Good afternoon, and welcome to VirTra's Second Quarter 2023 Earnings Conference Call. My name is Kyle, and I will be your operator for today's call. Joining us today's presentation are the company's Chairman and Co-CEO, Bob Ferris; Co-CEO, John Givens; and Chief Financial Officer, Alanna Boudreau. 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 Statement 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'd like to remind everyone that this call will be made available for replay via a link in the Investor Relations section on the company's website at www.virtra.com. Now I'd like to turn the call over to VirTra's Chairman and co-CEO, Mr. Bob Ferris. Thank you and you may proceed sir.

Thank you Kyle 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 second quarter ended June 30, 2023 along with highlighted business accomplishments. We also filed our 10-Q with the SEC today which is available for your review at your discretion. As a brief overview for today’s call, I’ll begin by providing highlights for the second quarter 2023, and I’ll summarize some of our recent business developments before passing the call to Alanna to discuss our financial results in more detail. John will then come on to discuss operations and our sales initiatives before providing an update on our military market progress. After that I’ll come back with some concluding remarks about our progress so far in 2023 before moving to Q&A. And with that, let's begin. In Q2, VirTra demonstrated exceptional performance, achieving the best financial results in our 30-year history. The success is the culmination of years of effort and a focus on operational excellence. Our internal process improvements have yielded remarkable results, propelling us to record-breaking revenue for the second consecutive quarter. During the period, our revenues rose to $10.3 million, a clear testament to the efficiency and effectiveness of our streamlined operations. Our focus on scaling the company and optimizing expenses has translated into our best-ever profitability quarter with a remarkable 25% increase in gross profit and net income of $1 million, further reinforcing the strength of our business model and the success of our strategic transformations in recent quarters. The results from the first half of 2023 set a strong foundation for the remainder of the year and beyond, but we are not satisfied, and there is still much work to be done as we progress into the…

Thank you, Bob. Good afternoon, everyone. It's a pleasure to be speaking to you today to review our unaudited financial results for the second quarter ending June 30, 2023. Our total revenue for the first six months of 2023 increased 38% to $20.4 million from $14.8 million in the prior year period. For the second quarter of 2023, revenue increased 29% to $10.3 million from $8 million in the second quarter of 2022. The increase in revenue resulted from improvements in operations, which helped move through the backlog and shift orders at a record pace. Our gross profit for the first six months of 2023 increased 25% to $12.9 million, or 63% of revenue, compared to $8.4 million, or 57% of revenue, in the prior year period. The increase in gross profit margin was primarily due to the increased sales achieved while maintaining cost of sales in line with 2022 levels. For the second quarter, gross profit increased 25% to $5.9 million, or 57% of revenue, from $4.7 million, or 49% of revenue, in the second quarter of 2022. The decrease in the gross profit margin resulted from the one-time inventory adjustments made when we went live with our new ERP system, which had the effect of increasing cost of sales in Q2 of 2023. Our net operating expense for the first six months increased to $7.5 million from $6.7 million in the prior year period. Net operating expense for the second quarter of 2023 was $4 million compared to $3.7 million in the second quarter of last year. The increase in net operating expense was primarily due to increases in salaries and benefits due to additional staff and expenses for the new Orlando office, as well as a $100,000 increase in R&D spend. Turning to our profitability measures, for…

Thanks, Alanna. Good afternoon, everyone. I'd like to provide you with an update on our overall company operations and our progress in the military market. First, it's important to note that our operational transformation and the full reimplementation of the ERP have been highly successful, resulting in the significant improvements across our operations, allowing for us to serve our customers and position ourselves for suitable growth moving forward. This successful implementation has effectively increased our capacity to install systems in an efficient manner while also enhancing our customer service capabilities. Furthermore, we have advanced our supply chain management, minimizing potential delays or disruptions, and optimizing our overall performance. With those streamlined processes and a scalable infrastructure, we have also improved inventory management, allowing for timely order fulfillment and greater financial visibility. These developments set the stage for effective scaling, enabling us to meet future demands and capitalize on new opportunities. Applying the same focus and tenacity, we are proactively taking measures to increase our bookings and unlock our full market potential, both domestically and internationally. Our sales enhancement initiatives are already underway, and it's our top priority as we strive to surpass our year-over-year bookings performance. While lower bookings in the first half are not uncommon due to budget cycles and decision-making patterns, the significant progress we've made to clear out backlog so far this year positioned us with $16.4 million in backlog as we enter Q3. While that presents a challenge for us, it also provides clarity on our capability to sell and deliver in a timely manner. The standard federal budget cycle in Q3 provides a strategic opportunity for us to bolster those sales efforts and further prop up the backlog, helping us maintain this momentum that you're seeing. As a key part of our sales initiatives, we're…

Thanks, John. The first half of 2023 has been marked by significant milestones, including the addition of key new talent and the implementation of effective processes to support increased business volume, leading to back-to-back record-breaking quarters. We recognize there are still areas needing improvement and far more growth potential, and we are proactively addressing these opportunities, as John has just mentioned. Our focus remains on strengthening our business pipeline in key markets, embracing a culture of world-class operations, and ensuring we deliver quality to our customers. I'd like to extend my gratitude to the entire VirTra team, these record-shattering results are due to their hard work and dedication. Moving forward, I am confident in our ability to sustain this momentum under the leadership of John Givens, who has proven his exceptional effectiveness time and time again. And with that, we'll open up the call for your questions. Operator, please provide the appropriate instructions.

Thank you. [Operator Instructions] Our first question comes from Jaeson Schmidt with Lake Street. Please go ahead.

Hey, guys. Thanks for taking my questions, and congrats on another strong quarter. Just want to focus on the military market first. Just going forward, is the team and infrastructure fully built out at this point for that business?

Yes, thanks for that question. It's getting close. We're targeting specific individuals for that space. And to answer your question, we're probably about 75%.

Okay, that's helpful. And then the consolidation, I know you said you're entering the final phase here. So should we expect to see sort of the full benefit from the efficiencies in Q4, or will we start to see a big chunk of that in Q3 here as well?

Bob, you want to take that one?

Sure. So I think the total efficiencies with the final phase would be more showing up in some of fourth quarter and certainly by Q1 of next year. We're expecting to have all the final phases done by fourth quarter, hopefully, and a lot of that done in third quarter. We have had challenges with construction, deadlines, no matter how much hair I lose over it or John, we've struggled with getting the timelines where we want. But we shifted, John recommended we shift contractors and so far that's working out a lot better. So we're now getting more confident that it would be third quarter or fourth quarter based on the latest contractor we're using.

I'll give you another example as well. So timing is everything. You can't shut down a machine shop in your production lines for very long. And some of the contracts that we've talked about have specific deadlines. So we've shifted the shutdown of our machine shop for the move until we finish that. So we have no hiccups. So that's why there'll be a little bit of a delay of seeing the efficiencies just so that we perform above expectations on the current contracts that we have.

Yes, the focus is making that as seamless as possible transition since we have a lot of pressure on us to maintain our productivity each day.

Okay, that makes sense. And then just the last one for me, and I'll jump back in the queue. Obviously, you guys gave your bookings and backlog. But how should we think about sort of Q3 or any additional color you could provide on order patterns here the first six weeks of the quarter?

John, you want to take that one?

Yes, order patterns right now, I'll speak specifically about military. Budget cycles end September 30th. So unfortunately, everybody waits until the final hour trying to move that money. So we won't see anything from the military until we've gotten some early, we've been pushing and gotten some early revenue from military. On our regular orders, we are seeing a steady, but like we talked about on previous calls, there is a drop between second and third quarter. And we've seen that same trend. But we are starting to see the orders and we're starting to see, I guess you'd say positive movement for third quarter. I hope that answered the question.

No, that's really helpful. Thanks a lot, guys.

I would add to that, that John's really been focused on the international market as well. And so the international market can also assist with having larger sales come in on times that are not as cyclical. And so a lot of times that's their timing on internationals based on the country and their budget, their internal budget cycle or award process, and those are not normally in sync with the U.S. federal government cycle. So the part of John's push for international sales is also along the lines of bolstering our sales throughout the year, if that makes sense.

No, it does. Thanks, guys.

Thank you.

Our next question comes from Richard Baldry with ROTH MKM. Please go ahead.

Thanks. Just looking on the balance sheet, there's a pretty unusual spike to receivables. It's like if you'd had what I call normalized levels of DSOs, you'd have almost 2x the cash on the balance sheet that you have right now. So I wonder if you can talk through why that very large step up. I mean, it's disproportionate even to the revenues you put up and the bookings, etcetera. So how should we think about that and when should that normalize to generate the cash? Thanks.

Yes, I can take that, guys. So one of the things we had to do when we transitioned software from one ERP to rebooting was we had to invoice and move everything to a receivable section in order to be able to move it over. That caused a spike in the receivables. You'll see a decrease in the unbilled revenue. So a lot of those were, in some cases, invoices for partial deliveries where we before were in the habit of only sending invoices when everything was fully completed. So we should start to see some of that convert in the next, this quarter and the beginning of fourth quarter into cash. Does that help?

Okay, great. Yes, it does and can you talk about is there a way to think about what a comfortable level of backlog to operate with would be now? You've demonstrated an ability to ship or do a throughput against orders now that's much faster. Do we think about it in dollar terms? Months of revenues, or is there some other way to try to think about what a good level for that should be?

So there as we've started to break out the backlog to help give some transparency because some of those we those are healthy, right? Warranty and backlog step things that are going to take time. The capital systems are the ones in which we normally have either been held up by our own internal processes to where things don't get produced quick enough or the client is requested a certain delay, but technically speaking VirTra would be would be wise to have the capacity to to fill orders within 7 to 30 days on a normalized basis no matter how large the simulator contract is. Now in in the military circles where John Givens has cut his teeth there have been contracts that were like 900 simulators actually a little over 900 simulators and those don't get filled in a 30-day process per contract, so those would be a different a bit of an exception if we were fortunate enough to land things like that, but on an on-going basis when it comes to selling a product via capital just somebody buying the product not a subscription service then that should be done quite rapidly outside of the fact we sometimes have a customer say you know what I know you have it ready but please hold on to it for a couple months for me, and then ship it.

Okay, and I'm not sure if I heard this exactly right, but it sounded like Military order here to date or actually above your 2024 goal for a year and again I may have heard that somewhat wrong but the question would be if you're at about 75% of the Infrastructure facility staffing kind of needs you have in that military world with orders. They're strong, do you think that you need to accelerate sort of finishing up that remaining 25% to get that fully staffed up and ramped?

Yes, it was kind of a twisted twisted sentence there. So what that sentence meant was is that we're already $4 million ahead of what our expectation was when we start the October 24 fiscal year. We didn't expect to collect any revenue until that that starts. So we've already collected four million in military contracts at that point. We'll continually staff up because other contracts subcontracts, there's one prime contract and we're -- will continually ramp up, but yet our expectation those aren't the expectation that was just our internal expectation. We already brought money in that we didn't expect to bring any in until after September 30th, that's what that sentence is about.

Got it okay, and so does that I guess to finish the question that is, does that give you any more confidence I guess in finishing up building that team out, or do you feel like you know what you have is good to you know get you ramped into the order side and maybe you start finishing it up as the order start coming in after the year the October 24th start time.

Yes, the way the way I think about that is we have just the core group in there now and we expect to grow that group as we grow the orders that we that we bring in. So that will be directly proportional with the amount of business that we bring in. We'll expand program management; we'll expand those things that currently aren't there as well as customer support staff and technical staff to support those locally because they're pulled out of the Orlando market or the Orlando [Indiscernible] Army, Air Force and Marine Core all right there, their acquisition. So those will grow. I don't expect that it's fully built out yet. Just the initial core staff, we're about 75% there.

Okay, and then you give a lot of backlog bookings information a lot of companies don't give. Sort of curious that we extend that one more level. You're talking about adding 35% to your sales capacity. That's, a pretty good step up. Do you think, is there a way to think about the sales pipeline growth that you're seeing or opportunities per rep or, capacity, efficiency, utilization of the existing group that's giving you that confidence to make another big push on the on the sales capacity side?

Actually that's a great question. So what we're looking at is making each of the sales territories more efficient. What does that mean? I need police departments that are over 5,000 police officers and a budget greater than 50 million or greater than a billion, whatever it is, breaking up each of those territories. So each one of those specific, each one of those specific sales territories have an equal amount of opportunity. What ends up happening is because these sales require a lot of focus, a lot of attention, a lot of hand-holding to bring them through that cycle because they're cops. They're not in the market to buy and do all of these sorts of things. They just want to train and that's what we're experts in. And so by doing that, I think what VirTra has done and been very successful at is they've chased the low-hanging fruit. So they've just grabbed the things they could just because they were understaffed. This way we act more like farmers than salesmen. We go out there and we plough the fields, we plant, we fertilize, we nurture each one of those territories in those accounts and by doing that we're going to drive more sales, more relationships, and more revenue to VirTra in that regards.

Got it. Great. Thanks and congrats on the great first half of the year.

At this time, this concludes our question-and-answer session. I'd now like to turn the call back over to Mr. Ferris for his closing remarks. Please sir, go ahead.

Thank you, Kyle. Before we close, I'd like to take a moment to announce a transition in the leadership team. Today, I'm honored to announce John Givens as the new sole Chief Executive Officer of VirTra. His visionary, practical, and world-class leadership helped to generate our rapid progress and he continues to show us how much more is possible for VirTra. Throughout our 30-year journey, VirTra has been driven by a powerful mission to equip the brave men and women of armed forces and law enforcement agencies around the world with the tools they need to serve their country, complete their missions, and return home safely. This mission is at the very core of why we exist and remains our firm commitment. As I take on the role of Executive Chairman of the Board, I will continue to support this vital mission knowing it is a worthy and noble calling that it resonates deeply with each member of the VirTra family, from employee, to investor to customer. Our dedication to innovation and excellence is fueled by the knowledge that the work we do directly impacts the lives of those who protect our communities and uphold the safety of free nations. Having worked closely with John, I have seen first-hand his expertise in the simulation military markets, which has been instrumental in our recent achievements. Under his leadership, I've seen VirTra accomplish things that we thought were simply impossible. I am confident that John's continued leadership as the CEO will lead VirTra to even greater heights in fulfilling our mission. We stand firm in our service to our customers and their life-saving missions. With John at the helm, I have no doubt that our future is incredibly bright. The passion and dedication of our team is the driving force behind our success, and I have every confidence that we will continue to push the boundaries of what is possible and change the world for the better. As we look forward to this new chapter, I want to express my deepest gratitude to each and every member of the VirTra family, our staff, our shareholders, and especially our customers. Your unwavering support has been the foundation of our success, and I'm excited to continue working with you all in my new role. Together, we will work to bring about an even brighter future for VirTra. Our journey is just getting started, and I am honoured to be part of this incredible team, what we've done, and especially what we are about to do. Thank you. Be safe, take care, and God bless.

Thank you for joining us for VirTra’s second quarter 2023 conference call. You may now disconnect.