Good afternoon. Welcome to VirTra's Second Quarter 2018 Earnings Conference Call. My name is Devin and I will be your operator for today's call. Joining us for today's presentation are the company's Chairman and CEO, Bob Ferris; and CFO, Judy Henry. Following their remarks, we will open up the call for your questions 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 statements 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 that this call was made available for replay via link in the Investor Relations' section of the company's website on www.virtra.com. Now, I would like to turn the call over to VirTra's Chairman and CEO, Mr. Bob Ferris. Please go ahead sir.

Good afternoon everyone and thank you for joining us today. We have issued our financial results for the second quarter of 2018 in a press release, a copy of which is available in the Investors Relations' section of our website. Both from a financial as well as operational perspective, we posted outstanding results for the second quarter 2018. In fact, we achieved the highest level of revenue as well as the highest adjusted EBITDA in the history of the company. Beyond our financial success, we also secured a number of important new wins this quarter as we highlighted in a press release. VirTra sold training simulators and accessories to three of the largest law enforcement agencies in the U.S., representing over 6,000 officers; the Dallas Police Department, the San Francisco Police Department, and the Southern Desert Regional Police Academy in Las Vegas. In aggregate, the contracts are valued at more than $1.15 million. We are extremely proud that all three of these departments are now using VirTra's premier V-300 simulator, the world's first 300 degree training platform with over 14 years of refinement. All three departments each spent more than a year researching and vetting training simulators and scenarios available. Ultimately, they all came to the same conclusion and chose VirTra for their simulation training needs. Also included in these contracts was another purchase from the San Francisco Police Department for our V-100 simulator. The SFPD plans to use the simulator to improve its marksmanship training program. VirTra's marksmanship products often do not receive as much attention as our judgmental use of force products, but we continue to receive feedback from veteran instructors that our marksmanship-focused offerings are exceptional product in their own right. At the core of this product is a sophisticated ballistics calculator that is both highly accurate and extremely efficient. It is also one of many items in our intellectual property portfolio that we continue to build upon each quarter. Now, before I dive further in our operational progress, I'd like to turn the call over to our CFO, Judy Henry, to walk us through our financial results for the quarter and first six months of 2018. Afterwards, I'll jump back on to talk more about our progress this quarter as well as our outlook for the rest of the year. Judy?

Thank you, Bob. Good afternoon everyone. Our total revenue for the second quarter of 2018 was a record $8.7 million. This was a 66% increase from the $5.3 million revenue we recognized in Q2 of last year. For the six months ended June 30, 2018, our total revenue increased 26% to $11.9 million from $9.5 million in the first six months of last year. The increase in total revenue for both periods was due to higher sales of our simulators, accessories, warranties, and other services. Our gross profit for the second quarter of 2018 increased [53%] [ph] to $5.7 million or 65.9% of revenue from $3.8 million or 71.4% of revenue in the second quarter of 2017. For the first six months of the year, our gross profit increased 29% to $8 million or 66.6% of total revenue from $6.2 million or 65.3% of total revenue. The gross margin variation for each period resulted from a different mix of systems and accessories sold. Our net operating expense for the second quarter of 2018 increased 31% to $2.8 million from $2.1 million in Q2 of last year. For the first six months of 2018, our net operating expense increased 26% to $5.2 million from $4.1 million in the same period a year ago. The increase in net operating expenses for each period was primarily the result of increases in general and administrative expenses. In each period, the increase in G&A expense resulted from expanding staffing levels and increases in payroll and benefit costs as well as professional service increases in accounting and legal fees, public company expense, and other fees and professional services. The year-over-year increase in professional services included non-recurring legal and public company expenses directly related to our SEC registration and NASDAQ Exchange up-listing. Turning to our profitability measures,…

Thanks Judy. At our last call, we discussed the excitement associated with up-listing to NASDAQ. That excitement continues with our recent inclusion into the Russell Microcap Index, bringing us to the attention of new investors and likely responsible for over a $1 million in stock trading volume over a few days. While we still have much progress to make as a company, we anticipate our move to NASDAQ will ultimately lead to more awareness, liquidity, and ultimately, greater shareholder value. But make no mistake though, the most significant driver of long-term business value is our ability to continue executing on our vision, which is to grow our business while improving and saving lives through the technology we contribute to society. One critical element of our plan is to build an expansive partner network to extend our credibility, presence, and relevance within the industry. As some of you know one of our key partnerships is with Force Science Institute, a recognized world-leader in law enforcement training courses. Force Science courses are vital to the education of officers, which is why we have uniquely integrated Force Science research and training into our simulators as well as the newly developed training curriculum VirTra now offers to our customers. During Q2, we launched a four-part series of law enforcement training courses based on the research, science, and applications that Force Science has developed over the past 40 years. We've already held two courses; one with the LAPD and the other with St. Louis County PD, which gave both agencies the opportunity to experience VirTra's new human factors enforcing counter's training events in our V-300 simulator based on the science and teachings of Force Science. Also during the second quarter, we team with the National Sheriffs Association to create a first of its kind training…

Thank you. We will now be conducting a question-and-answer session. [Operator Instructions] Our first question comes from the line of Alan Klee with Maxim Group. Please proceed with your question.

Yes. Good afternoon. Congratulations. Great quarter. Could you maybe start with helping me maybe understand the backlog we've had going into the quarter and how much of that was earned during the quarter? And then maybe how much the new bookings were? And how you think about the backlog you have now that's the $5-ish million, the timing it takes for that to get earned? Thank you.

Thank you for your question Alan. So, during the quarter, we have -- the company received new signed bookings totaling $3.3 million. At the quarter end, we recognized revenue of $8.7 million. So, from the prior quarter, we had approximately $8.3 million in backlog that rolls with the remaining amount going forward to be the backlog number of approximately $5.2 million. And as we had included in our management discussion and analysis in our 10-Q, management believes the majority of -- or over 50% percent of the bookings received in the second quarter will be converted to revenue by December 31 of 2018. But the balance may take longer to convert such as our extended warranties because they convert on a different method of accounting being a straight line basis over the term of the warranty period.

Okay. Thank you very much. And then could you talk a little about recurring revenue in the quarter of -- how we think about like how much that was and how it's trended? And any actions you guys think about of increasing that?

Well, I'll answer the last part of your question. Judy will answer the first part. On the last part, we very much think about how to increase recurring revenue. And we are constantly considering new methods, sometimes involving different product and service mixes that can focus and generate more recurring revenue. There are also some of our plans, as far as warranty, we include recurring revenue components for -- for some cases, it has to do with new content that people need to refresh based on the current and topical scenarios and so that's an important recurring revenue component. Obviously, warranty is a recurring revenue component. The other thing is a lot of people don't understand is when a department changes firearms, which occurs -- or they had Tasers or there is use of force changes, then they have to purchase the corresponding simulated weapons and so VirTra receives orders in that case. It's not entirely a recurring revenue component necessarily, but it is a overall value of decline through the lifecycle. So, as far as the actual recurring revenue component of our -- in our financial statements, Judy would be best to answer that.

We don't break our revenues out currently in that component and -- so that information is not readily available here today.

Okay. For your department of states contract, could you give kind of an update of how the -- of how much of it's been used and the outlook potentially for additional gifting of foreign aid of your simulators?

Yes. Well, so that IDIQ is currently set at $40 million. There is also two companies that are qualified under that IDIQ; VirTra being one of those two companies. The exact dollar figure of what has been used would include both what VirTra has received as well as what the other company has received. And I do not have that number for you. It's a combination of us and a competitor's number. But to give an update on that, the government -- that was a five-year IDIQ and they -- the government can extend that, it can expand that, it can cancel that, I mean it's completely at the discretion of the government. We've obviously been encouraged by awards that have been given to VirTra in that competitive IDIQ and we're hopeful that we will see more. I would say, in a general sense, I know that we are certainly not at the halfway point of the $40 million. In other words, certainly less than $20 million has been awarded -- again it's a combination of two companies. But it is still what would be considered sort of the early stages of an IDIQ if, in fact, it does continue along the caps that it has.

Thank you. And then the three wins with large police departments, could you give us a sense of how long they were trialed for? And to what extent do you think that can create, kind of -- I don't know what the right word is, but confidence for other large agencies to potentially have more confidence and to the extent that maybe you do have other large agencies in your sales pipeline if you could discuss that? Thank you.

Yes, I think that's a very, very important question. VirTra is becoming more and more established as the high quality, high training value product and many ways, affordable within the markets space. Those wins to large agencies go a long way to affirming that and reassuring agencies that are looking to implement trained programs using simulators. So, I would say the amount of time involved in that varies. Some -- I think those groups generally spend a year or more researching the various products on the markets. But we also have a lot of references now that span the gamut from one -- the largest law enforcement agency [indiscernible] which is CBP, all the way to one of the agencies that's responsible for some of the most hardened criminals apprehension, the U.S. Marshals to include also the Secret Service that are responsible with securing the leaders of our countries. So, we -- VirTra is having those large police departments decide to go with VirTra is very, very affirming. It's not everything. Obviously, three large departments is in no way covering the 18,000 agencies that crisscross America, but you know it is very helpful to, I believe, our future sales efforts.

Okay. Is there anything you'd like to highlight in terms of new offerings in your library that you think will stand out in terms of interest from customers?

Yes, it's -- we kind of take for granted how much research and development and how much effort we put in quarter-after-quarter dating back to our first release in 2004. But it is -- every single quarter, we are putting out new content that has relevancy to the industry. Our most recent content is very, very professional curriculum-oriented. It's designed to take training to a higher level. It's incorporating some of the top experts in the world from Force Science Institute; the NSA, to Haley Strategic, it's just three that we're working with. So, I think that partnership combined with our very, very high standards for how we want every minute in our simulation product to translate to real-world skills and very best decision-making for those entrusted with life or death situations.

Okay. And maybe a little flavor on the competitive environment in terms of some other companies having some multiscreen simulators and to the extent they're trying to use price as a way to win. How do you think about that or what you're seeing?

Yes. So, we think we are -- I think the most successful companies are the ones that are a little paranoid and I believe that we should and always will be diligent on considering our competition to be very dangerous to us. So, I in no way want to minimize the fact that every day we have to go out there and compete with other companies. And while we have enjoyed the leads in a lot of key areas because we had -- we really had a vision to just create the most effective training simulator that the world had ever seen, make that happen. We still have to appreciate the fact that we have competition. So, we're very, very mindful of that. A lot of the work we do is to extend our lead. Our focus is how do we make things better than the way they've been and our competitors have many times just tried to copy what we've done in years past. And -- so I think part of the competitive edge is always creating new products and continuing to invest in your best-selling products. So, -- but what's really helped us is within law enforcement, a lot of times, they don't trust those that say our product is equal to VirTra is cheaper, many times they call for reference or they actually try the product themselves. And that's when they really -- they recognize that the large difference between VirTra and other products in the space. So, a lot of people do take training seriously. They understand that it has a major impact on their agency and on the lives of the people that they employ. And they take it so seriously that they will go and try the simulators out and then decide based on what they experience, what they wanted -- which company they want to go with and VirTra just happens to do very well in those type of head-to-head competitions. But it's come at the cost of an enormous investment of time and money over a decade and a half.

Okay, great. And then you talked about some of the benefits from bringing some things in-house. So, but there seems to be a lot of moving parts with maybe some tariffs and things maybe some things the cost of goods maybe could be impacted by, but you're also getting efficiencies bringing things in-house. I'm just wondering if when you add up all the pieces, do you think that, in general, the trend in gross margins could be moving in one direction or the other.

As of right now we are not seeing tariffs as impacting our gross margins. And so I -- all I can say is as of right now, we're not seeing that sort of impact. As far as future gross margins, that is dependent on a lot of variables that's based on where we are as a company. I cannot comment really on an expectation of growing gross margins. I can't -- I don't -- we obviously will -- we fight against the idea of shrinking our gross margins, but that is possible. It's -- there is not a very -- there is not a absolute crystal ball when it comes to that. So, I would say that we've overall had gross margins at 60% or higher and we certainly -- we strive for that and -- but we certainly want to grow the company in a responsible prudent manner. And we could have a very great quarter and it might have great gross margins, it may have average gross margins, but we certainly strive for strong gross margins but also we strive for growth.

Okay, great. For your royalty license business related to modern round, I notice that grew. What's the current expectation there for the number of restaurants that they'll be operating or that they operate now that you will be potentially getting royalties on?

They currently operate one restaurant and they have I believe to two -- I think two or three licensee locations with lucky strike. And so that's where they are at now. I know that their intent is to grow, but they would be the best resource for information on their growth plans.

Okay. You also -- at one time during the call, you mentioned that there were some non-recurring expenses. Could you maybe point out how much that was?

I don't have the exact dollar amount right here in front of me, but it was related to the legal expense and accounting expense for the NASDAQ and SEC registration and up-listing.

[Operator Instructions] At this time, this concludes our question-and-answer session and I would like to turn the call back over to Mr. Bob Ferris for his closing remarks.

Thank you. Before we conclude today's call, I would like to mention that we are scheduled to ring the NASDAQ stock market opening bell in New York City on Tuesday August 21st. The ceremony is intended to commemorate our recent listing on the prestigious exchange. This event will symbolize the culmination of 25 years of determination, hard work, and a focus on improving and saving lives through creating superior solutions to difficult problems. This is an exciting time at VirTra and we certainly couldn't do it without the support and commitment from our extraordinary employees, customers, partners, and valued shareholders. I believe our best days are ahead of us and we look forward to updating you on our next call. Thank you and God bless.

Thank you for joining us today for VirTra's second quarter of 2018 conference call. You may now disconnect.