Ladies and gentlemen, good afternoon and welcome to VirTra's First Quarter 2020 Earnings Conference Call. My name is Jim, and I will be your operator for today's session. 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 questions from VirTra’s institutional analysts as well as 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 session. 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 on 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.

Good afternoon, everyone, and thank you for joining us today. When we held our last call on March 23rd, shelter-in-place and social distancing orders had just been issued across the United States. The impact on businesses and employees has never quite occurred at this level and on this timescale since our country was founded in 1776. Almost everyone has seen their daily routines uprooted. I know this is an extreme challenging time for many, personally and professionally. I sincerely hope you and your loved ones are healthy and safe and our deepest sympathies go out to anyone within the VirTra community who has been adversely affected by COVID-19. We view our employees, customers, shareholders and vendors as all part of the VirTra team; and if one of us hurts, we all hurt. Due to VirTra's government contracts which require continued performance, we are an essential business and have continued to operate in a modified format, whereby almost all staff have been working from home. We recognize the importance of VirTra not only surviving this pandemic, but ensuring we succeed into the future for all of our stakeholders. Therefore, we have taken any and all prudent measures to secure our future including applying for government assistance intended for businesses with fewer than 500 employees who are willing to maintain employment levels during this time. I am pleased to report that due to the exceptional work of our CFO, Judy Henry, VirTra was just notified about our loan application for $1.32 million under the CARES Act has been approved. Please note that our plan is to fully comply with the law so that this loan will ultimately be forgiven as we increase our corporate stability during this uncertain time. During our last call, we spent a good deal of time discussing why…

Thank you, Bob, and good afternoon, everyone. Our total revenue for the first quarter of 2020 was $3.3 million. This was a 9% increase from the $3.1 million of revenue we recognized in Q1 of 2019. The increase in recognized revenue for the three months ended March 31, 2020 resulted from an increase in the number of simulators and accessories completed and delivered compared to the same period in 2019. Our gross profit for the first quarter of 2020 was $1.6 million or 47.8% of revenue, compared to $1.8 million or 59% of revenue in the first quarter of 2019. The change in gross profit was primarily due to increased cost of sales and the product mix, and the varying quantity of systems, accessories and services sold. Our net operating expense for the first quarter of 2020 decreased 7% to $2.1 million from $2.3 million in Q1 of 2019. The decreases in net operating expense was due to reduced selling, general and administrative costs for labor, benefits, travel and professional services. Turning to our profitability measures. Loss from operations for the first quarter of 2020 was a $512,000 compared to a loss from operations of $457,000 in Q1 of last year. For the first quarter of 2020 net loss totaled $389,000 or $0.05 per diluted share. This compares to net loss of $313,000 or $0.04 per diluted share in Q1 of last year. Our adjusted EBITDA loss, a non-GAAP financial measure was $326,000 in the first quarter of 2020, compared to an adjusted EBITDA loss of $278,000 in Q1 last year. Turning to our bookings and backlog. We define bookings as the total of newly signed contracts and purchase orders received in a given time period. For the three months ended March 31, 2020, we received bookings totaling $5 million.…

Thanks, Judy. And there's no doubt that many industries have been hit incredibly hard by the pandemic. Because of the increasing demand we've seen over the past few months, we've been adding staff and increasing R&D efforts to ensure we're prepared to capitalize on the opportunities ahead of us. We are fully aware of the imperative need, especially now to be conservative with cash and improved liquidity. In many instances, what we've done is reallocated personnel and budgets to ensure they're as effective as possible. For example, we've repurposed some funds from our travel and trade show budget to digital marketing. We're fortunate to have a highly flexible and adaptive group of employees. In fact, portions of the staff are actually cross-trained so they can work on whatever is most needed, which helps us better scale in accordance with changing demand. However, given the uncertain nature of so much of the macro landscape and our need to preserve our talented and trained staff, we made the prudent decision to pursue additional means fortifying our balance sheet as Judy just mentioned. With the additional financing we secured subsequent to the quarter’s end, we can rest assured knowing we have the means at our disposal to take care of our staff and customers and ensure VirTra continue supplying the necessary training to law enforcement and military personnel should economic conditions deteriorate. Of course, there's still a great deal of unknowns in the world today. But other than some customer delays like the ones that occurred at the end of March, we've yet to see a decline in sales. Some orders will be taking longer to deliver and install, which in turn delays revenue recognition, but the demand in the market doesn't seem to have diminished. In fact, from a new sales perspective,…

Mr. Ferris and Ms. Henry, thank you for your remarks today. [Operator Instructions]. Our first question today comes from the line of Jaeson Schmidt at Lake Street. Please go ahead, Jaeson.

Hey, guys. Thanks for taking my questions. Just curious if you could quantify how much revenue was pushed out of Q1 into kind of Q2 and Q3?

We've not quantified that. But as a general number, it exceeded $1 million.

Okay. That's helpful. And then, Bob, I know you mentioned some of the traction you're seeing specifically with the IDIQ order in April, but curious if you could expand on that and just talk about some of the order patterns that you saw in April, and then now here in the first part of May?

Yes. Thanks for the question, Jaeson. We've not noticed a shift in the order patterns. Like I mentioned, we have seen some modifications on the delivery side and that is unknown exactly how that will work in the future if that was the linear to stay-at-home orders easing up or if there's going to be additional conservative approaches from customers. We have had a couple customers that are actually more aggressive and want installation, even though we are more cautious right now with obviously air travel. But -- so I think there could be a bit of a spectrum where some customers will be a bit more aggressive and others will be more conservative. But on the order side, I think the combination of having a larger product mix this year than we've had in previous years, having an enhanced reputation this year after doing a lot of hard work in previous years and decades, I think all of that is really benefiting us right now. So, I think it's a result of a lot of our website updates and our digital marketing capabilities has made us a better choice during this time of stay-at-home orders.

And the last from me and I will jump back into queue. It sounds like you're not seeing it today. But given the potential for constrained budgets in the future, are you seeing any pushback from customers from a pricing standpoint?

Thanks, Jaeson. Not any different than we've seen in the past. So, I -- we always have the potential to encounter people that are very price sensitive. We do our best to explain that sometimes you get what you pay for and being a department that has selected the lowest cost simulation provider that may have the weakest training potential in life and death situations is not a great position to be in and actually can be counterproductive. We think we are in an area where effective training can many times win the argument over the lowest cost provider, and we certainly work hard to explain that. So -- and we also -- for those who do want quality training we also have the STEP program, the subscription arrangement so that they don't have to put a large amount of money upfront, can pay a small amount of money over just 12-month period and have access to the world's best training. So, we have a lot of options for those that have some budgetary constraints and I think that seeing the world with COVID and the concerns of potential budget constriction that our STEP program is even more relevant and we're extremely pleased that we introduced that about a year ago and that we've refined that program to really pay dividends to get great training into more people's hands with the COVID-19 situation.

Thank you. Our next question will come from the line of Allen Klee at National Securities.

Could you provide an update on how you're thinking about your strategy to break into the military market?

Thank you, Allen. Thanks for being on the call and asking that question. So, our strategy really is focused on having the right product that meets the military needs. And so, in some cases that is being some adjustments to our pre-existing products and then making sure we get in front of the right people. And so that's really been a big focus of ours, is have the right product and get in front of the right people. And we continue to make headway on that plan to eventually end up with more and more military units using VirTra and eventually VirTra becoming a standard in the military like we have done in law enforcement.

Thank you. And then you spoke about the European distributor that got you a win. Can you provide a little more color on them in terms of kind of where they're -- what the opportunity and focus is that they have?

Sure. So the focus is really on penetrating the European market with VirTra technology. And I think there's areas in Europe that groups don't -- haven’t even heard of a VirTra, or only know that simulation is technology that's 15, 20 years old and stale. And so having a reputable agent group like the distributor in Europe that has contacts and is able to interview VirTra into areas that we would not be able to get into with our own sales staff and that we are not as accustomed to the culture over there, many times don't speak the language, that having a foreign distributor assist us in the international realm, particularly in Europe is very helpful. So it's the beginning. It was a great initial order. We were happy to see that. That's an excellent way to get started. Reminds me quite a bit of how we got started in Mexico, which was our -- actually our very first international installation and the distributor there was strong enough to place an order and get product into the market right away and be able to show it and demonstrate it and then was extremely successful at doing that. So we're looking forward to the group in Europe doing something similar. But it's one of those things that it grows over time and it's -- you don't see the results of that in the first month or the first year but it can be incredibly lucrative and it can increase the footprint of our training. We're really hoping to train those in Europe at the same level that we've been able to train people in the U.S. and other countries.

Thank you. Can you talk about the factors that affect the gross margin in the quarter and kind of, is there a good range to kind of think about where that could run in 2020?

Yes. So Allen, a couple of factors on gross margin. The biggest one being that we -- one of the factors in cost of goods sold is the staffing level. We had increased our staffing level to prepare for the sales pipeline that we saw coming. And so, first quarter included a bit more staffing in cost of goods sold than we’d had previous year, but it was intended to be there so that we would make sure and fulfill orders for customers. And when COVID-19 hit and we actually ended up not being able to ship and install as much as we were hoping in first quarter, and as we looked at the CARES Act and our own internal need of deciding that we wanted to keep our staff employed even if we weren't going to be able to go do installations, that ended up creating a higher cost item in cost of goods sold for the payroll piece, which created a lower gross margin for that quarter because of that combination. Going forward, to the second part of your question, as far as a range for gross margin, as you know, our historic gross margin is right around 60%, and we've been able to on average keep about 60% gross margin that can and does fluctuate. We remain hopeful that we are able to maintain 60% gross margin into the future, and of course that can be impacted in various ways, either potentially more gross margin or potentially less depending on a lot of factors. But definitely, we can speak to the factors involved in the numbers that we just reported, the first quarter numbers. We can speak to that. And that was a situation of staffing up in our production installation area and then not being able to fully utilize that staff due to COVID-19. We believe that's hopefully a temporary thing and that people will be getting back to work in the coming weeks and months.

Thank you. And then my last question is, as you've expanded your offerings, so now you have driver simulation and a lot more different scenarios. Can you help us to understand kind of -- in terms of your sales, do you think that, a lot of the opportunity is in expanding with existing clients or we're more targeting new clients and new opportunities?

That's a great question. So to answer it properly, I'd have to say both. Obviously, we've had success in keeping and growing with current customers as you can see from our previous press releases of having orders -- follow-on orders from groups like Customs and Border Protection, Secret Service, U.S. Marshals. We've had a lot of federal that -- really wonderful federal clients who have not just bought from VirTra but then continue to buy from VirTra. One of the most recent is FLETC, which is the Federal Law Enforcement Training Center, and they've been a great customer. So, there is a lot of opportunity and growth within. And you're right, there’s -- when you already have a client and they decide, hey, they want to add a driving simulation and they already are happy with your firearm or your judgmental use of force training system, there is opportunity that they would want to stay with the same vendor, and then add in driving simulation. However, I also should underscore, VirTra has not penetrated the FBI. We have not penetrated the U.S. Army to a large extent or the U.S. Marines to a large extent. There's certain countries that we don't have large install bases at, Britain and Spain and France and the list goes on. So, while I believe we’re in 33 countries international currently, there's still a lot of room to grow. I would -- I think most people would say though that VirTra has enormous room to grow in the military market. Even though special forces in different groups have been attracted to our products for many years and have successfully used them for multiple years, there's still several opportunities out there on the military side that we have not succeeded at. So, we have not succeeded in securing the projects. That’s something we're working on and we think a lot of our products would actually be superior to some of the products that they've used in the past. But there's a whole process of proving that and getting in front of the right people and ensuring that the products we're offering fit their needs. But definitely there's a lot of upside opportunity we have and nowhere -- in no way have we saturated markets on any of the products that we offer.

[Operator instructions]. Next we'll hear from Richard Baldry at Roth Capital.

With the backlog at a record level, I am sort of curious, once travel restrictions open up a little bit, can you talk about how much bandwidth you have and what the timing would look like to sort of clear that? How much could you play catch up in a short period of time or are there bandwidth constraints that would sort of spread that out by necessity?

Thank you, Richard, for that question. So, that's the silver lining from what I had mentioned earlier on how we had increased staff for cost of goods sold for the installers, that the silver lining is, is that we are ready and raring to go to install systems should the customer start to allow us. Now we are still doing some installs, I need to be clear. If it's a location we can drive to, if it's a place that we can have proper social distancing, and if the client is okay with it, and if we are okay with it, we still will do some. We are still actually doing some installs even during this time, only when we feel like it's -- it has ample safety for our staff and for our customer. But you're right, once things start to go back to normal, we believe we have band -- we have some pretty good bandwidth to be able to get installations done quickly and effectively.

And could you talk a little bit about the sales cycle now it’s sort of changing, any early feedback from the digital marketing, which I assume is front of the funnel? And how deep you feel you can go into the sales funnel toward closing stage in a virtual manner and any challenges inside that funnel?

I think the real challenge there for us is that we just don't know some -- the answer to some of these questions and I -- frankly, nobody quite knows because this COVID-19 world is unlike anything we've encountered before. It seems like our sales pipeline is progressing well, that our digital marketing strategy that we set up is working as we had hoped. And you're right, we do have a longer sales cycle. So, we are monitoring the front of the funnel, we're monitoring the back of the funnel. So far it's looking good, but we reserve judgment until we have a little bit more time and experience in this world. If things start to go back to normal, where for example let's say a customer likes digital marketing but really has decided they want to do personal demonstrations, which by the way, we highly encourage anyone interested in this type of equipment should do personal demonstration. Don't trust a company to say they have 800 great scenarios, do -- actually do the training, experience the system, do the scenarios for yourself, that's really where VirTra is able to shine because it shows the clear differences between check-the-box training and VirTra’s training in our opinion. So, there is a chance that when if things go back to normal and people are allowed to travel to our facility to get hands on our equipment, that will help our close rate. And -- but right now I think we have some momentum and some wind our back because of our reputation. A lot of those agencies I mentioned, Customs and Border Protection, U.S. Marshals, Secret Service, FLETC, these are really thought leaders in many regards and the fact that they've all selected VirTra is very reassuring a lot of other agencies that are looking for the best solution. So, that helps us maybe because we're the leader in this part of the market. It might help us more than others. But we really, really enjoy competing head-to-head and showing our product and features directly against competing products. And there's many times a world of difference.

And Mr. Ferris, at this time we have no further signals from our audience. Sir, I will turn it back to you for any additional or closing remarks that you may have.

All right. Thank you so much and thank you. Before we close, I'd like to point out that it is National Police Week in the U.S. It's especially important given the circumstances this year. I'd like to extend our sincere thanks to the brave men and women who are putting their own safety at risk every day to help ensure our communities are safe. It's an incredible privilege to have a career that serves those who serve us. And at the end of the day, it's what keeps us never satisfied and always pushing forward to create and even more effective simulation training product and a growing to benefit us all. We look forward to updating you on our next call. In the meantime, be safe, take care and God bless.

Ladies and gentlemen, this does conclude today's teleconference and we do thank you all for your participation. You may now disconnect your lines and we hope that you enjoy the rest of your day. Be well.