VTSI 10-K & 10-Q changes, risk factors and insider trading

We depend on governmentinternational, federal, state, regional and local 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. Federal, state, regional and local governmental agencies represented substantiallyapproximately all79% of our total revenues in fiscal year 2024.2025. 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.

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

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

The Sarbanes-Oxley Act requires, among other things, that we maintain effective internal control over financial reporting and disclosure controls and procedures. 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 are required to have our independent registered public accounting firm attest to the effectiveness of our internal control over financial reporting the later of (i) our second annual report on Form 10-K, or (ii) 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 could require that we incur substantial accounting expenseexpenses and expend significant management efforts including the potential of 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.

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 without further approval by our stockholders based upon such factors as our Board of Directors may deem relevant at that time. It is possible possible that we will issue additional shares of Common Stock under circumstances we may deem appropriate at the time.

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 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 11,260,20911,303,885 shares of our Common Stock outstanding as of March 24,23, 2025,2026, 7,500no sharesshares, other than those held by persons who are “control persons”, are restricted subject to Rule 144 with the remaining shares tradable without restriction.144. 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.

The provisions of our Articles of Incorporation and our Bylaws may be deemed to have anti-takeover effects, which include when and by whom whom special meetings of our stockholders may be called, and may delay, defer or prevent a takeover attempt. In addition, certain provisions provisions of the Nevada Revised Statutes also may be deemed to have certain anti-takeover effects which include that control of shares acquired more than 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 2,500,000 shares of preferred stock with such rights and preferences as may be determined from time to time by our Board of Directors at their sole discretion. Our Board of Directors may, without stockholder approval, establish and 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.

Gross Profit. Gross profit was $19,412,515$15,202,626 for the year ended December 31, 2024,2025, compared to $27,413,073$19,412,515 for the same period in 2023,2024, representing a decrease of $8,000,558$4,209,889 or 29%.22%. The gross profit margin was 74%68% for the year ended December 31, 2024,2025, and 71%74% for the same period in 2023.2024. The gross profit decrease was mainly due to the decrease in revenue.revenue Theand Company, however, was able to slightlythe increase its marginsin ascost itof continuessale todescribed optimize its processes.above.

Operating Expenses. Net operating expense was $17,416,184$14,765,131 for the year ended December 31, 2024,2025, compared to $17,029,508$17,416,184 for the same period in 2023,2024, representing ana increasedecrease of $386,676,$2,651,053 or 2%,15%, with general and administrative expenses increasingdecreasing by $177,688$2,031,346 or 1%14% and research research and development expenses increasingdecreasing by $208,988$619,707 or 7%.21%. The increasedecrease in operating and general and administrative expenses wasreflects management’s drivencontinued by an increase in travel costs, IT infrastructureefforts to prepappropriately VirTraalign foroverhead NISTcosts compliance,with current revenue levels. The decrease in research and increased labor costs. R&Ddevelopment costs increasedin 2025 was primarily attributable to the capitalization of certain significant development initiatives rather than expensing those costs as VirTraincurred. The Company continues to improveinvest in new product offerings and innovative ideas to enhance and expand its systems,product processes and tools as to remain competitive in its space.portfolio.

Other Income.Income (Expense). Other net incomeexpense was $254,636$290,307 for the year ended December 31, 2024,2025, compared to other income of $586,082$254,636 for the the same period in 2023,2024, representing a decrease of $331,446.$544,943. This decrease is due to sevenlarge fewerforeign monthsexchange ofexpenses rentalrelated income,to partially2023 offsetcontracts bythat anfinalized, increasewhere the payment ended up being significantly lower due to the major shift in interestexchange income.rate.

Income Tax Tax Expense.Expense (Benefit). Income tax expensebenefit was $887,286$111,258 for the year ended December 31, 2024,2025, compared to an expense of $1,818,812$887,286 for the same period in 2023,2024, representing a decrease in expense of $931,526 $998,544 or 51%.113%.

Net Income. Net income was $1,363,681$258,446 for the year ended December 31, 2024,2025, compared to $9,150,835net income of $1,363,681 for the same period in 2023, 2024, representing a decrease of $7,787,154$1,105,235 or 85%.81%. All the factors discussed above played a role in the net result, with our main issue being the revenue yearyear-over-year overdecrease yearin decrease.revenue. We continue to improvedecrease our margins,operating expenses, which offset some of the decrease in revenues.

Net cash cash provided by operating activities was $1,257,266$4,587,967 for the year ended December 31, 2024,2025, as compared to $6,682,616$1,257,266 of cash provided by by operating activities for the year ended December 31, 2023.2024. The decreaseincrease in cash provided was primarily driven by operatingefforts activitiesmade wasby mostly duethe team to the lowercollect netaccounts income.receivable and lowering our on-hand inventory and work-in-process accounts.

Net cash used in financing activities was $220,709$253,452 for the year ended December 31, 2024,2025, as compared to $188,184$220,709 used in financing activities for the year ended December 31, 2023.2024. FinancingThis activitiescash inwas bothused yearsprimarily consistedto offund principalour paymentsmortgage of debt, offset by proceeds from the exercise of stock options.payments.

The Company defines bookings as the total of newly signed contracts, awarded RFP’s and purchase orders received in a defined time period. The Company received bookings totaling $12.2$7.3 million for the three months ended December 31, 2024.2025. This brings the total booking bookings for the year ended 20242025 to $29.6$26.7 million. The Company has made one change to the booking qualifications. WeAs havepreviously disclosed, in 2024 we strengthened the language in the STEP contract Terms and Conditions to guarantee the agreement for the full three-year term. This means beginningchange inwas Q4 we had 8 STEP contracts with the full contract 3-year value recorded as bookings amountingdone to an additional $1.9 million. This change also securessecure future revenue and lowerslower our risk of unsigned or cancelled contracts. SinceTherefore, with thethis change was only made in Q4change, we still estimate,believe there are $5.3$2.5 million in renewable STEP contract options still outstanding, and based on current renewal ratesrates, the Company believes 95% of those options will be exercised.

The Company defines backlog as the accumulation of bookings from signed contracts and purchase orders that are not started, or are uncompleted performance objectives, and cannot be recognized as revenue until delivered in a future quarter. The Company splits the backlog into three categories. The first is capital which includes sales of all the simulators, corresponding accessories, installs, training custom content and custom design work. The second and third are extended warranty agreements and STEP agreementsagreements, respectively, that are deferred revenue recognized on a straight-line basis over the life of each respective agreement. As of December 31, 2024,2025, the Company’s backlog was $10.6$13.8 million in Capital, $6.6$5.1 million in Service and $4.8$6.7 million in STEPSTEP, for a total of $22$25.6 million.

Management estimates the majority of the new bookings received in the fourth quarter of 20242025 will be converted to revenue in 2025.2026. Management’s estimate for the conversion of backlog is based on current contract delivery dates,dates; however, contract terms and installinstallation dates are subject to modification and are routinely changed at the request of the customer or due to factors outside the Company’s control.

The Company only ships products when it has reasonable assurance that it will receive payment from the customer. When such assurance is not not available, the Company will require payment in advance. For customers other than United States governmental agencies, the Company generally requires advance deposits prior to shipment. The assessment of a customer’s creditworthiness is reliant on management’s judgment regarding such factors as previous payment history, credit rating, credit references and market reputation. The Company has decided to take a more conservative approach to the bad debt reserve by calculating a percentage of all outstanding ARaccounts receivable and updating the reserve quarterly based-onbased on the age of the accounts receivable.

Inventory is stated at the lower of cost or net realizable value with cost being determined on the average cost method. Work in progress and finished goods inventory includes an allocation for capitalized labor and overhead. Provision is made for obsolete, slow movingmoving, or defective items items where appropriate. This estimated valuation requires that management make certain judgments about the likelihood that specific inventory inventory items may have minimal or no realizable value in the future. These judgments are based on the current quantity of the item on hand compared to historical sales volumes, potential alternative uses of the products and the age of the inventory item.

Revenues include sales of products and services and are in 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 assurance-type warranties, extended service-type warranty agreements, related support, customer content and design work.

In reviewing our contracts, the identification of the performance obligations within the contracts, allocation of the transaction price to the performance obligations and the point when performance obligations were satisfied required significant judgment. In identifying the performance obligations, the Company considered whether the customer has a reasonable expectation that the Company will provide those goods or services and would view those goods or services as part of the negotiated exchange. The Company believes that, generally, our performance obligations are explicit in the contracts. The Company allocates the transaction price to the performance obligations based on the relative standalone selling price basis. This required consideration and determination of the stand-alone selling price for each distinct good or service using various sources of information. Under ASC 606, the Company recognizes revenue only when it satisfies a performance obligation by transferring the good or service to the customer. To determine when the performance obligation had been transferred to the customer, the Company consideredconsiders control of the performance obligation transferred once the customer hadhas the right and ability to direct the use of the product or service and the customer obtainedobtains substantially all the remaining benefit from the products and services.

Results of operations for the three and six months ended MarchJune 31,30, 2026, and MarchJune 31,30, 2025

Cost of Sales. Cost of sales increased to $2,347,656 for the three months ended June 30, 2026, from $2,166,461 for the same period in 2025, an increased of $181,195, or 8%, primarily due to a few content projects closing out which is charged to cost of goods as they finish and are sent to all customers. Cost of sales decreased to $1,340,342$3,687,998 for the threesix months ended March 31,June 30, 2026, from $1,963,367$4,129,828 for the same period in 2025, a decrease of $623,025,$441,830, or 32%,11%, primarily due to lower sales volumes. DespiteCost of sales decreased on a year-over-year basis; however, the overall decreasecorresponding reduction was less significant than the decline in revenue, resulting in an increase in cost of sales, year over year, cost of sales increased as a percentage of revenue,revenue. asThis certainwas driven primarily by development and content creation costs couldthat are not bedirectly reducedvariable inwith proportionrevenue to the decline in revenues.levels.

Gross Profit. Gross profit was $2,133,804$3,415,702 for the three months ended MarchJune 31,30, 2026, compared to $5,196,880$4,812,477 for the same period in 2025, a decrease of $3,063,076,$1,396,775, or 59%.29%. Gross profit was $5,549,506 for the six months ended June 30, 2026, compared to $10,009,357 for the same period in 2025, a decrease of $4,459,851, or 45%. The gross profit margin for the three months ended MarchJune 31,30, 2026 and 2025 was 61%59% and 73%,69%, respectively. The gross profit margin for the six months ended June 30, 2026 and 2025 was 60% and 71%, respectively. This decrease in margin is driven by the Company continuing to putwork outon new productscenarios for all our customers and workimprove onour integrations with other software, including VBS,VBS and Vialytics, which will help drive revenue in the future.revenue.

Operating Expenses. Net operatingOther Income. Other income net of other expense was $3,461,845$14,645 for the three months ended MarchJune 31,30, 2026, compared to $3,829,077net forother the same period in 2025, a decreaseexpense of $367,232,$748,052 or 10%. The decrease in operating expenses for the period results from continuing efforts by the Company to optimize and reduce overhead expenses during times of anticipated revenue declines Operating Income. Operating loss was ($1,328,041) for the three months ended March 31, 2026, compared to operating income of $1,367,803 for the same period in 2025, aan decreaseimprovement of $2,695,844$762,697, or 197%.102%. ThisOther year-over-yearincome decreasenet of other expense was $68,053 for the six months ended June 30, 2026, compared to net other expense of $749,794 for the same period in 2025, an improvement of $817,847 or 109%. The change from expense to income is primarily attributable to ana increasedsignificant costforeign exchange (FX) loss recognized in the second quarter of sales, only2025, marginalcompared declineswith minimal FX expense and higher interest income in operating expenses, and reduced revenues.2026.

Provision (Benefit) for Income Tax. Provision for income tax was $54,000$88,439 for the three months ended MarchJune 31,30, 2026, compared to $102,000 ($9,000) benefit for the same period in 2025, a decrease of $48,000,$97,439, or 47%.1083%. Provision for income tax was $142,438 for the six months ended June 30, 2026, compared to $93,000 for the same period in 2025, an increase of $49,438, or 53%. Provision for income tax is estimated quarterly applying both federal and state tax rates.

Net Income. Net loss was ($1,328,632$261,258) for the three months ended MarchJune 31,30, 2026, compared to net income of $1,264,060$175,314 for the same period in 2025, a decrease of $2,592,692$436,572 or 205%.249%. Net loss was ($1,589,890) for the six months ended June 30, 2026, compared to net income of $1,439,374 for the same period in 2025, a decrease of $3,029,264 or 210%. The fluctuation in net income relates to each respective revenue section discussed above.

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 $17,850,178$14,312,743 and $18,594,598$ 18,594,598 of cash and cash equivalents as of MarchJune 31,30, 2026, and December 31, 2025, respectively. Working capital was $29,276,508$28,373,949 and $30,793,890 as of MarchJune 31,30, 2026, and December 31, 2025,2025 respectively.

Net cash used in operating activities was $580,390$2,720,870 and net cash provided by operating activities was $65,691$6,047,430 for the threesix months ended March 31,June 30, 2026 and 2025, respectively. Net cash used in operating activities resulted primarily from the net loss for the period, period and increases in inventory which is intentionally done to support future growth.growth and $1,000,000 used for the Orlando building purchase deposit.

Net cash used in investing activities was $96,875$1,442,859 for the threesix months ended MarchJune 31,30, 2026, compared to net cash used in investing activities of $428,3713,261,941 for the threesix months ended MarchJune 31,30, 2025. Investing activities in 2026 and 2025 consisted of purchases of property and equipment.

Net cash used in financing activities was $67,154$122,116 for the threesix months ended MarchJune 31,30, 2026, compared to $65,521$128,962 used in the threesix months ended MarchJune 31,30, 2025. In both periods, cash was used primarily for principal payment of debt.debt and in 2026 the creation of the new mortgage note for the purchase of the Orlando building.

The Company defines bookings as the total of newly signed contracts, awarded RFP’s and purchase orders received in a defined time period. The Company received bookings totaling $3.8$5.5 million for the three months ended MarchJune 31,30, 2026 and bookings totaling $9.3 million for the six months ended June 30, 2026. The Company has made one change to the booking qualifications. As previously disclosed, in 2024 we strengthened the language in the STEP contract Terms and Conditions to better ensure the agreement remains in effect for the full three-year term. This change was done to secure future revenue and lower our risk of unsigned or cancelled contracts. Therefore, with this change, we believe there are $2.1$1.7 million in renewable STEP contract options still outstanding, and based on current renewal rates, the Company believes 95% of those options will be exercised.

The Company defines backlog as the accumulation of bookings from signed contracts and purchase orders that are not started, or have uncompleted performance objectives, and cannot be recognized as revenue until delivered in a future quarter. The Company splits the backlog into three categories. The first is capital, which includes sales of all the simulators, corresponding accessories, installs, training custom content and custom design work. The second and third are extended warranty agreements and STEP agreements that are deferred revenue recognized on a straight-line basis over the life of each respective agreement. As of MarchJune 31,30, 2026, the Company’s backlog was $13.2 million in Capital, $4.4$3.8 million in Service and $7.6$7.9 million in STEP, for a total of $25.2 $24.9 million. This is a slight decrease in backlog from December 31,202531, 2025 which sat at $13.8 million in Capital, $5.1 million in Service and $6.7 million in STEP, for a total of $25.6 million Management estimates that most new capital bookings received in the firstsecond quarter of 2026 will be converted to revenue in 2026. Management recognizes that there are a percentage of capital contracts that will extend into 2027 by request of the customers. Management’s estimate for the conversion of backlog is based on current contract delivery dates; however, contract terms and install dates are subject to modification and are routinely changed at the request of the customer or due to factors outside the Company’s control.

Our discussion and analysis of our financial condition and results of operations are based on our unaudited financial statements, which have been prepared in accordance with GAAP. The preparation of our unaudited financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenue, expenses, and related disclosure of contingent assets and liabilities. On an ongoing basis, we evaluate our estimates, including those related to areas that require a significant level of judgment or are otherwise subject to an inherent degree of uncertainty. Significant accounting estimates in these financial statements include valuation assumptions for share-based payments, allowance for doubtful accounts and notes receivable, inventory reserves, accrual for warranty reserves, the carrying value of long-lived assets, income tax valuation allowances, the carrying value of cost basis investments, and the allocation of the transaction price to the performance obligations in our contracts with customers. We base our estimates on historical experience, our observance of trends in particular areas, and information or valuations and various other assumptions that we believe to be reasonable under the circumstances and which form the basis for making judgments about the carrying value of assets and liabilities that may not be readily apparent from other sources. Actual amounts could differ significantly from amounts previously estimated. For a discussion of our critical accounting policies, refer to Part I, Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in our Annual Report on Form 10-K for the year ended December 31, 2025. Management believes that there have been no changes in our critical accounting policies during the three months ended MarchJune 31,30, 2026.

As of MarchJune 31,30, 2026, 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 guaranteed 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.