Good afternoon, and welcome to VirTra's Third Quarter 2023 Earnings Conference Call. My name is Irene, and I will be your operator for today's call. Joining us for today's presentation are the company's CEO, John Givens; CFO, Alanna Boudreau; and Executive Chairman, Bob Ferris. Following their remarks, we will open the call for questions. 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 of the company's website at www.virtra.com. Now, I'd like to turn the call over to VirTra's CEO, Mr. John Givens. Thank you, and you may proceed.

Thank you, operator, 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 third quarter ended 30, September 2023. Along with highlighted business accomplishments, we also filed our 10-Q with the SEC today, which is available for your review at your discretion. As a brief overview for today's call, I'll begin by providing highlights for the third quarter 2023 and summarizing our operations and initiatives before passing the call to Alanna to discuss our financial results in more detail. Bob will then come on to discuss our recent V-XR product development and after that, I'll provide some concluding remarks before moving to the Q&A. And with that, we'll begin. In Q3, we built on our success from the first half of the year, advancing our operations and sales efforts further. These improvements continue to show up in our financial performances with net income climbing over $2.4 million from the previous year and revenue increasing by 54% year-over-year. Operationally, we are finalizing our machine shop consolidation into a single facility. While being mindful to minimize the impact of our delivery schedule, we're also planning a $1.4 million capital investment to significantly enhance our manufacturing capability and speed, and most importantly, the quality of our product. As a result, we're improving the customer experience while also reducing our cost. We've established the right processes to scale our operation effectively without compromising the quality of our final product. Our operational efficiencies set the stage for increasing our sales opportunities. We maintain a robust pipeline of potential agreements within the law enforcement and military markets. With the recent introduction of our V-XR training solution, we have further accelerated this momentum. Since its debut last month at IACP, V-XR,…

Thank you, John, and good afternoon, everyone. It's a pleasure to be speaking to you today to review our unaudited financial results for the third quarter and first 9 months ended September 30, 2023. Our total revenue for the first 9 months of 2023 increased 42% to $27.9 million from $19.7 million in the prior year period. For the third quarter 2023, revenue increased 54% to $7.6 million from $4.9 million in the third quarter of 2022. The increase in revenue was driven by our continued improvement in sales strategy and continued demands for our training solutions. Our gross profit for the first 9 months of 2023 increased 67% to $18.3 million or 65% of revenue compared to $10.9 million or 56% of revenue in the prior year period. For the third quarter, gross profit increased 114% to $5.4 million or 71% of revenue from $2.5 million or 51% of revenue in the third quarter of 2022. The increase in gross profit margin for both the 3 and 9 month periods was due to increased sales, while maintaining cost of sales in line with 2022 levels. Our net operating expense for the first 9 months increased to $11.2 million from $10.3 million in the prior year period. Net operating expense for the third quarter of 2023 was $3.7 million compared to $3.6 million in the third quarter of last year. The increase in net operating expense is primarily due to an increase in salaries and benefits resulting from addition of new staff, expenses for the New Orlando office, increased R&D spend, and implementation expenses related to the launch of the new ERP system. Our operating income jumped to $7.1 million from the first 9 months of 2023, a $6.4 million increase from $0.6 million in the prior year period. For…

Thank you, Alanna, and good afternoon, everyone. I'd like to take a step back and provide a broader perspective on our trajectory and how our recent technological strides are aligning with overarching industry trends. As we navigate our leading position in the training landscape, innovation remains at the forefront of our strategy. It's clear that a key strength of ours lies in recognizing unique challenges just faced by each of our customers. The V-XR training solution is more than a new headset product. It embodies our response to an increasingly complex world that demands a sophisticated approach to training beyond the conventional. Its design is more than a shoot-don't-shoot trainer as John mentioned, extending its scope beyond mere marksmanship improvement. Rather it cultivates critical soft skills in high pressure situations. The V-XR is a low profile lightweight system that immerses users in a span of situations containing lifelike characters. Our 3D human characters captured by our V3 capture studio are displayed in front of students. These characters are highly realistic and include eye and mouth movements that look natural and eliminate the uncanny valley. This plagues all of our competitors and the difference between what they offer and what we offer is just undeniable. The system can be instructor-led or entirely self-driven, making it a flexible training solution for agencies. It offers a variety of lessons across 3 learning modules, which we call the 3 Es: educate, experience and engage. Users can learn skills like interviewing, de-escalation, weapon transitions, decision-making and more. Our Engage module for example provides unmatched training with realistic simulated individuals experiencing mental health crises. With V-XR, we are not just evolving training methods, but also responding to societal need for empathy and understanding in law enforcement and security practices. Regrettably, the lack of mental health resources…

Thanks, Bob. As highlighted, our products form the core of VirTra's mission. This year, we've witnessed growing demands for our solutions and I'm proud to say that our operations have scaled to meet this challenge. In the first half, we effectively addressed our backlog and concentrated on elevating the customer experience. The complete overhaul of our ERP system has not only increased our installation efficiencies, but also significantly boosted our customer service capabilities and provided visibility on how well our processes changes are affecting the bottom line. We also made strong advances in supply chain management, reducing the risk of delays and disruptions while enhancing our operational performance. These improvements along with our scalable infrastructure have refined inventory management, enhanced timely order fulfillment and improved financial oversight. The restructured territories and additional regional sales managers, along with the revised incentive plans and the addition of sales support specialists are already reflecting positively in our outcomes. Collectively, the modifications we've implemented in our operational and sales strategies are set to propel growth further. Our ongoing focus is to fortify our business pipeline across key markets, uphold a standard of world class operations and consistently deliver superior quality to our customers. As we move forward towards the end of the year and into 2024, we are confident in the opportunities that lie ahead and expect a strong continued pace of growth. And with that, I'll open up the call for questions. Operator, please provide the appropriate instructions.

[Operator Instructions] The first question we have is from Jaeson Schmidt of Lake Street.

Hey guys, thanks for taking my questions and congrats on a nice quarter. Want to start with that big jumping bookings. Was this driven by a few customers or was it just broad-based strength across the business?

It was broad-based strength and maybe in our perspective 1 or 2 decent sized deals. But yes, it was pretty much strength across the board.

I concur.

And then looking at gross margin also took a nice jump sequentially. How should we think about gross margin going forward? Is this the new level or will it revert to more of that normalized Q1, Q2 range?

I would say that Q1 is probably more normal. Q2, we know we took a hit or because of the inventory write offs that we had. So I think a combination of Q1 is where we need to be. Q3 was an anomaly as we moved a fair amount of labor into our R&D category as we were doing some development items that offset some of our cost of goods.

And then just the last one for me and I'll jump back in the queue. Looking at that V-XR product, I know it's early, but just based on customer feedback, how should we think about order patterns for this? Do you think police departments are ordering multiple of V-XR devices, or is this one for the whole department? And I guess, relatedly, it does seem very complimentary, but are you at all concerned that this will cannibalize your core simulator market?

Yes. I'll talk about the cannibalization I thought about that very long. So one of the problems that we've had is, there's such a long cycle because when you're doing sales, whether it's military or with counties or state governments, they have to put the budget in. So, there's 12 to 18 months. One of the problems that we had is we're standing alone waiting on that, but they have discretionary dollars at a level. We needed a product not only that serve to solve a problem of soft skills, but we also needed something at a price point, so we could stay in there, show our capability. As far as cannibalize, no, because the training component with our V300s, other than the shoot-don't-shoot in those scenarios, we're not chasing that in the V-XR headset because we find that that is negative training because you can't put your regular weapon, you can't see the sites. There's a whole bunch of complimentary. We did a lot of searching and a lot of investigating, a lot of research to put together what path we were going to chase. And so I think we're in a very sweet spot that really complements what our V300 or V180 does. We don't use our recoil kits with the V-XR. The price point is quite low. And your other part of that question is, I think they're going to buy multiple kits because of our price point and what's the value. I always say content is king and the V-XR is based on our content. We made a significant investment prior to me coming on board in the V3 studio and all these captures, and I want them to continue to capture. And I tell them every 3 months, I want them to come to me and tell me they need to paint the floor because they burnt paint off the floor with using it so much. So building that library is paramount and going forward. So I think you will see some nice revenue from that capability as a complementary product. But no, nothing in the cannibalizing at all.

At this time, this concludes our question and answer session. I'd now like to turn the call back over to Mr. John Givens for his closing remarks. Please go ahead.

Thank you, operator. We stand firm in our service to our customers and their life saving missions. The passion and dedication of our team is a driving force behind our success. And I have every confidence that we will continue to push the boundaries of what is possible and change the world for the better. As we look forward to the rest of the year and into 2024, I'm excited to see the results following the strong foundation we've worked diligently to layout. Thank you. Be safe. Take care and God bless.

Thank you for joining us today for VirTra's third quarter 2023 conference call. You may now disconnect.