Good afternoon, and welcome to VirTra's First Quarter 2023 Earnings Conference Call. My name is Claudia, and I will be your operator for today's call. Joining us for today's presentation are the company's Chairman and Co-CEO, Bob Ferris; Co-CEO, John Givens; and Chief Financial Officer, Alanna Boudreau. Following their remarks, we will open the call for questions from VirTra's institutional analysts 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'd like to remind everyone that this call will be made available for replay via a link in the Investor Relations section on 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. Thank you and you may proceed sir.

Thank you, Claudia and thank you everyone for joining us this afternoon. After the market closed today, we issued a press release that provided our financial results for the first quarter ended March 31, 2023 along with highlighted business accomplishments. We also filed our 10-Q with the SEC today, which is available for review at your discretion. As a brief overview for today's call, I'll begin by providing highlights for the first quarter 2023 and I'll summarize some of our recent business developments before passing the call over to John to discuss operations and provide an update on our military market progress. After that Alanna will discuss our financial results in more detail. I'll then come back on to discuss how 2023 has been going so far before moving to Q&A. And with that let's begin. Q1 we continue to build on the momentum of our 17th consecutive year of revenue growth by achieving a remarkable $10 million in quarterly revenue our best performance ever. We achieved this remarkable growth while at the same time pushing costs downward a difficult accomplishment with recent inflationary pressures. Our efforts to scale the company and control expenses led to our best profitability quarter on record. We increased our gross profit by an impressive 88% and achieved a gross margin of 69% of total revenue. This significant growth also led to a net income of $2.9 million. Our strong financial results are in large part, thanks to the investments we have made in our infrastructure, technology and talent over the last several quarters, which have ensured that our training solutions remain top of market by providing realistic scenarios that are highly effective in preparing individuals and teams for the field. In Q1, we continue to leverage the investments we made in our technology including…

Thank you Bob, and good afternoon everyone. I'd like to provide you an update on our overall company operations and our activity in the military market. First, regarding our sales effort, though, bookings were -- lower than expected in the first quarter, than we'd like to have. It's important to note that, lower bookings in the first quarter and into the second quarter are not uncommon due to budget cycles and decision-making skewing to the second half of the year. That being said, it is not an acceptable trend we want to continue. We are actively ramping up sales efforts, restructuring and prioritizing our sales territories and adding more sales staff. Our sales expansion efforts include adding international salespeople to cover Central South America, Canada, Africa, Europe and Asia as well as breaking up the domestic territories further to cultivate and grow the pipeline. While the timing of these efforts, particularly international is difficult to predict, we see good opportunities in the pipeline and are working to increase our footprint. The sales restructuring comes off the heels of our operations streamlining effort and the success of our process improvement to handle the increased sales volume. It's worth noting that our backlog remains robust and presents ongoing opportunities for executions in the second quarter, as we implement these additional sales initiatives. In a moment, Alanna, will brief you on our new backlog reporting which will provide leadership and shareholders, a transparent view of our progress as we target increasing our step in recurring revenue. We are confident in our ability to generate additional revenue through our sales efforts and cultivate the pipeline. Additionally, our investments in our ERP and scalability have resulted in higher capacity to install systems, increased customer service capabilities and are assisting us in identifying areas of opportunity…

Thank you, John. Good afternoon, everyone. It's a pleasure to be speaking to you today to review our unaudited financial results for the first quarter ended March 31, 2023. Our total revenue for the first quarter of 2023 increased 48% to $10 million from $6.8 million in the first quarter of 2022. The increase in revenue was the result of increases in STEP sales, simulator sales, accessories, curriculum and training, driven by both the domestic and international law enforcement markets. Our gross profit for the first quarter of 2023 increased 88% to $6.9 million from $3.7 million in the first quarter of 2022. Gross profit margin defined as total revenue less cost of sales was 69.3%, an improvement compared to 54.6% in the first quarter of 2022. The increase in gross profit was primarily due to the increased sales achieved while maintaining cost of sales in line with 2022 levels. This increased gross margin resulted from the favorable product mix of systems, accessories and services sold in the quarter. Our net operating expense for the first quarter of 2023 was $3.5 million, compared to $3 million in the first quarter of last year. The increase in net operating expense was mainly due to an 11% increase in R&D expenses, one-time costs related to the new Orlando facility, one-time costs in new hire staff and severance for old staff. Beginning March 1, the company entered into a new sublease for our old facility, which will give us offsetting revenue to the lease expense currently in our operating expenses. Turning to our profitability measures. For the first quarter of 2023, we saw operating income jump to $3.5 million from 700,000 in the first quarter of 2022. Net income for the first quarter of 2023, totaled $2.9 million or $0.27 per diluted share,…

Thanks, Alanna. I'd like to end by pointing out that the first quarter witnessed the onboarding of key new talent and implementing of the right processes, to support increased business volume while achieving the best financial quarter, in our company's history. Though we acknowledge our current positive results, we firmly believe that they do not fully reflect our true potential. There are numerous areas in which we can further enhance and improve to unlock even greater opportunities for growth. Still with these operational systems mostly in place, we are well positioned to further develop our business pipeline in our key markets, which encompass law enforcement military and international. The opportunities ahead are significant, and we remain focused on increasing momentum in all of these markets. We are shifting to a culture eager to address areas of improvement proactively, swiftly resolving challenges that arise. This approach allows us to fulfill our commitment to our shareholders and provide the level of quality that our customers, their loved ones and the public rightfully deserve. The first quarter of 2023 provides an objective perspective on our results so far. These results are due to the entire VirTra team, doing the hard work to enhance all facets of our business. We plan to continue our first quarter success, as we look to capitalize on the many opportunities that lie ahead and to best serve our customers every day. And with that, I'm going to wrap up my prepared remarks and we'll open the call up for your questions. Operator, please provide the appropriate instructions.

Thank you. We will now be conducting a question-and-answer session. [Operator Instructions] The first question comes from Richard Baldry from ROTH MKM. Please proceed with your question, Richard.

Thanks. Can you maybe drill into the cost of goods line? You're actually almost flat year-over-year on a nearly 50% increase and below the fourth quarter on higher revenues. Any way you want to look at it, a lot better. How sustainable, do you think that is? What were the key drivers there? Is there anything onetime in there to think about? It's the highest level over two years just -- it's very much an outlier performance. Any color would help.

Yes, thanks for that question. So that's -- we believe that's a reflection of the mix that occurred some efficiencies that we've been able to gain and some timings, on different things. There are not specific onetime reductions in that mix. Obviously, some of our infrastructure costs will get are streamlined, as we centralize in our headquarters, in other words certain overhead costs that have to be amortized across cost of goods sold, will go down and have started to go down in that regard. But structurally, we do expect that to fluctuate somewhat based on our cost of goods and what kind of deals we can do and then also as far as what our costs are on a particular order. So it was a particular favorable mix for us. We are not saying that this is the profitability that we will sustain indefinitely, but we are happy with that cost of goods sold number. And our focus is to try to find ways of even possibly increasing it, but it will vary from quarter-to-quarter. I mean yeah decreasing cost where we can.

Okay. Then a bridge from that into the inventory, which you've been building safety stocks and things for a few quarters. It stepped up another pretty considerable amount this quarter. Do you want to talk about why that is? Are there some visible order or visible shipments near-term that drove that? Was it something opportunistic for sourcing? How do we think about that level as new way to stay, or will it have -- float down over time?

Well, this is John. I would say that we've identified in the supply chain where we've had some issues and we have purchased for the future and done some blanket orders and are taking those on a -- trying to take those in a much more distributed fashion across quarters, but we found that we really can't do that because we put ourselves at risk, so you'll see it's one-off on some of our suppliers. So that's how you need to think about that. I mean, it will fluctuate just given the market. One time we had a problem with cameras. We resolved that. Now we have a problem with screens. And then we have another one and there will be another one that comes up. So it's just a matter of watching our supply chain closely and anticipating.

You don't give formal guidance. Maybe talk about how this quarter's outperformance impacts, which you'd expect to be typical seasonality on the revenue side? And then switching over to the booking side, which is a little below trend. The third quarter has typically been a big impact on your bookings for your full year. How do you feel like that's tracking in terms of pipeline et cetera versus prior years? Thanks.

I would say the keyword that you used in that sentence is pretty apropos, it's seasonality. So it's still going to be that way based on budgets. Now once we win a large military contract where we're on for a base in multiple option years, like, I talked about in previous calls that becomes plateau. So we'll raise our base each time that we get one of those contracts. That's one of the reasons why we've done STEP. Alanna broke out the STEP, so I could show the investors that transparency that says, well, if they execute everything in their capital backlog here's what the base of the revenue would be. Well, now going forward you can see as we increase our STEP, we then increase that base so we can try to flatten that out. But it is seasonal and there's just -- we try to do something about it and that's what the STEP program and our military contracts will do.

Okay. And then maybe looking at the bookings, because it has volatility like any other company. You talked about when you have a tougher quarter, does it feel like you enter the next quarter with some push-out deals that help that one come in, or are there other factors to think about in terms of what our expectations on near-term versus long-term bookings trends should look like?

Yeah. This quarter was disappointing in the bookings, and like I said in my prepared comments, my focus is on the sales the territories, the staffing and performance. So digging into that now, I'll probably have something more to say on that topic in the coming quarters, but right now, yes, it's something we're digging into. It's a bit disappointing. Long term I would say is, and I hate always using it because it sounds redundant like there's no performance on it, but our military and our federal contracts, I want to use those as my base and where we sit with revenue. We're looking at another product line that we can -- there's a lot of police departments out there but many of them have much lower budgets and much more -- less staff. So we're trying to put products in that range so we don't leave anything on the table. So I think I'll report more on that, as we dig into these and we look at the performance based on those initiatives. So, I can't give any more than that.

Great. Thanks for your help.

Thank you. [Operator Instructions] The next question comes from Jaeson Schmidt from Lake Street. Please proceed with your question, Jaeson.

Hey, guys. Thanks for taking my questions. I just want to follow-up on sort of the March quarter outperformance. Did the quarter benefit from any sort of push outs from December or pull-ins from June? Just trying to get a sense of what really drove you guys being able to buck seasonality here?

Yeah, that was -- those quite unique because we -- as you know we had those two large government contracts that came out and kind of the revenue itself pushed into the first quarter. We didn't pull anything in early. But the other significant piece of that is kind of like I said our report card for streamlining our operations and working off the backlog that's what really drove the revenue.

Okay. That's helpful. And then just following up on gross margin, I know you mentioned it's going to fluctuate based on mix and obviously revenue level. But just based on sort of this recent performance and assuming there's not a massive drop off on the top line is it fair to say that you guys should be able to keep gross margin at the sort of 60% or better level?

I wouldn't speculate that. I would say that, if you're looking at it I would keep it somewhere between the Q4 performance and the Q1 performance in that range. And the reason why I say that is that because we have -- with our ERP we're really identifying those areas of opportunities and we are taking advantage of our previous cost on buys on our supply chain. So we'll get a better idea as that starts to flush out.

Okay. That's helpful. And then just last one for me and I'll jump back in the queue. In regards to the STEP program is there a target percentage of how much you'd like revenue to be coming from that program, or how big of a piece of the pie it should be longer term?

We love subscription revenue, but we also recognize a lot of folks out there have grant money and they need to actually spend capital money or that's what they're approved for. So our preference the subscription is a great tool. It's a great tool to keep us on track with great service and support, but it's also a great tool to have some revenue waiting for us on the upcoming quarters. We'd like to see that over 30% for sure and -- but we're willing to -- we're certainly willing to take large orders of cash upfront or cash on delivery. Those are also -- are very acceptable. We just want to also make sure that people get the very best training tools that money can buy whether it's a subscription arrangement or just an outright purchase, but 30% or higher would be our preference.

And actually I can be a little more specific on how you need to think about that. I want the STEP revenue to be at 30% and the reason for that is when you take on the first year of revenue from the STEP the margins are lower. So I don't want to take away from our gross margins because we increase a STEP too much. Once we get those on we want to replace it every year because in the outer years our margins are much higher. So that will kind of level the margins and keep us moving throughout the year and the multiple years after.

Okay. That makes sense. Thanks a lot guys.

Thank you, Jaeson.

Thank you,

Thank you. At this time, this concludes the question-and-answer session. I'd now like to turn the call over to Mr. Harris – apologies, Mr. Ferris for closing remarks. Thank you, sir.

No problem, Claudia. Thank you. We would like to express our gratitude to all those who have shown an interest in our company and extend a special thank you to our investors for their unwavering support. VirTra team is fully committed to financial success, delivering shareholder value and developing the world's most effective simulation training products. Our mission is to equip the brave men and women of armed forces and law enforcement agencies around the world with the tools they need to serve their country, complete their missions and return home safely. It is at the core of why we exist. Once again, thank you for your continued interest and support. We are hard at work to increase the chances of delivering outstanding results for our shareholders. With 2023 off to a strong start, I firmly believe the best days for VirTra are ahead of us. Be safe, take care and god bless.

Thank you very much, sir and thank you very much for joining us today for VirTra's first quarter 2023 conference call. You may now disconnect your lines.