Good afternoon. And welcome to VirTra’s Second Quarter 2019 Earnings Conference Call. My name is Tom 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 the CFO, Judy Henry. Following their remarks, we will open up the call for questions from the VirTra's institutional analyst 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 would like to remind everyone on this call that there will be 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 CEO, Mr. Bob Ferris. Sir, please proceed. [Technical Difficulty] And Mr. Ferries, you may begin.

Sorry about this technical difficulties. Good afternoon everyone and thank you for joining us today. After the market closed, we issued our financial results for the second quarter 2019 in a press release, a copy of which is available in the Investor Relations’ section of our website. As those of you who have followed our story know our goal at VirTra is to both grow the business and improve and save lives by providing the very best and most effective simulation training possible. The recent horrific shootings underscore just how imperative it is to decisively and quickly end such threats for the safety of all. The idea that better training for more personnel can ultimately save lives and be a profitable business is that the core of why VirTra exists. At the start of this year, we implemented a number of new strategic initiatives which we believe will not only improve our end-users ability to effectively deescalate and appropriately respond to potentially life-threatening situations. But will also help propel VirTra to the next level as a business. These changes include bolstering our technological capabilities, expanding and diversifying our products and services to create more stable and consistent revenue streams. And further expanding our presence in the military market. In the second quarter of 2019, we made substantial operational progress implementing many of these structural changes, which we believe will have material and positive impacts on our customers and our business over the next several quarters and years. In fact, we are encouraged by ever improving technology available to our engineers, while customers seem more and more open to computerized solutions for many of their training needs. As we've stated in previous quarters, it is common witness fluctuations in our financial results between quarters both positive and negative. This lumpiness is…

Thank you, Bob and good afternoon, everyone. Our total revenue for the second quarter of 2019 was $3.1 million. This was a 65% decrease from the $8.7 million of revenue we recognized in Q2 of last year. For the six months ended June 30, 2019, our total revenue decreased 49% to $6.1 million from $12 million in the first six months of last year. The decrease in revenues for the three and six months ending June 30, 2019 was the result of a reduction in the number of simulators and accessories completed and delivered compared to the same period in 2018. For the three and six months ending June 30, 2018 recognized revenues included the $4.2 million from the large federal simulator and accessory ordered that was originally valued at $4.6 million in addition to all the other customer revenues. Our gross profit for the second quarter of 2019 decreased 74% to $1.5 million or 49.6% of revenue from $5.7 million or 66% of revenue in the second quarter of 2018. For the first six months of the year, our gross profit decreased 59% to $3.3 million or 54.3% of total revenue from $8 million or 66.7% of total revenue. In both periods, the decrease in gross profit was primarily due to differences in the product mix and the quantity of systems, accessories and services sold. Our net operating expense for the second quarter of 2019 decreased 14% to $2.4 million from $2.8 million in Q2 of last year. For the first six months of 2019, our net operating expense decreased 11% to $4.7 million from $5.2 million in the same period a year ago. The decrease in operating expense for both periods was due to reduced selling, general and administrative expenses, cost for labor, benefits, professional services and public…

Thanks Judy. One of the key objectives we outline for 2019 was to expand our footprint in the military market. As part of that initiative, we have attended and spoken at conferences and participated in several product demonstrations with military officials. In order to help us better navigate this market, we engaged a highly regarded business development consultant retired colonel Joe O'Connell. Joe's background in both military and the private sector make him uniquely qualified to assist VirTra gaining new business within the military market. Since we engage the services, he's been incredibly helpful in assisting us explore new channels, which otherwise would have been challenging for us to navigate independently. He's a great resource and a highly respected expert in the field. And we're proud to have him as a member of the VirTra team. We are optimistic that the combination of Joe's assistance and our market leading products will bear fruit. And we will continue to provide updates on our progress in this market as it materializes. As part of our business expansion initiatives in March of this year, we added driving simulators to our product suit. Similar to the enhancements we made to our recoil kits, introduction of driving simulators as part of our goal to strengthen our technological capabilities to expand our customer base, and add to our revenue streams. Though this may seem like a departure from firearms simulators, we view police driving simulators as a natural complement to our business. We designed these new simulators to provide law enforcement with a safe and reliable environment in which to practice and absorb new skills. Effective simulation training is our core competency. By introducing driving simulators, we have opened the doors to new revenue, as well as created instances for cross selling with current customers. As…

[Operator Instructions] Our first question from Jaeson Schmidt with Lake Street.

Hey, guys. Thanks for taking my questions. Just curious if you could comment on how customer reception has been for the STEP program? And both feedback from current customers and potentially new customers.

Yes. Thanks Jaeson for the question. So the feedback that we've been hearing is that customers are finding it easier to go from interest in VirTra products to actually getting a contract completed and getting product scheduled for delivery for them. So it seems like by avoiding equipment purchase in some instances, customers are finding it easier to get approvals through and obtain our equipment. So generally, we're hearing that as main feedback for certain customers. Now there are some customers that already received grant money or already had gone through the process for equipment purchase. And that was one reason we wanted to do both subscription program and maintain the ability to sell to customers who want to just purchase equipment outright. Because sometimes they are set up for an outright purchase. But we're finding that some customers that have interest in VirTra are finding that STEP gives them a expeditious way to obtain VirTra product.

Okay, that's helpful. And congrats on the additional orders for the driving simulators. Just wondering if you could comment on why you're seeing some early success in the market and why you're winning again some of your competitors in that space?

Yes. I think that there's that in that space there's a potential for innovation. It's some of these systems have been out in the market for many years. And I think VirTra having the latest software technology in this space, it's helpful and because our development on this is the most recent of any company in that space. We're able to leverage the very latest in the technology realm from 3D graphics to other capabilities. We haven't gone into full disclosure on what the technological features are that we feel are competitive for that product. But I do think that also sometimes it's having the right product at the right time. And we're certainly encouraged by the success of it so far.

We'll take our next question from Allen Klee with Maxim Group.

Hi Bob and Judy. This is a Josh Diamond actually calling on behalf of Allen at Maxim Group. How are you guys? Good. So I first wanted to ask you guys about gross margin and I know that your revenue fell largely because of when it is recognized with your customers, but I was wondering if you could guys could explain a little bit why it fell 17% and kind of where you expected to go by the end of the year?

Thanks for the question, Josh. A lot of it has to do with the mix of the products. The various systems, the type of systems, the accessories and what type of contract that it is being purchased under. Obviously, we have a great variety between federal and state and commercial. And so it really just relates to the combination of those factors. Fortunately, this quarter several things came into play including the more competitive contracts that had a little bit lower margin and then the some of the products that went out that had a little bit lower margin.

Got it, great. And kind of a follow up to that is do you guys have any programs to kind of to help expedite the process of your customers installing your product or partnerships to make installing it or constructing rooms around it any easier for them?

Yes. We do and in fact one of the key aspects for VirTra in installing is early contact with the customer. We don't right now have any plans to be involved in room construction and assist in that area. So that is one area that we really can't help in and that has to do with the kind of bonding that's required and general contracting law that we really don't want to get involved with. So in that area we are not working, but in other areas we do coordinate with customers to try to expedite installs and sometimes that works out and the customer is actually willing to get the equipment on time or early. And then other times, the customer actually needs to postpone delivery for a variety of reasons.

Great. And with your recent increase in backlog, do you guys expect to see most of that come to fruition at the end of this year or next year or is it's hard to tell at the moment?

Well, of course, we have a forecast about that. When we say we expect the majority of it to come in this year but there's always an unknown factor with the customer schedule. And so that's always the caveat and that's going to slow over into 2020 for sure. But at this point, we think we should see 50% or more.

We'll go next to William Gibson with ROTH Capital Partners.

First a housekeeping question, Judy. When you put a STEP order in bookings and backlog is it the whole future cash flow over the life of the contract or how is that treated?

There are certain -- well thanks Bill for the question. There are certain components that we get to recognize right away such as installation and shipping. And then the remainder of the contract that is for the subscription-based is recognized over the life of the contract, a simple straight line amortization.

And so is that total in the backlog?

Yes. It is.

Okay, thank you.

And the backlog didn't include all the deferred revenues.

Okay. And Bob you mentioned the effort to grow the military business. Are there contracts coming up this year that you have a shot at?

So thanks for the question. We are very carefully monitoring the military area. We do think that there are some contracts that may occur. It is not set in stone though what contracts and what areas will be occurring for the remainder of 2019. Certainly, we're starting to get more visibility on where the opportunities are in the military space based on our current product mix. So we do have our eyes on various potential contracts, but we, there is not one specific contract that is release right now for bid that I can point to and say that's one that we're going after and we're going to win. We are certainly looking at what opportunities are evolving in that market. And they're giving new information out sometimes weekly in that market. There seems to be a lot of activity in the military market more than we've seen over the past years 15 really. And it seems to be that the military is looking at innovative, newer ways to do simulation training and focused on point of need training that would be actually shipping equipment to war fighter and having them you do sort of their own training rather than going to a centralized large training facility. That's a paradigm shift. In that paradigm shift we're seeing potential opportunities for a variety of companies. But specifics are in short supply right now as both the Army and the Marines are two groups that both seem to be looking at changing their paradigm or are actually doing things different than they have in years past. And so VirTra trying to be in a position make sure we can present the products that might work well and fit well with what the military is wanting. And certainly the new consultant is helping us in doing that work. We're encouraged that there may be some opportunity for VirTra in this process based on what we're seeing. End of Q&A

At this time, there are no further questions. Mr. Ferris, I'd like to turn the call back over to you for any closing remarks.

Thank you very much. And thanks everyone for listening to the call today. This is a very exciting time at VirTra and we certainly would not be where we are today without the support and commitment from our extraordinary employees, customers, shareholders and partners. I believe our very best days are ahead of us and we look forward to updating you on our next call. Thank you and God bless.

Thank you, ladies and gentlemen, for joining us today for VirTra second quarter 2019 conference call. You may now disconnect.