Good afternoon, and welcome to VirTra's First Quarter 2021 Earnings Conference Call. My name is Matthew, and I'll be your operator for today's call. Joining us for today's presentation are the company's Chairman and CEO, Bob Ferris; and Chief Accounting Officer, Marsha Foxx. Following their remarks, we will open up the call for questions from VirTra's institutional analysts and investors. Before we begin the call, I would like to revise 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 be made available for 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.

Thank you. Good afternoon, everyone, and thank you for joining us today for VirTra's first quarter 2021 earnings call. We entered this year with strong momentum after completing a very successful 2020. Today I am very pleased to announce that last year's momentum continued into and through the first quarter of 2021. During the first quarter, we generated $4.4 million in revenue, net income of $655,000, which translates to earnings per share of $0.08 and positive adjusted EBITDA of $751,000. While each of these metrics is a substantial improvement from the first quarter of last year, we're particularly encouraged by our ability to beat last year's results and grow our revenues 33% year-over-year while our backlog grew 42% year-over-year to a record $16.1 million. We also exited the quarter with $5 million in cash and cash equivalents. After successfully executing an $18 million capital raise following our last call, our cash position has improved to $23.7 million. Demand for our solutions is reaching a fever pitch and our ability to fulfill that demand and continue to grow has never been more critical. However, before we dig into where we're headed, let's review where we've been. The success of the first quarter can predominantly be attributed to our increased sales, which improve our ability to ship and install simulators despite COVID limitations. VirTra success, as a direct reflection of two fundamental attributes of our company. First, our people and partners. VirTra has worked alongside some of the most talented people in our industry long before de-escalation training made the headlines. We fundamentally believe in effective training and we have a unique ability to deliver value to our end users and our shareholders. Second, our high-tech solutions improve marksmanship and decision-making skills, which improves the performance of law enforcement and military personnel.…

Thank you, Bob. And good afternoon, everyone. It's a pleasure to be speaking to you today to review our financial results for the first quarter ended March 31, 2021. Our total revenue for the first quarter of 2021 was $4.4 million. This was a 33% increase from the $3.3 million of revenue we recognized in Q1 of last year. The increase in revenues was the result of an increase in the number of simulators and accessories completed and delivered, and therefore revenue recognized compared to the same period in 2020. Our gross profit for the first quarter of 2021 increased 61% to $2.6 million or 57.8% of revenue from $1.6 million or 47.8% of revenue in the first quarter of 2020. The increase in gross profit was primarily due to decrease costs as well as differences in the product mix of systems, accessories and services sold. Our operating expense for the first quarter of 2021 was $2 million, a 5% decrease from the $2.1 million we reported in Q1 of last year. The decrease in operating expense for the three months ended March 31, 2021 was mainly due to reduced selling and traveling expenses partially offset by an increase in professional services expense. Turning to our profitability measures. Income from operations for the first quarter of 2021 improved to $564,000 from a loss of operations of $512,000 in Q1 of last year. Our net income for the first quarter of 2021 totaled $655,000 or $0.08 per diluted share. This compares to a net loss of $389,000 or a loss of $0.05 per diluted share in Q1 of last year. Our adjusted EBITDA, a non-GAAP financial measure increased to positive $751,000 in the first quarter of 2021 from a loss of $326,000 in Q1 last year. Turning to our bookings and…

Thank you, Marsha. A hallmark of VirTra since going public in 2001 is that we are extremely diligent in how we decide to deploy capital and try to be extremely effective when we do so. We avoid cash burn and work hard to allocate capital to the areas of our business that will yield the highest ROI, return on investment, the best position for the long term, the best products for our clients and the best returns for our investors. By doing that, we've been able to organically grow for 15 consecutive years with nearly every year showing solid margins and a profit, but there's no doubt that we must be ready to take advantage of unique market opportunities. Over the course of our history, we have occasionally found ourselves capital constraint and we had to adjust our plans according to our means. Sometimes that meant missing out on various growth opportunities. Also, as we've succeeded, we've captured larger and larger contracts with ever increasing capital requirements. Just one example of a larger contract, which we're currently in talks for is a potential follow on order from the U.S. Customs and Border Protection or CBP. CBP is a long-standing VirTra client. And one who has reordered from us on multiple occasions. Last Friday, they posted a solicitation for us to supply them with new products through a new indefinite delivery, indefinite quantity or IDIQ contract vehicle. To clarify, we have not yet won this business. However, if we do win it, it could be worth up to $24.5 million of new business spread out over a five-year period. We'll keep investors appraise of how this progresses, but it clearly shows strong interest from one of the largest law enforcement agencies in the world, and they are not alone. This helps…

Thank you. [Operator Instructions] Now, our first question is coming from Richard Baldry from ROTH Capital. Please proceed.

Thanks. Maybe from a very high level, could you talk about what you believe sort of a ballpark growth rate could be, or maybe on A level, B level for a year? And you've got bookings up 48% year-over-year, your backlog is up 42%, your organic growth 33, it's either a lot higher numbers than we've seen for a while. So I'm just sort of curious how you feel about organic growth in the near term versus where it's been over maybe the last year or two?

Yes, thank you for that question. So we're very excited with the growth prospects for 2021. The one challenge that we have is on one hand, we have – we've seen a steady increase in law enforcement, various agency purchases that are on the smaller side in the six-digit range. Whereas on the other hand, we often get a multi-million seven digits or higher that come once in a while. And we're seeing both of those in 2021 potentially. But the exact timing of those is what's extremely difficult to predict. So we have noticed that as we've grown as a company year-over-year in our revenue and our customer base has grown. We are seeing a little bit more of a stable increase in growth rate, but you're right, this is a rather large acceleration of our growth rate. I do think if you look back through the company during the last 15 years, we have had on average a pretty solid growth rate in the double-digit range. And so while it's very difficult for us to commit to an aggressive growth rate as a guarantee, especially with a global pandemic still in existence. There is a definite argument to be made that we're positioned well for a double-digit growth rate during 2021, especially after this first quarter result has been posted. So it's just unfortunately, obviously impossible to exactly predict or refined such an estimate, but first quarter is great if we – if that's an indication of the rest of 2021 that would be fantastic. And it's certainly within the realm of possibility, but there's also the potential for headwinds based on the pandemic or other factors that may be out of our control.

Maybe following up on that, could you talk a little bit about how your implementation challenges sort of working now? It feels like things are opening up with mask restrictions coming off. So do you feel like some of that backlog will be worked down this year? It's been building pretty steadily, maybe and – whether that's first half, second half, and how about any change to the ability to maybe do some in-person marketing?

Yes. Thanks for that question. So our – internationally, it's still tough for in-person marketing. We are hoping to see that ease. There is an increase in the ability for us to do in-person marketing within the United States, but that is somewhat locale specific. So we are encouraged that at 2021 might be a year in which we have more ability to install and deliver equipment than 2020, where we were – where we had quarters that were very hampered by the COVID-19 pandemic. So yes.

Maybe a last for me and I'll turn over, but how do you feel about the funding environment, given, there's been a lot of money actually pushed at municipalities who actually saw their revenues, I think be better than they worried about. And maybe also with a sort of a backdrop of the return of earmarks, do you feel like any of your potential customers are well positioned to use that incremental funding mechanism on top of traditional ones? Thanks.

So we remain convinced that our sales team and our customers having the option to do a subscription model in our space is valuable and useful and has generated recurring revenue at VirTra that we would not otherwise have access to and has gotten great training devices into the hands of trainees who need them. So we're pleased those were two of the main objectives of that program, and it seems to be hitting. In fact, I'm pleased to report that of every customer who has done our subscription model, not one has lots of it [ph]. Eventually that's one of those things that seems like it's impossible to keep that up forever. It's amazing that we've not had somebody, sometimes you have staff change. Sometimes they have a change in their training policies. Sometimes they switch to buying a system, but so far every single client that we've had that started on a subscription model has stayed on the subscription model. So, and as renewed everything – everyone is renewed so far. So we're very encouraged by that. We do think that our challenge is really making sure that the agencies out there that are using mediocre simulators or no simulators at all, have an on-ramp to getting quality training from VirTra, that's our main focus. We still think that's where we need to improve more than any other area. Once in a while, I believe a client does have a funding challenge. But I do agree with your assessment that that there is considerable funding out there, it's really coming down to does the client really see the value of high-quality training for their department. And they're willing to use some of their resources towards that end and put time and effort into training at the level that should be trained at when you're dealing with lethal force decisions and the responsibilities that that entails.

Maybe one last one for me if I could. Let – first quarter is up 33%. That's actually on a tough compare because a year ago you grew almost 10% before COVID made a tough Q2. So sequentially, last year revenues were down. Is there a way to think about what you think of as normal seasonality from Q1 to Q2 with – let's say COVID doesn't get worse or better? It just stays whatever it is. So sort of what would a normal sequential progression feel like after what was a pretty strong start to the year? Thanks.

That's a good question. Generally, first quarter has been challenging for us and you're right last – first quarter, we were happy to see that the increase. But second quarter is one of those that can definitely be influenced by the international side and by larger federal and the timing of that. Many times, it gets into – sometimes it gets into Congress and the federal budget cycle. So sadly, we don't have great visibility to give you a ratio for second quarter, but you are correct generally our first quarters are often on the smaller side with the seasonality that we do sometimes experience, as I noted before, some of that seasonality dissipates a bit with a scaled-up company, and we've been scaling up now for many years and we're starting to see some of that. But there is still generally a bit more challenge in first quarter.

Great. Congrats on the strong start to the year.

Thank you so much.

Thank you. [Operator Instructions] Your next question is coming from Jason Smith from Lake Street. Please proceed.

Hey guys. Thanks for taking my questions. Bob, it sounds like you are seeing some really nice momentum on the law enforcement side. Just curious if that's coming mainly from new customers or are these existing customers upgrading or replacing their systems?

I'm sorry, I didn't quite catch all of that. Could you repeat the question?

Yes. Just curious on the law enforcement momentum that you are seeing if that's really being driven by new customers, or if it's existing customers who are upgrading or replacing their current systems?

Thank you for that question. It's a combination of both. We've been fortunate that we've been maintaining our customers that on the police side, but there is also the new customers coming in through our sales and marketing efforts. So, it is a combination, but we've been very fortunate to – a key aspect of any business is being able to keep your current customers happy while still pursuing new opportunities and having other customers gravitate to your solution. And it's a combination of both of those. But yes, we're very mindful of maintaining the customers we have. We do have competition, that's trying to convince our current customers to go elsewhere. And so, there is a constant battle there. But we've been very fortunate to keep the ones – the customers I've mentioned in previous calls are still VirTra customers, and it's a real testament to the decades of investment that we've put into this market.

Okay. That's helpful. And are you seeing any supply constraints or any friction on obtaining any components?

From time to time there are supply constraints we've been able to find alternatives. Many of the unique products that we sell are products that we make in-house from components that we try to make sure are readily available and have alternatives. So far so good with that, that we have been able to continue to ship. But we are mindful of some of the computer supply issues, but fortunately we've been able to keep the supply flowing. So, at this point we are able to continue to supply customers. And we do sometimes order a bit more inventory. And so, having a stronger balance sheet gives us more opportunity there to bolster our inventories when we do see concerns on certain components. But so far, we've been in good position for that. But yes, that is part of our operations have put a bit more effort into that during the last six months. But so far so good on that level.

Okay. And then just the last one for me, and I'll jump back into queue. Can you just update us on the STEP program and if you are seeing any traction there, or if that is no longer a big focus?

Sure Jason, yes. We still see STEP as a very valuable option for customers and our sales team. And we we've been impressed with the traction we've gotten with it. So, we do see that continuing into the future. And we've been fortunate that since the very first STEP contract that was February of 2019, we have not every single STEP customer has renewed their agreement, which is wonderful news for us. And a real testament to our operation team and our sales team to have that kind of success, so.

Okay. I appreciate all the color. Thanks a lot, guys.

Thank you.

Thank you. At this time this concludes our question-and-answer session. I now like to turn the call back over to Mr. Ferris for his closing remarks.

Thank you. We really appreciate everyone taking the time to join us today. Two days ago, our country celebrated Armed Forces Day, and I'd like to take a moment to pay special tribute to the men and women who currently serve or have served in the armed forces of our country. This year’s celebration is particularly special as VirTra’s innovative products have never made more progress in helping our service men and women train with more realism than ever before. Does an investor choose a company with a bright financial future or a company that helps solve some of the most tragic headlines? I say, is it much to ask for both? Our vision is to remain the leader with the world's most effective simulation training products so that the war fighter and the peace officer can serve their country, accomplish their mission and make it home safely. I hope you can detect our determination to supply evermore trainees with superior tools to give them every possible advantage far into the future. As for me every day, I feel blessed beyond measure and I firmly believe the best days for VirTra are ahead of us. Thank you for being part of VirTra’s story. We are honored by your support. Be safe, take care. And God bless.

Thank you for joining us today on VirTra’s first quarter 2021 conference call. You may now disconnect.