Good afternoon, and welcome to VirTra’s Third Quarter 2022 Earnings Conference Call. My name is Keith, and I will be your operator for today’s call. Today’s call is being recorded. Joining us for today’s presentation are the company’s Chairman and Co-CEO, Bob Ferris; and Co-CEO, John Givens; Following their remarks, we will open the call for questions from VirTra’s institutional analysts and investors. Before we begin the call, I would like to provide VirTra’s Safe Harbor statements that includes cautions regarding forward-looking statements made during this call. During this presentation, management may discuss financial projections, information or expectations about the company’s products and services or markets or otherwise make statements about the future, which are forward-looking and subject to a number of risks and uncertainties that could cause actual results to differ materially from the statements made. The company does not undertake any obligation to update them as required by law. Finally, I would like to remind everyone this call will be made available for replay via a link in the Investor Relations section of the company’s website at www.virtra.com. Now, I would like to turn the call over to VirTra’s Chairman and Co-CEO, Mr. Bob Ferris. Sir, please proceed.

Thank you, Keith, and thank you, everyone, for joining us this afternoon. After the market closed today, we issued a press release that provided our financial results for the third quarter and nine months ended September 30, 2022, along with highlighted business accomplishments. We also filed our 10-Q with the SEC today, which is available for a review at your discretion. The third quarter included several exciting milestones for VirTra that we are proud to update you on today. Importantly, we had a record quarter of bookings of $16.7 million representing year-over-year growth of 52%, bringing our year-to-date bookings to $26.6 million. Our strong bookings in the third quarter allowed us to end the period with a record backlog of $28.3 million up 30% year-over-year. This growth was driven by our continued penetration of our core law enforcement markets. Keep in mind, we still see massive upside in the military market for our shareholders, especially given VirTra’s technological leadership position with de-escalation and small arms training. We are increasingly convinced we can expand our military simulation market share through efforts spearheaded by John Givens that he will detail shortly. Our backlog growth was partially driven by lighter shipments in the third quarter, shipping to customers prior to the close of the quarter, causing our year-over-year revenue to decline by a little over $1 million to $4.9 million. We do encounter quarter-to-quarter variations, and we recommend viewing VirTra on more of an annual basis. But given our strong performance in the first half of the year, our revenue for the first nine months of the year totaled $19.7 million up 24% compared to the prior year period. We are set up for likely another year of record revenue in 2023, which would be 17 in a row, a rare record in…

Thanks, Bob, and hello, everyone. First, let me bring you up to speed on what we’ve been up to in Orlando these past few months. As you may have seen on October 4, we announced the opening of our Orlando, Florida facility to support military and market objectives. We hosted an open house on October 20 to showcase a facility and provide immersive training demonstrations of our world class training solutions. The open house was extremely well attended by military members, acquisition leadership, government program managers, law enforcement, industry prime contractors, local and state officials, and even shareholders. The feedback from the attendees were overwhelmingly positive about our solutions and local presence in the Orlando simulation community. This 9,000 square foot facility, which we have an option to purchase will serve as an extension of our R&D efforts, customer service, and as a demonstration and meeting site for our prospective customers. The office strategically provides convenient access and support for Florida and East Coast based potential customers. Orlando is considered the epicenter of the world’s military simulation market, so the availability to demonstrate to our customers in their backyard is critical. Currently, we have the site set up to demonstrate our V-300 4K and V-ST PRO simulators. Since opening the facility, we have been extremely busy with tours and site visits of prospective military customers leveraging our local footprint and my relationships built over many years in the training and simulation market. As far as I know, no other direct competitor in the small arm simulation training military market has a similar and convenient facility providing us another advantage. On our last call, I talked about two of the three ingredients for success in the military market, which are a physical presence in Orlando and strong relationships. We now have…

Thanks, John. Before we close out, I’d like to cover one more very exciting development for VirTra and for our industry as a whole. We are tremendously proud of our announcement on October 19 that introduced our breakthrough training content creation technology, what we have trademarked as V3 or VirTra Volumetric Video. The ability to create realistic and effective training content is fundamental in our market and one of the greatest assets for a company like VirTra is a usefulness and longevity of our library of training scenarios and curriculum. Prior to V3, customers had to make a trade-off between high definition video capture or CGI human avatars with each having their advantages and disadvantages. High definition video looks real, but is limited to the single angle originally captured. Meanwhile, CGI can be 3D, but cannot accurately replicate real human appearances, movements or subtle emotions that are critical for effective de-escalation training and judgemental use of force exercises. With V3, for the first time in the history of our industry, we can combine the best of both worlds, utilizing high definition video and 3D characters with the ability to affordably build a comprehensive training library. Additionally, this library can be used for screen based and headset based platforms to provide a true first mover advantage with a significant competitive mode, while uniquely meeting the current and future demands of various customer training needs. At this time, throughout the world, there is only one volumetric video studio devoted to police and military training, and it’s owned by VirTra. Further, we have secured exclusivity rights for this technology from 40 views within our markets. While still early, feedback – the feedback has exceeded our high expectations, even from industry veterans with decades of experience who have seen it all, not since our first introduction of the V-300 simulator has the word wow been used so often after someone experiences the realism of a V3 character. The introduction of V3 continues VirTra’s track record in developing world class and innovative training solutions. We are executing well on our core business as demonstrated by our strong bookings and backlog, we are building momentum in the military market and we are continuing to innovate to stay ahead of the competition and maintain and grow our dominating market presence. We remain as optimistic as ever about our future. And with that, I’m going to wrap up my prepared remarks and we’ll open the call up for your questions. Operator, please provide the appropriate instructions.

Thank you. At this time, we will begin the question-and-answer session. [Operator Instructions] And the first question comes from Richard Baldry with ROTH Capital.

Thank you. Could you remind us about the issues that sort of gate, the timing turning backlog into revenues? Sort of curious with the record number that you’ve got up there now that’s actually pretty close to a full year of revenue sitting on backlog. Are there things that push it out longer or some of the newer orders or is there things within your control to kind of determine the pace of that rolling out?

Yes, thanks so much for the question. So to remind you, on the – the gates on this, we – it’s a combination of three main things. One is the production process, how long it takes us to produce, get the computer set up, and get all of the parts in, test the system and be ready to ship it out. That’s usually the first gate. That’s something that John has really worked hard on revolutionizing actually changing that from things that took. What was it, John? One item…

Six months, seven months to 45 days.

Yes. So some of the longer lead time items he’s been able to really reduce. The second part of that has to do with a lot of coordination with the customer as far as when they want the equipment and if they have space, sometimes people have rooms that are being built. And then the third is coordinating the training and installation, some of our customers want the equipment to arrive at the exact same moment that they have people ready to train on it and learn how to use it. And so some of those are in our control. The first one is in our control. The second and third items are more in the control of the customer that we work closely with. So yes, it’s a combination of things. There’s also keep in mind in backlog, sometimes there are warranty items or step contracts that are in backlog and those have a prescribed length of time. We get a recognized revenue, in other words, we recognize revenue over the time span of when we’re – when those are going in. So sometimes those can actually be out one or two or three years into the future, if somebody is ordered a very long extended warranty and they – sometimes they order that up front, so.

Okay. And maybe could you give us a bit of an update on supply chain issues? It seems to keep cropping up randomly across different companies. So how good do you feel about the supply chain safety stocks you’ve been able to put in with inventory, sort of climbing a bit with your bookings climbing to kind of ease any of those potential bottlenecks down the road?

Yes. That’s one of the things that we’ve really looked at. We’ve put together tiger team to kind of monitor and see which vendors – we’ve got multiple vendors now that we’re monitoring where we’ve seen some trending on how long it will take to get some of our long – I guess, long pole items. And we have split those between multiple vendors. And then we’ve also done some buy up, as you’ve seen, our inventory has gone up, when we’ve been projecting out because of the backlog. There have been some key items that have taken longer that maybe only had one or two suppliers that were backlogged that we’re looking, we have looked and identified other vendors so that we can keep our supplies moving without having to outlay as much cash. So right now, it’s gotten better. I will say in the last six months, we’ve seen it ease up slightly and we can get back to normal ordering without having to do these big buys, but it’s been very dynamic and fluid, so appreciate that question. But we have identified that and with our Epicor implementation we’re doing – we’re running these reports on a weekly basis as the sales come in for just that reason.

And maybe last for me. Given the very strong backlog, record bookings in the quarter, you maybe talk a little bit about the top of the funnel for the sales pipeline. Do you feel like, you really brought in a lot of orders, just cross the finish line at the right time, right pace and maybe the top of the funnel’s a little lighter, so we have to be careful watching sequential comparisons or just feel like there is the top of the funnel keeps growing as well. So this type of execution can continue. Thanks.

Yes. That’s a great question. So we’re seeing a mix. Some of our larger government contracts at the top of that funnel, we’re going to be able to get those out by the end of the year, because they are not dependent on the install and the training, but more of getting the equipment to the site. So we’re implementing cycle counts to make sure all the inventory is there before the end of the year, and we’ve identified those top tiers to maximize our throughput through the end of December 31 to burn off some of that backlog. The one thing that may have not been clear with Bob is that we also have what we call the step programs where we’re basically spreading the cost over five years for some of the smaller police departments, and those are in that backlog of the $28 million. And so some of those remain on, I don’t have the breakdown at the moment, but those we won’t be able to collect further down into the funnel.

Great. Thanks. Congrats on the bookings number.

Thank you.

Thank you. And the next question comes from Jaeson Schmidt with Lake Street.

Hey guys, thanks for taking my questions. Just want to look at the Q3 results. Understanding things can be lumpy, but do you think this was a situation where orders got pulled into Q2 or relatedly got pushed out into Q4 or was just the normal air pocket that can happen sometimes?

Yes. Thanks, Jaeson for the question. I think it was a combination. I think on the recognized revenue side some things got pushed and pulled away from this quarter. I think on the sales order side, remember this is the quarter that that corresponds to usually our larger bookings and our larger order intake from federal customers. And so our team did a really good job on doing that this quarter. So I think the quarter was a combination of some push and pull on both recognized revenue and something of a seasonality on new order flow.

Okay. That’s helpful. And then gross margin obviously up year-over-year, down sequentially, was that just a function of the lower revenue level or were there other dynamics going on?

It was a combination, but it was a little bit of a mix. The inflation we’re not immune to inflationary pressures that are out there in the market, but also the lower recognized revenue had an impact for sure.

Okay. And then the last one from me, and I’ll jump back into queue, just following-up on that comment, Bob, how are you thinking about pricing? Are you guys passing along some of the pricing increases that you are seeing?

Well, I want to follow-up on that one. So the other thing that had the pressure on Q3 was also because we’ve taken these orders in backlog and because we have to build them and buy, and the pressures of inflation driving our costs up, our margins are actually down because of those pricing. Right now, what we’re doing, we’re actively looking at all the COGS for all of the prices of the – of our products across the Board and looking at the pricing of those that cover those inflationary costs and still remain competitive in our space.

Okay. That’s really helpful. Thanks a lot guys.

Thank you.

Thank you. And this concludes our question-and-answer session. I would like to turn the floor to Mr. Ferris for any closing comments.

Thank you, Keith, and thank you, everyone. We really appreciate you taking time to join us today. As you know, last Friday, we honored the service of all veterans. I ask that we make special effort to keep in our thoughts and prayers, the missing, the fallen, and those who right now volunteer to potentially be in harm’s way to preserve our way of life. Please know we are dedicated more than ever before to building shareholder value and building the world’s most effective simulation training products so that the war fighter and the law officer can serve their country, accomplish their mission, and make it home safely. I firmly believe the best days for VirTra are ahead of us. Be safe, take care, and God bless.

Thank you for joining today – for today for VirTra’s earnings conference call. You may now disconnect.