Good afternoon. Welcome to VirTra's Third Quarter 2019 earnings Conference Call. My name is Cynthia, 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. [Operator Instructions]. 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 that this call will made available for replay via a link in the Investor Relations section of the company's website at www.virtra.com. Now I'd like to turn the call over to VirTra's Chairman and CEO, Mr. Bob Ferris. Sir, please proceed.

Thank you. Good afternoon, everyone, and thank you for joining us today. After the market closed, we issued our financial results for the third quarter 2019 in a press release, a copy of which is available in the Investor Relations section of our website. At VirTra our primary mission is improve and ultimately save lives by providing law enforcement and military personnel with the world's most effective simulation training. We use cutting edge technological solutions to help first responders safely practice and prepare for the risks and uncertainties they may face at any moment during their careers. That's been the primary focus of this business for over a decade and a half and ever since we entered this market we've continued to push boundaries and innovate to establish and advance our position as an industry leader in this space. This is an ongoing process that requires consistent ingenuity and perseverance as well as patience as there is no overnight shortcut for long-term success. In the third quarter of 2019 we saw much of our diligence over the last few quarters rewarded as we recognized the second most successful quarter in our company's history and our best third quarter to date. During third quarter 2019, we recognized $6.7 million in revenue, and we generated $1.4 million in EBITDA and $937,000 in net income. Furthermore, we generated these results while increasing our backlog to a record $11.3 million. Typically, we have seen an inverse correlation between our revenues and our backlog. For example, when customers request delayed shipment of product revenues were not recognized but backlog increases. In third quarter this year, however, both of these metrics moved in tandem. This parallel increase naturally begs the question, what changed in third quarter from prior quarters? What did we do differently that caused…

Thank you, Bob, and good afternoon, everyone. Our total revenue for the third quarter of 2019 was $6.7 million. This was an 89% increase from the $3.5 million of revenue we recognized in Q3 of last year. The increase in revenues for the 3 months ended September 30, 2019, resulted from an increase in the number of simulators and accessories completed, delivered, and revenue recognized compared to the same period in 2018. For the 9 months ended September 30, 2019, our total revenue decreased 18% to $12.8 million from $15.5 million in the first nine months of last year. The decrease in revenue for the 9 months ending September 30, 2019, was the result of a large onetime order being recognized in 2018 that did not recur in 2019. Our gross profit for the third quarter of 2019 increased 80% to $3.8 million or 55.9% of revenue from $2.1 million or 58.8% of revenue in the third quarter of 2018. For the first nine months of the year, our gross profit decreased 30% to $7.1 million or 55.2% of revenue from $10.1 million or 64.9% of total revenue in the first nine months of the year 2018. In both periods, the increases and decreases in gross profit was primarily due to differences in our product mix, the varying quantities of systems, accessories and services sold. Our net operating expense for the third quarter of 2019 increased 25% to $2.5 million from $2 million in Q3 of last year. For the first nine months of 2019, our net operating expense was relatively flat at $7.2 million compared to the same period a year ago. The increase in expense for the third quarter was due to increases in selling, general, administrative costs for labor, benefits, professional services, sales and marketing expense and…

Thanks, Judy. As I mentioned earlier, we've added new revenue streams this year, which was a major component of the strategy we outlined in January. But, of course, even great products require expert salesmanship. So in an effort to market ourselves and our solutions more effectively, we completed a number -- a record number of demos for key decision-makers over the past few months as well as developed some tremendous partnerships. Of the annual events in the police industry, the largest and the most important is the International Association of Chiefs of Police or IACP conference, which we attended in September. I'm pleased to report that the conference was, by all metrics, a huge success for VirTra. Of the vendors who operate in police training, we had the most new products, the largest staff presence and the most respected experts working alongside us and in our booth. We showcased many of the new products we've introduced this year, including our upgraded recoil kits, the industry's newest driving simulator designed specifically for U.S. and international law enforcement, our new ultra-high definition simulators that leverage 4K projectors, and our certified V-VICTA curriculum. V-VICTA is the only nationally certified simulation training curriculum for a variety of key policing topics, and it sets the standard for use-of-force training curriculum. It is one of the reasons we notice our products standing further and further apart from the competition's. While trying to remain as unbiased as possible, and from the conversations I had with attendees, customers, prospective clients it was clear that IACP helped prove that VirTra is the company best positioned to improve the training of police officers to save lives. I think any attendee who compared VirTra to other competitors at ICP 2019 would see the numerous and substantial advantages of going with VirTra.…

[Operator Instructions]. Our first question comes from William Gibson of Roth Capital Partners.

Bob, could you give us a little more update or insights into the progress on the STEP program, perhaps even the number of people that are now signed up.

Yes. So we continue to sell STEP to both law enforcement and military customers. It's progressing well, but it remains a relatively small amount of our revenue. So when we started STEP, we did explain that we were allowing customers to either go with STEP or go with the traditional equipment purchase route, and that came after quite a bit of market testing and internal debate on what is the best way to go forward. So that continues to be our strategy of pricing it fairly. But it is taking time for people to get into the pipeline with STEP. The good news is that STEP is, we believe, a very streamlined way to purchase. So there are people that found out about STEP and then were able to activate a STEP contract right away. But at this time, we're not breaking it out, and we're not giving a lot of information about the amount of STEP contracts or the dollar value of STEP contracts right now, but we're looking forward to that changing as it, hopefully, will become a larger portion of our revenue.

And does that show up in net sales or in-licensing income?

Net sales.

Net sales. Thank you. And then 1 follow-up, please. You mentioned the driving simulators. Is that available on a pay-as-you-go method as well?

Yes. We're still working out the details of that, but our hope is to definitely have driving simulators be available on the STEP program.

[Operator Instructions]. And 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.

Thank you. This is a very exciting time at VirTra, and we certainly would not be here without the support and commitment from our extraordinary employees, customers, shareholders and partners. Yesterday, our country celebrated Veterans Day, and it was a solemn reminder of the responsibility and privilege we have to serve those who serve our country by going the extra mile in providing the absolute best training simulators with the best customer service found in our industry. That is how exceptional reputation is earned. 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 Third Quarter 2019 Conference Call. You may now disconnect.