.

 

Subject to any required action by the stockholders of the Company and the requirements of Sections 409A and 424 of the Code to the extent applicable, in the event of any change in the Stock effected without receipt of consideration by the Company, whether through merger, consolidation, reorganization, reincorporation, recapitalization, reclassification, stock dividend, stock split, reverse stock split, split-up, split-off,spin-off, combination of shares, exchange of shares, or similar change in the capital structure of the Company, or in the event of payment of a dividend or distribution to the stockholders of the Company in a form other than Stock (excepting normal cash dividends) that has a material effect on the Fair Market Value of shares of Stock, appropriate and proportionate adjustments shall be made in the number, Exercise Price and kind of shares subject to the Option, in order to prevent dilution or enlargement of the Participant’s rights under the Option. For purposes of the foregoing, conversion of any convertible securities of the Company shall not be treated as “effected without receipt of consideration by the Company.” Any fractional share resulting from an adjustment pursuant to this Section shall be rounded down to the nearest whole number and the Exercise Price shall be rounded up to the nearest whole cent. In no event may the Exercise Price be decreased to an amount less than the par value, if any, of the stock subject to the Option. The Committee in its sole discretion, may also make such adjustments in the terms of the Option to reflect, or related to, such changes in the capital structure of the Company or distributions as it deems appropriate. All adjustments pursuant to this Section shall be determined by the Committee, and its determination shall be final, binding and conclusive.

 

  10. RIGHTS AS A STOCKHOLDER, DIRECTOR, EMPLOYEE OR CONSULTANT.

 

The Participant shall have no rights as a stockholder with respect to any shares covered by the Option until the date of the issuance of the shares for which the Option has been exercised (as evidenced by the appropriate entry on the books of the Company or of a duly authorized transfer agent of the Company). No adjustment shall be made for dividends, distributions or other rights for which the record date is prior to the date the shares are issued, except as provided in Section 9. If the Participant is an Employee, the Participant understands and acknowledges that, except as otherwise provided in a separate, written employment agreement between a Participating Company and the Participant, the Participant’s employment is “at will” and is for no specified term. Nothing in this Option Agreement shall confer upon the Participant any right to continue in the Service of a Participating Company or interfere in any way with any right of the Participating Company Group to terminate the Participant’s Service as a Director, an Employee or Consultant, as the case may be, at any time.

 

  - 6 -  
     

 

  11. NOTICE OF SALES UPON DISQUALIFYING DISPOSITION.

 

The Participant shall dispose of the shares acquired pursuant to the Option only in accordance with the provisions of this Option Agreement. In addition, if the Grant Notice designates this Option as an Incentive Stock Option, the Participant shall (a) promptly notify the Chief Financial Officer of the Company if the Participant disposes of any of the shares acquired pursuant to the Option within one (1) year after the date the Participant exercises all or part of the Option or within two (2) years after the Date of Grant and (b) provide the Company with a description of the circumstances of such disposition. Until such time as the Participant disposes of such shares in a manner consistent with the provisions of this Option Agreement, unless otherwise expressly authorized by the Company, the Participant shall hold all shares acquired pursuant to the Option in the Participant’s name (and not in the name of any nominee) for the one-year period immediately after the exercise of the Option and the two-year period immediately after Date of Grant. At any time during the one-year or two-year periods set forth above, the Company may place a legend on any certificate representing shares acquired pursuant to the Option requesting the transfer agent for the Company’s stock to notify the Company of any such transfers. The obligation of the Participant to notify the Company of any such transfer shall continue notwithstanding that a legend has been placed on the certificate pursuant to the preceding sentence.

 

  12. LEGENDS.

 

The Company may at any time place legends referencing any applicable federal, state or foreign securities law restrictions on all certificates representing shares of stock subject to the provisions of this Option Agreement. The Participant shall, at the request of the Company, promptly present to the Company any and all certificates representing shares acquired pursuant to the Option in the possession of the Participant in order to carry out the provisions of this Section. Unless otherwise specified by the Company, legends placed on such certificates may include, but shall not be limited to, the following:

 

“THE SHARES EVIDENCED BY THIS CERTIFICATE WERE ISSUED BY THE CORPORATION TO THE REGISTERED HOLDER UPON EXERCISE OF AN INCENTIVE STOCK OPTION AS DEFINED IN SECTION 422 OF THE INTERNAL REVENUE CODE OF 1986, AS AMENDED (“ISO). IN ORDER TO OBTAIN THE PREFERENTIAL TAX TREATMENT AFFORDED TO ISOs, THE SHARES SHOULD NOT BE TRANSFERRED PRIOR TO [INSERT DISQUALIFYING DISPOSITION DATE HERE]. SHOULD THE REGISTERED HOLDER ELECT TO TRANSFER ANY OF THE SHARES PRIOR TO THIS DATE AND FOREGO ISO TAX TREATMENT, THE TRANSFER AGENT FOR THE SHARES SHALL NOTIFY THE CORPORATION IMMEDIATELY. THE REGISTERED HOLDER SHALL HOLD ALL SHARES PURCHASED UNDER THE INCENTIVE STOCK OPTION IN THE REGISTERED HOLDER’S NAME (AND NOT IN THE NAME OF ANY NOMINEE) PRIOR TO THIS DATE OR UNTIL TRANSFERRED AS DESCRIBED ABOVE.”

 

  13. MISCELLANEOUS PROVISIONS.

 

13.1 Termination or Amendment. The Committee may terminate or amend the Plan or the Option at any time; provided, however, that except as provided in Section 8 in connection with a Change in Control, no such termination or amendment may have a materially adverse effect on the Option or any unexercised portion thereof without the consent of the Participant unless such termination or amendment is necessary to comply with any applicable law or government regulation. No amendment or addition to this Option Agreement shall be effective unless in writing.

 

13.2 Further Instruments. The parties hereto agree to execute such further instruments and to take such further action as may reasonably be necessary to carry out the intent of this Option Agreement.

 

13.3 Binding Effect. This Option Agreement shall inure to the benefit of the successors and assigns of the Company and, subject to the restrictions on transfer set forth herein, be binding upon the Participant and the Participant’s heirs, executors, administrators, successors and assigns.

 

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13.4 Delivery of Documents and Notices. Any document relating to participation in the Plan or any notice required or permitted hereunder shall be given in writing and shall be deemed effectively given (except to the extent that this Option Agreement provides for effectiveness only upon actual receipt of such notice) upon personal delivery, electronic delivery at the e-mail address, if any, provided for the Participant by a Participating Company, or upon deposit in the U.S. Post Office or foreign postal service, by registered or certified mail, or with a nationally recognized overnight courier service, with postage and fees prepaid, addressed to the other party at the address of such party set forth in the Grant Notice or at such other address as such party may designate in writing from time to time to the other party.

 

(a) Description of Electronic Delivery and Signature. The Plan documents, which may include but do not necessarily include: the Plan, the Grant Notice, this Option Agreement, the Plan Prospectus, and any reports of the Company provided generally to the Company’s stockholders, may be delivered to the Participant electronically. In addition, if permitted by the Company, the Participant may deliver electronically the Grant Notice and Exercise Notice called for by Section 4.2 to the Company or to such third party involved in administering the Plan as the Company may designate from time to time. Such means of electronic delivery may include but do not necessarily include the delivery of a link to a Company intranet or the Internet site of a third party involved in administering the Plan, the delivery of the document via e-mail or such other means of electronic delivery specified by the Company. Any and all such documents and notices may be electronically signed.

 

(b) Consent to Electronic Delivery and Signature. The Participant acknowledges that the Participant has read Section 13.4(a) of this Option Agreement and consents to the electronic delivery of the Plan documents and, if permitted by the Company, the delivery of the Grant Notice and Exercise Notice, as described in Section 13.4(a). The Participant agrees that any and all such documents requiring a signature may be electronically signed and that such electronic signature shall have the same effect as handwritten signature for the purposes of validity, enforceability and admissibility. The Participant acknowledges that he or she may receive from the Company a paper copy of any documents delivered electronically at no cost to the Participant by contacting the Company by telephone or in writing. The Participant further acknowledges that the Participant will be provided with a paper copy of any documents if the attempted electronic delivery of such documents fails. Similarly, the Participant understands that the Participant must provide the Company or any designated third party administrator with a paper copy of any documents if the attempted electronic delivery of such documents fails. The Participant may revoke his or her consent to the electronic delivery of documents described in Section 13.4(a) or may change the electronic mail address to which such documents are to be delivered (if the Participant has provided an electronic mail address) at any time by notifying the Company of such revoked consent or revised e-mail address by telephone, postal service or electronic mail. Finally, the Participant understands that he or she is not required to consent to electronic delivery of documents described in Section 13.4(a).

 

13.5 Integrated Agreement. The Grant Notice, this Option Agreement and the Plan, together with the Superseding Agreement, if any, shall constitute the entire understanding and agreement of the Participant and the Participating Company Group with respect to the subject matter contained herein and supersede any prior agreements, understandings, restrictions, representations, or warranties among the Participant and the Participating Company Group with respect to such subject matter. To the extent contemplated herein, the provisions of the Grant Notice, the Option Agreement and the Plan shall survive any exercise of the Option and shall remain in full force and effect.

 

13.6 Applicable Law. This Option Agreement shall be governed by the laws of the State of Nevada as such laws are applied to agreements between Nevada residents entered into and to be performed entirely within the State of Nevada.

 

13.7 Counterparts. The Grant Notice may be executed in counterparts, each of which shall be deemed an original, but all of which together shall constitute one and the same instrument.

 

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VIRTRA, INC.

NOTICE OF GRANT OF STOCK OPTION

(For U.S. Participants)

 

VirTra, Inc. (the Company) has granted to the Participant an option (the Option) to purchase certain shares of Stock pursuant to the VirTra, Inc. 2017 Equity Incentive Plan (the Plan), as follows:

 

Participant:                            Employee ID:    
       
Date of Grant:                          
       
Number of Option Shares:                        , subject to adjustment as provided by the Option Agreement.  
       
Exercise Price:   $                      
       
Vesting Start Date:                           
       
Option Expiration Date:   The tenth anniversary of the Date of Grant  
       
Tax Status of Option:                      Stock Option. (Enter “Incentive” or “Nonstatutory.” If blank, this Option will be a Nonstatutory Stock Option.)  
       
Vested Shares:   Except as provided in the Option Agreement and provided the Participant’s Service has not terminated prior to the applicable date, the number of Vested Shares (disregarding any resulting fractional share) as of any date is determined by multiplying the Number of Option Shares by the Vested Ratio determined as of such date, as follows:  
       
    Vested Ratio
    Prior to first anniversary of Vesting Start Date      0
       
    On first anniversary of Vesting Start Date (the “Initial Vesting Date”)      [__]
       
    Plus       
       
    For each additional full month of the Participant’s Service from the Initial Vesting Date until the Vested Ratio equals 1/1, an additional      [__]
       
Superseding Agreement:   [None]

 

By their signatures below or by electronic acceptance or authentication in a form authorized by the Company, the Company and the Participant agree that the Option is governed by this Grant Notice and by the provisions of the Option Agreement and the Plan, both of which are made a part of this document, and by the Superseding Agreement, if any. The Participant acknowledges that copies of the Plan, the Option Agreement and the prospectus for the Plan are available on the Company’s internal web site and may be viewed and printed by the Participant for attachment to the Participant’s copy of this Grant Notice. The Participant represents that the Participant has read and is familiar with the provisions of the Option Agreement and the Plan, and hereby accepts the Option subject to all of their terms and conditions.

 

VIRTRA, INC.   PARTICIPANT
     
By:  
  [officer name]   Signature
  [officer title]  
      Date
Address:  
      Address
       

 

ATTACHMENTS:    2017 Equity Incentive Plan, as amended to the Date of Grant; Stock Option Agreement, Exercise Notice and Plan Prospectus

 

 

 

 

FORM OF

OFFERING DEPOSIT ACCOUNT AGENCY AGREEMENT

 

This Offering Deposit Account Agency Agreement (this “Agreement”) is entered into as of _________________, 2017, by and between VirTra, Inc., a Nevada corporation with its principal office located at 7970 S. Kyrene Road, Tempe, AZ 85284 (“Issuer”), FlashFunders, Inc., a Delaware corporation with its principal office located at 15260 Ventura Blvd, 20th Floor, Sherman Oaks, CA 91403 (“Intermediary”) and FinTech Clearing, LLC, a Delaware limited liability company and FINRA registered Broker/Dealer, with its principal office located at 15260 Ventura Blvd, 20th Floor, Sherman Oaks, CA 91403 (“Deposit Account Agent”). Issuer, Intermediary and Deposit Account Agent shall collectively be referred to as “Parties”.

 

RECITALS

 

This Agreement is entered into in reference to the following facts:

 

(a) The Issuer is offering securities of the Issuer, as identified on Schedule A (the “Securities”) in a private placement financing described in an offering document (the “Offering”) to investors (the “Subscribers”) pursuant to Regulation A, promulgated under Securities Act of 1933, as amended (the “33 Act”), and represents that such offering is compliant with all applicable securities laws, including, without limitation, the 33 Act, and any other governing acts, rules, regulations or amendments promulgated by the Securities and Exchange Commission (“SEC”).

 

(b) The Intermediary provides Issuers and Subscribers with an online intermediary platform (the “Platform”) where the Securities are offered for sale by the Issuer.

 

(c) The Issuer desires that the Deposit Account Agent act as agent for transmission or maintenance of payments received from the Subscribers (“Proceeds”) received by the Intermediary until the Offering period has ended and the Offering has Closed (as defined below) or otherwise terminated.

 

(d) The Deposit Account Agent is willing to act in such capacity, subject to the terms hereof.

 

NOW, THEREFORE, in consideration of the mutual covenants hereinafter set forth, the Parties hereto hereby agree as follows.

 

ARTICLE 1 - PROCEEDS

 

1.1 Appointment; Account.

 

(a) The Issuer and the Intermediary hereby appoint the Deposit Account Agent to act as deposit holder for the Proceeds under the terms of this Agreement. The Deposit Account Agent hereby accepts such appointment, subject to the terms, conditions, and limitations hereof.

 

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(b) Immediately following the Deposit Account Agent’s execution of this Agreement and prior to the date of the commencement of the Offering, the Parties shall establish an account record designated by the Deposit Account Agent (the “Offering Deposit Account”) for the purpose of receiving and holding Subscriber Proceeds. All Subscribers will be instructed to wire funds or make checks payable directly to Deposit Account Agent in accordance with the instructions in Schedule B. All Parties agree to maintain the Offering Deposit Account and act with respect to the Offering Deposit Account and Proceeds in a manner that is compliant with SEC Rules SEC Rules 10b-9, 15c3-3, and 15c2-4 promulgated under the Securities Exchange Act of 1934, as amended (including SEC and FINRA interpretations of such Rules), and all other applicable laws, rules, and regulations.

 

1.2 Deposits Held.

 

(a) The Intermediary and the Issuer shall direct each Subscriber purchasing securities interests to deliver the Proceeds to the Deposit Account Agent as their subscriptions for the Offering are accepted. The Deposit Account Agent shall deposit and hold all Proceeds in the Offering Deposit Account at all times until such funds are disbursed therefrom in accordance with the terms hereof. As and when such Proceeds are delivered to the Deposit Account Agent, the Intermediary will also deliver to the Deposit Account Agent a completed Report from Intermediary in the form attached hereto as Schedule B, and copies of executed Subscriber subscription agreements for each Subscriber whose funds are included in such Proceeds. Promptly after its receipt thereof, the Deposit Account Agent shall notify the Intermediary that the Deposit Account Agent has received the Proceeds. Upon request from time to time, the Deposit Account Agent shall notify the Intermediary of the amount of the Proceeds then held in the Offering Deposit Account.

 

(b) Proceeds in the form of ACH or wire transfer are deemed deposited into the Offering Deposit Account when delivered to the Deposit Account Agent. Any Proceeds deposited in the form of a check, draft or similar instrument are deemed deposited when the collectability thereof has been confirmed (hereinafter “Cleared Funds”). All such checks and similar instruments shall be made payable to “FinTech Clearing”. Any checks or other instruments that are not made so payable shall be returned by the Deposit Account Agent to the party submitting the check or other similar instrument. Any check returned unpaid to the Deposit Account Agent shall be returned to the party that submitted the check and the Deposit Account Agent shall promptly notify the Intermediary of such return.

 

(c) The Proceeds shall be disbursed by the Deposit Account Agent from the Offering Deposit Account by wire transfer of funds or by check payable to the appropriate distributee at the address set forth herein, except for disbursements of Proceeds payable to itself under the terms hereof.

 

1.3 Investment. The Offering Deposit Account shall be a demand deposit account, and no interest shall accrue on the Proceeds deposited therein. The Deposit Account Agent shall not be obligated to earn any earnings or interest on the Proceeds.

 

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ARTICLE 2 – DISBURSEMENT PROCEDURES

 

2.1 Disbursement of Proceeds. The Deposit Account Agent shall hold and disburse the Proceeds in accordance with the following procedures:

 

(a) Initial and Subsequent Closings when Minimum Met. If, prior to the Termination Date, the Deposit Account Agent has received Cleared Funds equal to or greater than the Minimum Amount and receives a joint written instruction from the Issuer and the Intermediary confirming a closing of the transaction contemplated in the Offering (a “Closing”), the Deposit Account Agent shall, pursuant to such written instruction, pay such Cleared Funds to the Issuer promptly (noon the following business day) upon receipt of such written instruction (“First Closing”). Thereafter, with respect to any additional Cleared Funds received after the First Closing or subsequent Closing and held by the Deposit Account Agent prior to the Termination Date, the Deposit Account Agent shall, upon receipt of written instruction confirming a Closing and identifying the Subscribers (and corresponding Proceeds) participating in such Closing, pay such Cleared Funds specified in the joint written instruction to the Issuer at one or more subsequent Closings promptly (noon the following business day) upon receipt of such written instruction. If the Deposit Account Agent does not receive a written instruction regarding the disbursement of any Cleared Funds remaining in the Deposit Account fifteen (15) business days after the Termination Date, then the Deposit Account Agent will initiate a return payment to return any Cleared Funds after the most recent Closing to each Subscriber according to the amount received and cleared from the Subscriber after the most recent Closing without deduction, penalty, or expense to Subscriber.

 

(b) No Closing Even though Minimum Met. If no Closing has taken place within fifteen (15) business days of the Termination Date (where the Deposit Account Agent has received Cleared Funds at least equaling the Minimum Amount prior to the Termination Date), the Deposit Account Agent shall return all Cleared Funds to Subscribers according to the amounts and return payment instructions contained in the Offering Report (defined under Schedule B) promptly (noon the following business day) upon expiration of such fifteen (15) business day time period, or if the Issuer and the Intermediary notify the Deposit Account Agent pursuant to a written instruction at any earlier time that no Closing will take place, the Deposit Account Agent shall return all Cleared Funds to Subscribers according to the amounts and return payment instructions contained in the Offering Report promptly (noon the following business day) upon such written notification without deduction, penalty, or expense to Subscriber.

 

(c) Terminated Listing. If, at any time, either (i) the Intermediary notifies the Deposit Account Agent in writing that the Intermediary has exercised its right to terminate the Issuer’s Offering and not proceed with the Closing of the Offering or (ii) the Deposit Account Agent receives a written instruction stating that the Offering has been terminated and the Parties will not proceed with a Closing, the Deposit Account Agent shall return all Cleared Funds to Subscribers according to the amounts and return payment instructions contained in the Offering Report promptly (noon the following business day) upon such written notification without deduction, penalty, or expense to Subscriber.

 

(d) Minimum Not Met. If, prior to the Termination Date, the Deposit Account Agent has not received Cleared Funds at least equaling the Minimum Amount, the Deposit Account Agent shall return all Proceeds to Subscribers according to the amounts and return payment instructions contained in the Offering Report promptly (noon the following business day) upon Termination Date, without deduction, penalty, or expense to Subscriber

 

3
 

 

(e) Rejection of Subscriber. If, at any time, Deposit Account Agent receives a written notice from Intermediary that either (i) the Issuer has determined not to accept any Subscriber’s subscription for Securities or (ii) the Intermediary has determined that such Subscriber has not satisfied Intermediary’s legal, regulator or other compliance reviews for the Offering, the Deposit Account Agent shall return all Cleared Funds of such Subscriber to such Subscriber according to the amount and return payment instructions contained in the Offering Report promptly (noon the following business day) upon such written notice from Intermediary.

 

(f) Return of Proceeds to Subscribers. Any return payment to Subscribers initiated by the Deposit Account Agent in accordance with this Section 2.1 shall be payable to the Subscriber using the applicable instructions provided to the Deposit Account Agent in the Offering report in connection with the Subscriber’s deposit without deduction, penalty or expense to the Subscriber. If any return payment is returned to the Deposit Account Agent as undeliverable, Deposit Account Agent will immediately notify Intermediary and obtain updated return payment instructions from Intermediary, or (at the election of Intermediary) return such Subscriber’s Cleared Funds by check payable to the Subscriber and mailed to an address designated in the Offering report.

 

(g) Return of Funds Undeliverable. If any amount of Proceeds is returned to Deposit Account Agent as undeliverable following the operation of clauses (a)-(e) of this Section 2.1, Deposit Account Agent, in addition to its other rights herein, may maintain and manage such Proceeds for such period of time as it determines may be necessary or appropriate, including in accordance with applicable state escheatment and unclaimed property laws, as determined by Deposit Account Agent in its reasonable discretion and may take any other action permitted by this Agreement.

 

(h) Fees and Costs. Issuer agrees to pay all fees and costs associated with the Agreement, including monthly and transactional fees (which shall include incoming and outgoing return payment fees) as set forth on Schedule C. All disbursements of Proceeds in Section 2.1(a) after the applicable sale date (to the Issuer) shall be subject to the fees, costs, expenses and other amounts due to Deposit Account Agent owed by the Intermediary and/or the Issuer and any other indemnified party (as defined below) hereunder.

 

ARTICLE 3 - GENERAL TRANSMISSION AND MAINTENANCE OF PAYMENTS PROCEDURES

 

3.1 Accounts and Records. The Deposit Account Agent shall keep accurate books and records of all transactions hereunder. The Intermediary and Deposit Account Agent shall each have reasonable access to one another’s books and records concerning the Offering and the Proceeds. Upon final disbursement of the Proceeds, the Deposit Account Agent shall deliver to the Intermediary a complete accounting of all transactions relating to the Proceeds.

 

3.2 Duties. The Deposit Account Agent’s duties hereunder shall be determined solely by the express provisions of this Agreement. The Deposit Account Agent’s duties are purely contractual in nature. Nothing in this Agreement shall be construed to give rise to any fiduciary obligations of the Deposit Account Agent with respect to the Subscribers or to the other Parties to this Agreement. Except for a possible reference to the definitions of certain words or terms defined in the Offering Memorandum, but not defined herein, the Deposit Account Agent is not charged with any duties with respect to the Offering Memorandum and shall not otherwise be concerned with the terms thereof. The Deposit Account Agent shall not be required to notify or obtain the consent, approval, authorization, or order of court or governmental body to perform its obligations under this Agreement, except as expressly provided herein.

 

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3.3 Disputes.

 

(a) If there is any disagreement or the presentation of any adverse claim or demand in connection with the disbursement of the Proceeds, the Deposit Account Agent may, at its option, after providing written notice to the Intermediary and Issuer of such disagreement or adverse claim or demand, refuse to comply with any such claims or demands during the continuance of such disagreement and may refrain from delivering any item affected hereby, and in so doing, the Deposit Account Agent shall not become liable to the undersigned or to any other person, due to its failure to comply with such adverse claim or demand. If the Intermediary and/or Issuer does not provide satisfactory assurances to the Deposit Account Agent that it may act in accordance with the other provisions of this Agreement, then the Deposit Account Agent shall be entitled to continue, without liability, to refrain and refuse to act until:

 

(i) authorized to disburse the Proceeds by an order from a court purporting to have jurisdiction of the Parties and the Proceeds, after which time the Deposit Account Agent shall be entitled to act in conformity with such order; or

 

(ii) the Deposit Account Agent (i) shall have been notified that all differences shall have been adjusted by agreement, and (ii) shall have been directed in writing to take certain actions with respect to the Proceeds subject to the adverse claim or demand, signed jointly or in counterpart by the Intermediary and Issuer and by all persons making adverse claims or demands, at which time the Deposit Account Agent shall be protected in acting in compliance therewith.

 

(b) At any time prior to the Deposit Account Agent’s receipt of a court order or a notice, as provided in clauses (i) or (ii) of this Section 3.3(a), the Deposit Account Agent may, but is not required to, file a suit in interpleader and obtain an order from the court requiring the Parties to interplead and litigate in such court adverse claims or demands raised pursuant to this Section 3.3. If such interpleader suit is brought, the Deposit Account Agent shall ipso facto be fully released and discharged from all obligations to further perform any and all duties or obligations imposed upon it in relation to the disputed amount. The Issuer agrees to reimburse the Deposit Account Agent for all costs, expenses, and reasonable attorney’s fees expended or incurred by the Deposit Account Agent in connection with such adverse claim or demand, the amount thereof to be fixed and judgment thereof to be rendered by the court in such lawsuit.

 

3.4 Liability Limited.

 

(a) Deposit Account Agent shall have no duties or responsibilities other than the ministerial duties as expressly set forth herein and no other duties and obligations shall be implied (fiduciary or otherwise). Deposit Account Agent shall have no duty to enforce any obligation of any person to make any payment or delivery, or to direct or cause any payment or delivery to be made, or to enforce any obligation of any person to perform any other act. Deposit Account Agent shall be under no liability to the other Parties hereto or to anyone else by reason of any failure on the part of any party hereto or any maker, guarantor, endorser or other signatory of any document or any other person to perform such person’s obligations under any such document. Deposit Account Agent shall have no liability with respect to the transfer or distribution of any funds effected by the Deposit Account Agent pursuant to wiring or transfer instructions provided to the Deposit Account Agent by the Intermediary or Issuer, or set forth in any subscription agreement. Except for instructions given to Deposit Account Agent pursuant to a joint written instruction, Deposit Account Agent shall not be obligated to recognize any agreement between any and all of the persons referred to herein, notwithstanding that references thereto may be made herein and whether or not it has knowledge thereof. In the event of any conflict between the terms and provisions of this Agreement and any other agreement, the terms and conditions of this Agreement shall control subject to Section 4.18 hereof.

 

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(b) Deposit Account Agent shall not be liable to the Issuer or the Intermediary or to anyone else for any action taken or omitted by it in good faith except to the extent that a court of competent jurisdiction determines that Deposit Account Agent’s gross negligence or willful misconduct was the primary cause of any loss to the Issuer or the Intermediary. In no event shall Deposit Account Agent be liable for incidental, indirect, special, consequential or punitive damages of any kind whatsoever (including lost profits), even if Deposit Account Agent has been advised of the likelihood of such loss or damage and regardless of the form of action. The officers, directors, members, partners, trustees, employees, agents, attorneys or other representatives and Affiliates of Deposit Account Agent owe no duty or obligation to any party hereunder and shall have no liability to any person by reason of any error of judgment, for any act done or not done, for any mistake of fact or law, or otherwise. Deposit Account Agent may rely conclusively, and shall be protected in acting, upon any order, notice, instruction (including a joint written instruction (such as a wire transfer instruction)), request, demand, certificate, opinion or advice of counsel (including counsel chosen by Deposit Account Agent), statement, instrument, report or other paper or document (not only as to its due execution and the validity (including the authority of the person signing or presenting the same) and effectiveness of its provisions, but also as to the truth and acceptability of any information therein contained), which is believed by Deposit Account Agent to be genuine and to be signed or presented by the proper person or persons. Deposit Account Agent shall not be bound by any notice or demand, or any waiver, modification, termination or rescission of this Agreement or any of the terms thereof, unless evidenced by a written amendment in accordance with Section 4.11 hereto.

 

(c) Deposit Account Agent shall not be obligated to take any legal or other action or commence any proceeding in connection with the Proceeds, any account in which Proceeds are deposited, this Agreement or any other agreement, or to appear in, prosecute or defend any such legal action or proceeding (whether or not it shall have been furnished with acceptable indemnification and advancement). Deposit Account Agent may consult legal counsel selected by it in the event of any dispute or question as to the construction of any of the provisions hereof or of any other agreement or of its duties hereunder, or relating to any dispute or question involving any party hereto, and shall incur no liability and shall be fully indemnified from any liability whatsoever in acting in accordance with the opinion or instruction of such counsel. The Intermediary shall promptly pay, upon demand, the reasonable fees, costs and expenses of any such counsel.

 

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(d) Deposit Account Agent shall not be responsible for the sufficiency or accuracy of the form of, or the execution, validity, value or genuineness of, any document or property received, held or delivered by it hereunder, or of any signature or endorsement thereon, or for any lack of endorsement thereon, or for any description therein; nor shall Deposit Account Agent be responsible or liable to the other Parties hereto or to anyone else in any respect on account of the identity, authority or rights of the persons executing or delivering or purporting to execute or deliver any document or property or this Agreement. Deposit Account Agent shall have no responsibility with respect to the use or application of any Proceeds paid by Deposit Account Agent pursuant to the provisions hereof. Deposit Account Agent shall have no duty to solicit any payment which may be due to be paid in Proceeds or to confirm or verify the accuracy or correctness of any amounts delivered in accordance with this Agreement or the calculation of the Minimum Amount or the Maximum Amount in respect to the Proceeds. Deposit Account Agent shall not be liable to the Intermediary, Issuer or to anyone else for any loss, which may be incurred by reason of any investment of any monies, which it holds hereunder.

 

(e) Deposit Account Agent shall have the right to assume in the absence of written notice to the contrary from the proper person or persons that a fact or an event by reason of which an action would or might be taken by Deposit Account Agent does not exist or has not occurred, without incurring liability to the other Parties hereto or to anyone else for any action taken or omitted, or any action suffered by it to be taken or omitted, in good faith, in reliance upon such assumption.

 

(f) Deposit Account Agent is authorized, in its sole discretion, to comply with orders issued or process entered by any court with respect to the Proceeds, without determination by Deposit Account Agent of such court’s jurisdiction in the matter. If any portion of the Proceeds is at any time attached, garnished or levied upon under any court order, or in case the payment, assignment, transfer, conveyance or delivery of any such property shall be stayed or enjoined by any court order, or in case any order, judgment or decree shall be made or entered by any court affecting such property or any part thereof, then and in any such event, Deposit Account Agent is authorized, in its sole discretion, to rely upon and comply with any such order, writ, judgment or decree which it is advised by legal counsel selected by it is binding upon it without the need for appeal or other action; and if Deposit Account Agent complies with any such order, writ, judgment or decree, it shall not be liable to any of the Parties hereto or to any other person or entity by reason of such compliance even though such order, writ, judgment or decree may be subsequently reversed, modified, annulled, set aside or vacated.

 

3.5 Reliance on Documents, Etc. The Deposit Account Agent may rely on and shall be protected in acting in reliance upon any instructions or directions furnished to it in writing or pursuant to any provisions of this Agreement and shall be entitled to treat as genuine, and as the document it purports to be, any letter, paper, or other document furnished to it and believed by it to be genuine and to have been signed and presented by the proper Party or Parties. The Intermediary and/or Issuer shall not include the Deposit Account Agent’s name in any document unless such document has been approved in writing by the Deposit Account Agent, except with regard to those documents pertaining to and referring to the Deposit Account Agent’s functions as Proceeds holder pursuant to this Agreement.

 

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3.6 Indemnification. From and at all times after the date of this Agreement, the Issuer and Intermediary shall, to the fullest extent permitted by law, defend, indemnify and hold harmless Deposit Account Agent and each of its directors, officers, members, partners, trustees, employees, attorneys, agents and affiliates (collectively, the “Indemnified Parties”) against any and all actions, claims (whether or not valid), losses, damages, liabilities, costs, penalties, settlements, judgments and expenses of any kind or nature whatsoever (including costs and expenses and reasonable attorneys’ fees) incurred by or asserted against any of the Indemnified Parties from and after the date hereof, whether direct, indirect or consequential, as a result of, in connection with, or arising from or in any way relating to any claim, demand, suit, action or proceeding (including any inquiry or investigation) by any person, including the Intermediary and/or the Issuer, whether threatened or initiated, asserting a claim for any legal or equitable remedy against any person (whether it is an Indemnified Party or not) under any statute or regulation, including any federal or state securities laws, or under any common law or equitable cause or otherwise, arising from or in connection with the negotiation, preparation, execution, performance or failure of performance of this Agreement or any transactions contemplated herein or relating hereto (including tax reporting or withholding or the enforcement of any rights or remedies under or in connection with this Agreement), whether or not any such Indemnified Party is a party to any such action, proceeding, suit or the target of any such inquiry or investigation (without derogation of any other indemnity afforded to Deposit Account Agent); provided, however, that no Indemnified Party shall have the right to be indemnified hereunder for any liability finally determined by a court of competent jurisdiction, subject to no further appeal, to have resulted solely from the gross negligence or willful misconduct of such Indemnified Party. Each Indemnified Party shall, in its sole discretion, have the right to select and employ separate counsel with respect to any action or claim brought or asserted against it, and the reasonable fees, costs and expenses of such counsel shall be paid, upon demand, by the Intermediary.

 

3.7 Compensation. The Intermediary shall compensate Deposit Account Agent for its services hereunder pursuant to a separate agreement. Deposit Account Agent is expressly authorized and directed, but shall not be obligated, to, and may, charge against and disburse to itself (to the extent Rules 15c2-4 under the Securities Exchange Act of 1934, as amended, permits) from the Proceeds that are payable to the Issuer pursuant hereto after the applicable Sale Date(s), from time to time, the amount of any compensation and reimbursement which are due and payable hereunder, including any amount to which Deposit Account Agent or any other Indemnified Party is entitled to seek indemnification pursuant to Section 3.6 hereof, or any other amount owing to Deposit Account Agent hereunder. Deposit Account Agent shall notify the Issuer of any disbursement from the Proceeds to itself or any other Indemnified Party in respect of any reimbursement hereunder and shall furnish to the Issuer copies of all related invoices and other statements through electronically submitting such notice on the Platform. Subject to Rule 15c2-4 under the Securities Exchange Act of 1934, as amended, the Issuer hereby grants to Deposit Account Agent and the other Indemnified Parties a security interest in and lien upon the Proceeds (a) for the payment of any fees, costs, expenses and other amounts due to Deposit Account Agent or any other Indemnified Party hereunder and (b) to secure any and all obligations of the Issuer in this Agreement with the right to offset any amount due any of them under this Agreement against the Proceeds; provided, however, that such lien shall attach only after the Sale Date for the applicable Proceeds. If for any reason funds in the Proceeds are insufficient to cover such amount, the Issuer shall pay, upon demand, such amounts to Deposit Account Agent or any other Indemnified Party upon receipt of copies of related invoices and other statements.

 

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3.8 Filings and Resolution. Concurrently with their execution and delivery of this Agreement, the Issuer shall each deliver to the Deposit Account Agent (a) a copy of its articles of incorporation, certificate of incorporation or similar formation document, (b) corporate resolutions, signed by its corporate secretary, authorizing it to enter this Agreement, and (c) a Certificate of Authority in the acceptable to the Deposit Account Agent.

 

3.9 Customer Information. Concurrently with its execution and delivery of this Agreement, the Issuer shall deliver to the Deposit Account Agent such identification as required by law and such authorization documents, all as the Deposit Account Agent may require. Without limiting the generality the foregoing, the Issuer shall deliver to the Deposit Account Agent (a) a copy of its organizational documents (e.g., articles of incorporation, operating agreement, etc.), (b) corporate/partnership resolutions, signed by its an appropriate signatory, authorizing it to enter this Agreement, and (c) a completed Certificate of Authority in the form approved by the Deposit Account Agent, reflecting the names and titles of the persons authorized to sign and deliver any document specified herein on behalf of any party hereto and an original handwritten exemplar of such persons signature.

 

3.10 Identification Number. The Issuer represents and warrants that (a) its Federal tax identification number (“TIN”) specified on the signature page of this Agreement underneath its signature is correct and is to be used for 1099 tax reporting purposes, and (b) it is not subject to backup withholding. The Issuer agrees to provide the Deposit Account Agent with the tax identification number for any person or entity to whom interest is paid on any of the Proceeds.

 

3.11 Term. The term of this Agreement shall commence as of the date and the year first above written and shall end on the date (the “Termination Date”) which is either (a) the Intermediaries’ notification to the Deposit Account Agent of the termination of the Offering pursuant to Section 2.1(c) of this Agreement, or (b) the final Closing date; provided, however, that the Deposit Account Agent shall perform all necessary actions pursuant to Sections 2.1(a), (b), (c) or (d) hereof in connection with the Proceeds then being held by the Deposit Account Agent, or (c) the date upon which the Deposit Account Agent confirms that it has received in the Offering Deposit Account in an amount equal to at least the Minimum Amount specified on Schedule A and has received a written instruction confirming a Closing with respect to at least the Minimum Amount.

 

During the Term, the Parties agree that (a) the Proceeds will be held in an account for the exclusive benefit of Subscribers (as defined under Rule 15c3-3 of the Securities Exchange Act of 1934) until such time the applicable Securities are considered sold as defined by SEC Rules and the Offering documents (the “Sale Date”) and (b) the Issuer is not entitled to any funds received and no amounts deposited in the Offering Deposit Account shall become the property of the Issuer or any other entity, or be subject to the debts of the Issuer or any other entity.

 

3.12 Termination of Agreement; Resignation of Agent. Upon the first to occur of (a) the disbursement of all amounts in the Proceeds in accordance with this Agreement (including Section 2.1(e) and the operation of applicable state escheatment and unclaimed property laws), (b) the resignation of Deposit Account Agent, (c) termination of the Offering either pursuant to Section 2.1(c) or pursuant to a written instruction, Deposit Account Agent shall be released from its obligations hereunder and Deposit Account Agent shall have no further obligation or liability whatsoever with respect to this Agreement or the Proceeds and the Offering Deposit Account shall be closed. In the event of the termination of the Agreement, the Deposit Account Agent shall return all Proceeds to the Subscribers promptly (noon the following business day) upon notice of such termination. The obligations of the Issuer will continue to exist notwithstanding the termination or discharge of Deposit Account Agent’s obligations or liabilities hereunder until the obligations of the Issuer have been fully performed.

 

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Deposit Account Agent may resign at any time and be discharged from its duties as Deposit Account Agent hereunder by giving the Issuer and the Intermediary at least thirty (30) days’ notice thereof, which may be submitted via email. Upon any such notice of resignation, the Issuer and the Intermediary shall jointly issue to Deposit Account Agent a written instruction authorizing redelivery of the Proceeds to a depository that has been retained as successor to Deposit Account Agent hereunder prior to the effective date of such resignation. As soon as practicable after its resignation, Deposit Account Agent shall turn over to such successor deposit account agent or escrow agent all monies and property held hereunder upon presentation of the document appointing the new deposit account agent or escrow agent and such deposit account agent or escrow agent’s acceptance thereof, and after deduction and payment (to the extent Rule 15c2-4 under the Securities Exchange Act of 1934, as amended, permits) to the retiring Deposit Account Agent after the Sale Date with respect to such Proceeds of all fees, costs and expenses (including court costs and expenses and attorneys’ fees) or any other amount payable to, incurred by, or expected to be incurred by the retiring Deposit Account Agent in connection with the performance of its duties and the exercise of its rights hereunder. In the event no successor deposit account agent or escrow agent has been appointed by the Issuer on or prior to the date Deposit Account Agent’s resignation is to become effective, Deposit Account Agent shall be entitled to tender into the custody of any court of competent jurisdiction all assets then held by it hereunder. Deposit Account Agent shall have no responsibility for the appointment of a successor deposit account agent or escrow agent hereunder.

 

After Deposit Account Agent’s resignation, the provisions of this Agreement shall inure to its benefit as to any actions taken or omitted to be taken by it while it was Deposit Account Agent under this Agreement. Any corporation or other entity into which Deposit Account Agent may be merged or converted or with which it may be merged or consolidated, or any other entity to which all or a majority of all of Deposit Account Agent’s business may be transferred by sale of assets or otherwise, shall be Deposit Account Agent under this Agreement without further act or consent of any party hereto.

 

ARTICLE 4 - GENERAL PROVISIONS

 

4.1 Representations and Warranties. Each of the Issuer and the Intermediary severally covenants and makes the following representations and warranties to Deposit Account Agent:

 

(a) It is duly organized, validly existing, and in good standing under the laws of the state of its incorporation or organization, and has full power and authority to execute and deliver this Agreement and to perform its obligations hereunder;

 

(b) This Agreement has been duly approved by all necessary action, including any necessary shareholder or membership approval, has been executed by its duly authorized officers, and constitutes its valid and binding agreement enforceable in accordance with its terms;

 

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(c) The execution, delivery, and performance of this Agreement is in accordance with the agreements related to the Offering and will not violate, conflict with, or cause a default under its articles of incorporation, bylaws, management agreement or other organizational document, as applicable, any applicable law, rule or regulation, any court order or administrative ruling or decree to which it is a party or any of its property is subject, or any agreement, contract, indenture, or other binding arrangement, including the agreements related to the Offering, to which it is a party or any of its property is subject;

 

(d) All information herein is true and accurate and the Deposit Account Agent may rely solely on information in this Agreement and any amendments to this Agreement. The Deposit Account Agent shall have no responsibility or obligation to interpret the terms of any document related to the Offering, other than the terms of this Agreement, even if the Deposit Account Agent has received a copy of any such document.

 

(e) Deposit Account Agent is appointed to act as agent only for the limited purposes set forth in this Agreement; no representation, statement, communication or other suggestion shall be made that Deposit Account Agent has investigated the desirability or advisability of investment in the Securities or has approved, endorsed or passed upon the merits of purchasing the Securities; and the name of Deposit Account Agent has not and shall not be used in any manner in connection with the offering of the Securities other than to state that Deposit Account Agent has agreed to serve as deposit account agent for the limited purposes set forth in this Agreement;

 

(f) No party other than the Parties hereto has, or shall have, any lien, claim or security interest in the Proceeds or any part thereof. No financing statement under the Uniform Commercial Code is on file in any jurisdiction claiming a security interest in or describing (whether specifically or generally) the Proceeds or any part thereof;

 

(g) It possesses such valid and current licenses, certificates, authorizations or permits issued by the appropriate state, federal or foreign regulatory agencies or bodies necessary to conduct its respective businesses, and it has not received any notice of proceedings relating to the revocation or modification of, or non-compliance with, any such license, certificate, authorization or permit;

 

(h) It is in compliance with all applicable federal, state, and local laws and regulations, including, but not limited to Securities laws, including but not limited to disclosure requirements and rules, regulations and guidance related to contingency offerings; and that Intermediary is in compliance with all anti-money laundering and know-your-customer laws, including the Bank Secrecy Act, the USA PATRIOT Act, and all regulations promulgated thereunder, and economic sanctions implemented by the Office of Foreign Assets Control;

 

(i) It is not a target of any governmental investigation or enforcement action or order; and

 

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(j) All of its representations and warranties contained herein are true and complete as of the date hereof and will be true and complete at the time of any disbursement of Proceeds.

 

4.2 Notice. Any notice, request, demand or other communication provided for hereunder to be given shall be in writing and shall be delivered personally, by certified mail, return receipt requested, postage prepaid, or by transmission by a telecommunications device, and shall be effective (a) on the day when personally served, including delivery by overnight mail and courier service, (b) on the third business day after its deposit in the United States mail, and (c) on the business day of confirmed transmission by telecommunications device. The addresses of the Parties hereto (until notice of a change thereof is served as provided in this Section 4.2 shall be as follows: To the Deposit Account Agent:

 

 

If to the Intermediary:   If to Issuer:
     
FlashFunders, Inc.   Virtra, Inc.
Attn: Brian Park   Attn: Robert D. Ferris, CEO
15260 Ventura Blvd., 20th Floor   7970 S. Kyrene Road
Sherman Oaks, CA 91403   Tempe, AZ 85284
     
with a copy to:   with a copy to:
     
If to Deposit Account Agent:    
     
FinTech Clearing, Inc.   Legal & Compliance, LLC
Attn: Brian Par   Attn: Laura Anthony, Esq.
15260 Ventura Blvd., 20th Floor   330 Clematis Street, Suite 217
Sherman Oaks, CA 91403   West Palm Beach, FL 33401
     
with a copy to:    

 

4.3 Arbitration.

 

(a) All disputes between the Intermediary or Issuer, on the one hand, the Deposit Account Agent on the other hand, relating to the payment of the Proceeds and/or the Deposit Account Agent’s rights, obligations, and liabilities arising from or related to this Agreement shall be resolved by mandatory binding expedited arbitration under the JAMS Comprehensive Arbitration Rules & Procedures in effect as of the date the request for arbitration is filed (the “Rules”) before a single neutral arbitrator selected in accordance with the Rules. Each of the Parties may initiate such arbitration pursuant to the Rules. The arbitration shall be held in Los Angeles, California (such site being herein referred to as the “Forum”). The arbitrator shall issue a written opinion that includes the factual and legal basis for any decision and award, unless the Parties agree otherwise.

 

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(b) Any court having jurisdiction of the Parties and the subject matter may enforce such a decision. Each of the Parties hereto submits to the non-exclusive personal jurisdiction of the courts of the Forum as an appropriate place for compelling arbitration or giving legal confirmation of any arbitration award, and irrevocably waives any objection which it may now or hereafter have to the venue of any such enforcement proceeding brought in any of said courts and any claim of inconvenient forum. Each of the Parties agrees that service of process for all arbitration proceedings may be made in accordance with the Rules and shall be deemed effective as provided therein.

 

(c) Any claim or action of any kind (including, but not limited to, any claims for breach of contract), against the Deposit Account Agent arising out of or connected with this Agreement shall be barred and waived unless asserted by the commencement of an arbitration proceeding within 180 days after the accrual of the action or claim. This limitation shall also apply to claims which might otherwise be asserted against as a “set-off,” credit, cross-complaint, or defense. This section and the forgoing limitation shall survive termination of this Agreement.

 

4.4 Effect of Agreement. This Agreement shall inure to the benefit of, and be binding upon, the respective successors and assigns of the Parties hereto.

 

4.5 Governing Law. This Agreement shall be governed by and construed in accordance with the laws of the State of California.

 

4.6 Counterparts and Electronic Signatures. This Agreement may be executed in counterparts, each of which shall be deemed to be an original, but which together shall constitute one and the same instrument. Delivery of an executed counterpart of this Agreement by facsimile shall be equally effective as delivery of a manually executed counterpart of this Agreement. Any party delivering an executed counterpart by facsimile shall also deliver a manually executed counterpart of this Agreement, but failure to do so shall not affect the validity, enforceability, of binding effect of this Agreement.

 

The intentional action in electronically signing this Agreement shall be evidence of consent to be legally bound by this Agreement, including any schedules hereto and notices. The use of an electronic version of this Agreement and any notices fully satisfies any requirement that they be provided to the Parties in writing. Each party is solely responsible for reviewing and understanding all of the terms and conditions of this Agreement. Each party accepts as reasonable and proper notice, for the purpose of any and all laws, rules and regulations, notice by electronic means, including, the posting of modifications to this Agreement and any schedule hereto. Each party agrees to not contest the admissibility or enforceability of the electronically signed copy of this Agreement in any proceeding arising out of the terms and conditions of this Agreement.

 

4.7 USA Patriot Act Notice. The Deposit Account Agent notifies the Intermediary and Issuer that pursuant to the requirements of the USA Patriot Act (Title III of Pub. L. 107-56, signed into law October 26, 2001) (the “Patriot Act”) the Deposit Account Agent is required to obtain, verify and record information that identifies the other Parties to this Agreement, which information includes the name and address of those Parties and other information that will allow the Deposit Account Agent to identify them in accordance with the Patriot Act. In particular:

 

To help the government fight the funding of terrorism and money laundering activities, Federal law requires all financial institutions to obtain, verify, and record information that identifies each person or entity that opens an account.

 

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WHAT THIS MEANS FOR YOU: when you open an account, we will ask the name and address of the entity and other information that will allow us to identify the business or organization. We may also ask to see identifying documents.

 

4.8 No Third Party Beneficiaries. None of the Intermediary, the Issuer and the Deposit Account Agent intends that any rights, duties or restrictions contained herein shall inure to the benefit of any third party.

 

4.9 Final Agreement. This Agreement is intended by the Deposit Account Agent, Intermediary and the Issuer to be the final, complete, and exclusive expression of the agreement between them. This Agreement supersedes any and all prior oral or written agreements relating to the subject matter hereof. No modification, rescission, waiver, release, or amendment of any provision of this Agreement shall be made, except by a written agreement signed by the Parties hereto by a duly authorized officer thereof.

 

4.10 Security Procedures. Deposit Account Agent may rely solely upon any account numbers or similar identifying numbers provided by the Intermediary or Issuer, as appropriate, to identify (a) a beneficiary, (b) a beneficiary’s bank, or (c) an intermediary bank. Deposit Account Agent may apply any of the Proceeds for any payment order it executes using any such identifying number, even where its use may result in a person other than a beneficiary being paid, or the transfer of funds to a bank other than a beneficiary’s bank or an intermediary bank designated.

 

4.11 Amendment or Waiver. This Agreement may be changed, waived, discharged or terminated only by a writing executed by the Parties hereto; provided, however, that the Deposit Account Agent’s signature (agreement) is not required in respect to any change to, waiver of, discharge or termination of any section to which it is not subject. No delay or omission by any party hereto in exercising any right with respect hereto shall operate as a waiver. A waiver on any one occasion shall not be construed as a bar to, or waiver of, any right or remedy on any future occasion.

 

4.12 Severability. To the extent any provision of this Agreement is prohibited by or invalid under applicable law, such provision shall be ineffective to the extent of such prohibition or invalidity, without invalidating the remainder of such provision or the remaining provisions of this Agreement.

 

4.13 Entire Agreement. This Agreement constitutes the entire agreement between the Parties hereto relating to the holding, investment and disbursement of Proceeds and sets forth in their entirety the obligations and duties of Deposit Account Agent with respect to the Proceeds.

 

4.14 Dealings. Deposit Account Agent and any stockholder, director, officer or employee of Deposit Account Agent may buy, sell, and deal in any of the securities of the Issuer and become interested in any transaction in which the Issuer may be interested, and contract and lend money to the Issuer and otherwise act as fully and freely as though it were not Deposit Account Agent under this Agreement. Nothing herein shall preclude Deposit Account Agent from acting in any other capacity for the Issuer or for any other entity.

 

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4.15 Currency. The currency applicable to any amount payable or receivable under this Agreement is United States dollars.

 

4.16 Force Majeure. Notwithstanding anything to the contrary hereunder, Deposit Account Agent shall not be liable for any delay, failure to perform, or other act or non-act resulting from acts beyond its reasonable control, including acts of God, terrorism, shortage of supply, labor difficulties (including strikes), war, civil unrest, fire, floods, electrical outages, equipment or transmission failures, internet interruption, vendor failures (including information technology providers), and other similar causes.

 

4.17 No Strict Construction. The Parties hereto have participated jointly in the negotiation and draft of this Agreement. In the event any ambiguity or question of intent or interpretation arises, this Agreement shall be construed as if it were drafted jointly by the Parties hereto, and no presumption or burden of proof shall arise favoring or disfavoring any party hereto by virtue of authorship of any provision of this Agreement.

 

4.18 Priority. In the event of any conflict between the provisions of any schedule attached hereto and the remainder of this Agreement, this Agreement shall be construed in a manner prescribed by Deposit Account Agent acting in good faith.

 

4.19 Headings. The headings in this Agreement are for convenience purposes and shall be ignored for purposes of enforcing this Agreement, do not constitute a part of this Agreement, and may not be used by any party hereto to characterize, interpret, limit or affect otherwise any provision of this Agreement.

 

[Signature Page to Follow]

 

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IN WITNESS WHEREOF, the Parties have caused this Agreement to be duly executed delivered by and through its duly authorized representative as of the date and the year first above written.

 

  ISSUER:
     
  VIRTRA, INC.
     
  By:
  Name: Robert D. Ferris
  Title: Chief Executive Officer
     
  INTERMEDIARY:
     
  Flashfunders, inc.
     
  By:
  Name: Brian Park 
  Title: President
     
  DEPOSIT AGENT:
     
  Fintech clearing, LLC
     
  By:
  Name: Brian Park
  Title: President 

 

[Signature Page to the Offering Deposit Account Agency Agreement]

 

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SCHEDULE A

 

Offering Details

 

In connection with the Offering, the Issuer is offering securities for sale as follows:

 

Securities Offered: [__]
Minimum Funding Amount1: (less the Debt Conversion Amount)
Debt Conversion Amount2: [__]
Maximum Funding Offered: [__]
Termination Date3: [__]

 

1 “Debt Conversion Amount” shall mean the Debt Conversion Amount specified on Schedule A, which represents the aggregate purchase price of the Securities to be sold at initial Closing of the Offering upon conversion of outstanding indebtedness of the Issuer that is being converted pursuant to written agreement of the Issuer and the holder of such indebtedness (an Subscriber). The Debt Conversion Amount shall be counted toward the Minimum Amount. Issuer and Intermediary represent to the Deposit Account Agent that appropriate disclosures to potential Subscribers regarding the Debt Conversion Amount have been made as part of the Offering; and Issuer agrees to take appropriate measures to verify that any Debt Conversion Amount is an actual outstanding obligation of the Issuer. The Parties agree that the Deposit Account Agent solely relies on information reported on Schedule A and has no duty or obligation to verify its accuracy.

 

2 “Termination Date” shall mean the date on which the Maximum Funding Amount has been sold in one or more Closings or the Offering End Date specified on Schedule A, whichever event occurs first; provided, however, that the Issuer and Intermediary may extend the Offering End Date in this definition for up to 60 days upon delivery of a written instruction to Deposit Account Agent and its statement that it has received and accepted subscription statements (and the accompanying payments have been deposited in the Proceeds and have cleared) equal to the Minimum Amount.

 

3 “Minimum Amount” shall mean the Minimum Funding Amount specified on Schedule A, which corresponds to the minimum aggregate dollar amount of securities that must be ordered to meet the contingency for a successful Offering. For purposes of this Agreement only, the Minimum Amount may be $0 if all contingencies have already occurred (e.g., Issuer opts to terminate its relationship with a deposit account agent who has completed its services through the contingency period). In any event, Issuer and Intermediary agree to provide accurate information in Schedule A and understand and agree that Deposit Account Agent solely relies on such information and has no duty or obligation to verify its accuracy.

 

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SCHEDULE B

Funding Instructions

 

Report from Intermediary

 

FlashFunders shall submit a report (“Subscriber Report”) to the Deposit Account Agent with the following information for each Subscriber before Subscriber initiates the funding wire:

 

  Name
  Address
  Number of shares
  Purchase price
  Purchase date
  Form of payment (e.g., wire or check)

  If by wire, wire originating bank
  if by check, instruct the Subscriber to make checks payable to FinTech Clearing, LLC as Deposit Account Agent for [Issuer]

  Return Payment instructions (should a Return Payment be required pursuant to this Agreement)

 

If there is a discrepancy between the Subscriber Report and the payment submitted by the Subscriber, the Deposit Account Agent may, in its sole discretion, reject a Subscriber’s payment. If there is a material discrepancy in purchase price, the Deposit Account Agent will reject the payment. If there is a non-material discrepancy in purchase price, the Deposit Account Agent may in its sole discretion accept the payment and require that either the Subscriber Report be corrected or the difference in purchase price be submitted. There will be a service fee charged for any discrepancies.

 

Wire Instructions to Subscribers

 

Subscribers shall be instructed to wire fund to the Offering Deposit Account held at Pacific Western Bank in connection with the Offering as follows:

 

ABA Routing #: 122238200
Bank Name: Pacific Western Bank
Bank Address: 1880 Century Park East, Suite 100
  Los Angeles, CA 90067
   
Beneficiary Account Name: FinTech Clearing, LLC
Beneficiary Account #: [TBD]
Beneficiary Address: 1538 20th St., Floor 2
  Santa Monica, CA 90404
REF: Virtra - [Subscriber Name]

 

** Each wire must include return payment instructions. **

 

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SCHEDULE C

 

Fee Schedule

 

Service   Fee
Cash Management Fee   25 bps (0.25 %) of Proceeds disbursed to Issuer
Technology Fee   25 bps (0.25 %) of Proceeds disbursed to Issuer
CIP/AML check (applied to each subscriber)   $2.00
Wire Transfers – Incoming (Domestic or Foreign)   $12.00
Wire Transfers – Outgoing (Domestic)   $30.00
Wire Transfers – Outgoing (Foreign)   $40.00
ACH per transaction (incoming or outgoing)   $0.50
ACH Exceptions (incoming or outgoing)   $8.00
Check Processing (incoming or outgoing)   $10.00

 

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Exhibit 8.2

 

FORM OF

Issuer ACKNOWLEDGEMENT

Regulation A Offering

 

The undersigned (the “Issuer”) has engaged FinTech Clearing, LLC (“Broker Dealer”) and FlashFunders, Inc. (“Website Administrator”) to provide certain services to the Issuer pursuant to the Terms of Use located at www.flashfunders.com (as amended or supplemented from time to time, the “Terms of Use”). All capitalized terms not expressly defined in this Issuer Acknowledgement shall have the respective meanings ascribed to them in the Terms of Use. As a material inducement to Broker Dealer and Website Administrator to provide the Services, the Issuer hereby agrees as follows:

 

1.       Defined Terms. As used herein, the following terms have the following meanings:

 

(a)       Affiliate” means any entity controlled by or under common control with the Issuer and any predecessor of the Issuer. For the purposes hereof, “control” means the possession, direct or indirect, of the power to direct or cause the direction of the management and policies of an entity, whether through the ownership of voting securities, by contract or otherwise.

 

(b)        Closing” means the consummation of an Offering.

 

(c)        Commission” means the Securities and Exchange Commission.

 

(d)       Gross Proceeds” means the total gross process raised by an Issuer in an Offering.

 

(e)       Investor” means any investor or any potential investor in an Offering.

 

(f)       Offering” means an Offering being conducted pursuant to Rule 251(a) of the Securities Act.

 

(g)       Offering Statement” means an offering statement filed with the Commission pursuant to Rule 252 of the Securities Act.

 

(h)       Platform” means the website located at www.flashfunders.com.

 

2.       Compensation; Reimbursable Expenses; Payment Terms.

 

(a)       Compensation. Prior to the placement of the Offering on the Platform the Issuer shall pay to FlashFunders a fee equal to ten thousand dollars ($10,000) (the “Fees”). Broker Dealer will be compensated in connection with the Offering pursuant to and in accordance with that certain Selected Dealers Agreement by and between Broker Dealer and Boustead Securities, LLC, a copy of which is attached to this Issuer Acknowledgement as Exhibit A. Broker-Dealer may further enter into an Offering Deposit Account Agency Agreement (“Deposit Agreement”) with the Issuer in the form attached as Exhibit B to act as the Deposit Account Agent for the Offering and shall be compensated and/or reimbursement according to the terms and conditions therein.

 

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(b)       Reimbursable Expenses. Broker Dealer shall be entitled to reimbursement for all out-of-pocket third party expenses that it pays or incurs on behalf of the Issuer in connection with any Offering (collectively, “Reimbursable Expenses”). Reimbursable Expenses shall include, without limitation, any state filing fees, blue-sky filing fees, and payment processing fees.

 

(c)       Payment Terms. At each Closing, Broker Dealer shall deliver to the Issuer a summary of the unpaid Reimbursable Expenses as of such Closing. The Issuer acknowledges and agrees that Broker Dealer has the right, but not the obligation, to deduct all such Reimbursable Expenses directly from the funds held in the Escrow Account (the “Closing Funds”). Broker Dealer shall invoice the Issuer for all Reimbursable Expenses not deducted from the Closing Funds. The Issuer shall pay all such amounts within ten (10) calendar days after the date of such invoice.

 

3.       Representations, Warranties and Covenants. With respect to any Offering, the Issuer hereby represents, warrants and covenants to Broker Dealer and Website Administrator that:

 

(a)       Terms of Use. The Issuer shall at all times comply with the Terms of Use.

 

(b)       Disclosure. None of the information filed with the Commission by or on behalf of the Issuer, or any of the information provided to Broker Dealer or Website Administrator (through the Platform or otherwise) by or on behalf of the Issuer, contains any untrue statement of a material fact or omits to state a material fact necessary in order to make such statements not misleading in light of the circumstances under which they were made.

 

(c)       Reliance. Broker Dealer and Website Administrator are entitled to rely on all representations and warranties of the Issuer made in any investment documents, included in any Offering materials, or otherwise provided in connection with any Offering.

 

(d)       Securities Filings. The Issuer will timely make all securities filings required under applicable federal and applicable state securities laws, and will otherwise abide by all of the rules, regulations and other requirements applicable to issuers of securities under the Securities Act and other applicable laws.

 

(e)       Own Advisors. The Issuer has been advised to, and has, consulted with the Issuer’s own legal, financial and tax advisors in connection with an Offering. The Issuer is not relying on any statements or representations of Broker Dealer or Website Administrator or their agents, for legal, financial or tax advice with respect to an Offering, use of the Platform or any corporate preparation, clean-up and/or structuring of the Issuer related thereto.

 

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(f)       No Assurances. The Issuer understands that Broker Dealer can make no assurance that any Offering will be successful or that the Issuer will receive any minimum or target investment in such Offering.

 

(g)       Termination of Offering. The Issuer acknowledges and agrees that (i) Broker Dealer has the right, without any liability to the Issuer, to deny the Issuer access to the Platform or terminate any Offering at any time and for any or no reason (including, without limitation, if Broker Dealer determines that the Issuer or such Offering presents the potential for fraud or otherwise raises concerns about Investor protection), and (ii) as between the Issuer (and its stockholders and affiliates) and Broker Dealer, to the fullest extent permitted by law, Broker Dealer has no liability or obligation to conduct any examination or investigation, or to detect, conclude or report to the Issuer any concerns, based upon any information known to or discoverable by Broker Dealer, that the Issuer or such Offering presents the potential for fraud or otherwise raises concerns about Investor protection.

 

(h)       Notice of Termination of Offering. The Issuer shall immediately notify Broker Dealer in writing if the Issuer terminates, cancels or is otherwise unable to complete an Offering.

 

(i)       Use of Platform. The Issuer acknowledges that the Platform has been developed and is maintained by Website Administrator. WEBSITE ADMINISTRATOR DOES NOT RECOMMEND, SOLICIT TRANSACTIONS IN, RECEIVE COMPENSATION FROM, OR OTHERWISE PARTICIPATE IN SECURITIES OFFERINGS IN ANY MANNER. The Platform serves only as an online interface utilized by the Broker Dealer to display securities offerings. All securities related activities are conducted by Broker Dealer.

 

(j)       Compliance with Laws. THE ISSUER HAS READ, CONSULTED WITH ITS OWN LEGAL ADVISOR REGARDING, AND UNDERSTANDS RULES 251 TO 263 OF THE SECURITIES ACT AND REGULATION A. THE ISSUER HAS COMPLIED WITH THE REQUIREMENTS IN RULE 251 TO 263 OF THE SECURITIES ACT.

 

(k)       No Disqualification Event. None of the Issuer, any of its predecessors, any affiliated issuer, any director, executive officer, other officer of the Issuer participating in the Offering, any beneficial owner of 20% or more of the Issuer’s outstanding voting equity securities, calculated on the basis of voting power, nor any promoter connected with the Issuer in any capacity at the time of sale (each, an “Issuer Covered Person”) is subject to any of the “Bad Actor” disqualifications described in Rule 262(a)(1) to (8) under the Securities Act (a “Disqualification Event”), except for a Disqualification Event covered by Rule 262(b) or (c) under the Securities Act. The Issuer has exercised reasonable care to determine whether any Issuer Covered Person is subject to a Disqualification Event. Prior to the commencement of an Offering, the Issuer shall cause each Issuer Covered Person to complete, execute and deliver to Broker Dealer a bad actor questionnaire provided by Broker Dealer.

 

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(l)       Eligible Issuer. The Issuer is organized under the laws of the United States or Canada, or any State, Province, Territory or possession thereof, or the District of Columbia, with its principal place of business in the United States or Canada. The Issuer is not required to file reports pursuant to section 13 or 15(d) of the Securities Exchange Act of 1934 (the “Exchange Act”) immediately before the offering. The Issuer not an investment company registered or required to be registered under the Investment Company Act of 1940 or a business development company as defined in section 2(a)(48) of the Investment Company Act of 1940. The Issuer is not issuing fractional undivided interests in oil or gas rights, or a similar interest in other mineral rights. The Issuer is not, and has not been, subject to any order of the Commission entered pursuant to Section 12(j) of the Exchange Act within five years before the filing of the Offering Statement. The Issuer has filed with the Commission all reports required to be filed, if any, pursuant to Rule 257 during the two years before the filing of the offering statement (or for such shorter period that the Issuer was required to file such reports). The Issuer is not a development stage company and has a specific business plan. Such business plan does not indicate that the Issuer plans to engage in a merger or acquisition with an unidentified company or companies. A copy of such business plan is, or will be, included in the Offering Statement.

 

(m)       Offering Statement. The Issuer has completed and filed with the Commission, or will complete and timely file with the Commission, the Offering Statement in compliance with Rule 252 of the Securities Act. The Commission has qualified the Offering Statement. The Issuer will provide Broker Dealer with a filed copy of the Offering Statement and all amendments thereto. The Issuer acknowledges that the Issuer is solely responsible for the contents of its Offering Statement and is not relying on any statements or representations of Broker Dealer or its agents, for legal or other advice with respect to its Offering Statement or any amendments thereto or other filings with any governmental agency.

 

(n)       Indemnification. The Issuer agrees to indemnify, hold harmless and defend the Indemnified Parties at the Issuer’s expense, against any and all claims, actions, proceedings, and suits and all related liabilities, damages, settlements, penalties, fines, costs and expenses and costs and expenses of investigations (including, without limitation, reasonable attorneys’ fees and other dispute resolution expenses) incurred by any Indemnified Party arising out of or relating to (a) the Issuer’s breach of any representation, warranty or covenant, or any of its obligations, under this Issuer Acknowledgement or any of the offering documents and/or (b) any violation by the Issuer of any law, rule, order or regulation applicable to an Offering (including, without limitation, the Securities Act).

 

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(o)       Incorporation by Reference. The Terms of Use (including, without limitation, Sections 18 (Disclaimer of Warranties), 19 (Limitation of Liability; Sole and Exclusive Remedy), 21 (Dispute Resolution and Governing Law) and 22 (Binding Arbitration)) are hereby incorporated into this Issuer Acknowledgement by this reference.

 

(p)       Conflict. In the event of any conflict between this Issuer Acknowledgement and the Terms of Use, this Issuer Acknowledgement shall govern.

 

[remainder of this page intentionally left blank]

 

  5  
 

 

In Witness Whereof, the Issuer has executed this Issuer Acknowledgement as of the day and year set forth below.

 

  ISSUER NAME: VIRTRA, INC.
     
  By (signature):       

  Name: Bob Ferris
  Title: Chief Executive Officer
  Date:     

 

ACKNOWLEDGED AND ACCEPTED:

 

FINTECH CLEARING, LLC

 

By:       
Name: Brian Park  
Title: President  
Date:    

 

FLASHFUNDERS, INC.  
     
By:       
Name: Brian Park  
Title: President  
Date:    

 

     
 

 

EXHIBIT A

SELECTED DEALERS Agreement

(See attached)

 

     
 

 

EXHIBIT B

OFFERING DEPOSIT ACCOUNT AGENCY Agreement

(See attached)

 

     
 

 

 

Exhibit 11.1

 

 

CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

 

We hereby consent to the inclusion in this Offering Circular on Form 1-A of VirTra, Inc. (the “Company”) of our report dated March 30, 2017, with respect to the Company’s financial statements as of December 31, 2016 and for the year then ended.

 

We also consent to the reference to our firm under the caption “Experts” in this Registration Statement.

 

/s/ Friedman LLP  
   
East Hanover, New Jersey  
September 8, 2017  

 

 

 
 

 

 

Exhibit 11.2

 

CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

 

We hereby consent to the inclusion in this Offering Circular on Form 1-A of VirTra, Inc. (the “Company”) of our report dated March 31, 2016, with respect to the Company’s financial statements as of December 31, 2015 and for the year then ended.

 

We also consent to the reference to our firm under the caption “Experts” in this Registration Statement.

 

/s/ Semple, Marchal & Cooper, LLP  
 Semple, Marchal & Cooper, LLP  
Phoenix, Arizona  
September 8, 2017