Good afternoon, and welcome to VirTra's Second Quarter 2024 Earnings Conference Call. My name is Paul, and I will be your operator for today's call. Joining us for today's presentation are the company's CEO, John Givens; and CFO, Alanna Boudreau. 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. You may proceed, sir.

Thank you, Paul, and thank you, everyone, for joining us this afternoon. After the markets closed today, we issued a press release that provided our financial results for the second quarter ended June 30, 2024, along with highlighted business accomplishments. Today, I'll begin by discussing our second quarter performance and strategic achievements, including the launch of our V-XR platform and our military market engagements before handing it over to Alanna for a detailed financial review. After that, I'll provide some concluding remarks before moving on to Q&A portion. Our second quarter results reflect the continuation of a transitional period as we ramp up our new sales initiatives. While our performance was not strong as we had hoped, I take full responsibility for these results. And we have entered into the second-half in a position to reboot progress. Our revenue came in at $6.1 million. The results are due to both controllable and uncontrollable factors. The controllables are being our go-to-market efforts, the uncontrollables being delayed decision-making from delayed budgeting resolutions during the first-half of the year. We are making progress on the controllable areas and finding workarounds to the uncontrollable areas, which I'll detail shortly. Despite our top line results, we maintained exceptionally strong gross margins of 91%, demonstrating that our operational efficiencies we put in place last year and the beginning of this year are yielding positive results. These efficiencies will support our growth as sales initiatives gain momentum. Notably, our bookings increased by $3 million quarter-over-quarter, doubling since Q1, highlighting improved market conditions and the strengthened sales approach. Despite recent challenges, the demand for our solution remains robust, and we are still positioned to capitalize on it moving forward. We have faced external headwinds in the first-half of the year due to primarily delayed budget decisions at the…

Thank you, John, and good afternoon, everyone. Now let's review our unaudited financial results for the second quarter ended June 30, 2024. Total revenue was $6.1 million compared to $10.3 million in the prior year period. The decrease was primarily due to delays in federal funding attributed to the U.S. government's continuing resolution, which caused numerous contracts to be placed on hold. This temporary challenge impacted bookings in the first-half of the year. Our gross profit totaled $5.5 million, 91% of total revenue, compared to $5.9 million, 57% of total revenue in the prior year. The 7% decrease in gross profit was primarily due to the change in sales. Gross margin increased mainly due to the lower cost of sales driven by operational enhancement, offsetting labor costs related to development projects and 40% of the total revenue driving from our service and step contracts, which have limited cost of sales associated with that revenue. Net operating expense was $4.4 million, marking a 10% increase from the $4 million in the prior year period. This increase was driven by investments in sales and marketing, as well as strategic hiring to support growth initiatives. Also adding to the increased operating expenses related to our improved IT structure and compliance requirements for our future -- for our current and future contracts. Operating income was $1.1 million, compared to $1.9 million in the second quarter of 2023. Net income was $1.2 million or $0.11 per diluted share based on the 11.1 million weighted average diluted shares outstanding, a 17% increase from net income of $1 million or $0.09 per diluted share based on 10.9 million weighted average diluted shares outstanding in the prior year period. Adjusted EBITDA, a non-GAAP metric, was $1.6 million, compared to $2.6 million in the prior year period. Now turning…

Thank you, Alanna. As we review the past quarter and the first half, it's clear that while we are navigating through some temporary challenges, our strategic initiatives and our operational improvements are setting the stage for incredible future growth. Our upcoming launch of the V-XR platform and growth into our strategic military engagements are important components to this response, and they will be key to our success for the rest of 2024. Looking ahead, we have the right procedures in place and are optimistic for the second half of the year as grant funding becomes clear and military contracts begin to open. We are positioned to capitalize on our healthy pipeline of opportunities in the months ahead while continuing to enhance our customer relationships, which are the single most important in this business, particularly as we extend our global reach and rollout of new products. In conclusion, despite the temporary hurdles, VirTra does remain at the helm of training industry, driven by innovation and a commitment to excellent training outcomes. We are optimistic about what the back end of 2024 holds and we look forward to sharing our progress, and we appreciate your continued support and interest. Now before we open the call for questions, I want to let everyone know that our Annual Shareholder Meeting will be held in Chandler, Arizona in October. We'll follow this with an Investor Day where we'll offer a presentation and a tour of the facility. More details will be made available in a forthcoming press release, and we look forward to engaging with our shareholders and investor during these events. And with that, we'll open up the call for your questions. Operator, please provide the appropriate instructions.

Thank you. Well, now we'll be conducting a question-and-answer session. [Operator Instructions] Our first question is from Jaeson Schmidt with Lake Street Capital Markets. Please proceed with your question.

Hey guys, thanks for taking my questions. Just want to dig in a little bit more on sort of the bookings activity. Obviously, a nice rebound in Q2. Understanding the budget constraints impacting Q2. Just curious if you've seen bookings continue to accelerate here in Q3?

We are seeing -- see not to make it forward-looking. We're pleased with what's happening in the first month of the quarter.

Okay. No, that's helpful. And then looking at – sorry, you noted some continued traction in the health care market, adding kind of six additional institutions. When do you think those could maybe pivot from more kind of pilot programs to firm POs?

Well, we're seeing several of those come in, and those are the numbers that were reported in bookings. It's an underserved market that has -- there's specific rules in California and Connecticut now that require health care workers to have some type of training, not certified, but I think it's going to move towards that and VirTra is right there at the start and the middle of it right now. So we should see that's the growth that we're seeing, the word's getting out and VirTra is taking care of their customers and they're seeing that it's meeting the needs they have now and is driving some of their policies going forward. So that's a bit unpredictable of -- it's going to be a very large market, but we're going to have to see how that plays out because the health care industry has never had to deal with this -- with training, they just usually had a security force is just dealing with stuff. And as these laws come out to protect patients and health care workers, it becomes -- it's becoming more apparent that they need some type of training aid. And the training that we do, it doesn't require much to adapt to what they need in that industry. It's more about how they handle it within their environment because it is slightly different.

Okay. That's really helpful. And then just last one for me, and I'll jump back in the queue. Obviously, gross margin was extremely strong in the quarter. You noted mix and some other efficiency improvements. But how should we think about gross margin here in the second-half? I assume it's going to at least come down a bit from Q2 level.

Yes, we expect...

We don't -- yes, go ahead Alanna.

Yes. No, we do expect it to come down. There was sort of the best of all the things that could have happened in this quarter to get such a high number, as we pull in the development projects that we were talking about and those start -- those expenses start to hit that all sort of level set us out. So I still expect us to be in the low 60s where we anticipated this quarter was just unique in an outlier.

And I'll add, Jaeson. I'm willing to sacrifice a little bit of the gross margin to gain when we start releasing the V-XR to gain as much market share as I can. So high 50s is probably -- mid- to high 50s is the lowest target that I'll go to, but I'm willing to sacrifice a little bit for that.

Okay, no, that's really helpful. Thanks a lot, guys.

Thanks.

Thank you. Our next question is from Richard Baldry with ROTH Capital Partners. Please proceed with your question.

Thanks. You've been very focused on efficiencies in the business since you took the CEO seat. I want to -- I'm curious that the inventory level sort of set a new high in the quarter as revenues have been a bit soft. Does that indicate something you're seeing in sort of near-term opportunities? Or are there more defensive stance to be taken on maybe harder to procure items or something we need to be aware of?

One of the -- I can take that. So one of the things that you're seeing in the $1 million increase in inventory is those labor costs that we're talking about that got moved to a work-in-progress account until those projects come to fruition to match the revenue accordingly. So that is a big chunk of it, work-in-progress.

Got it. And...

And Richard, the other part is the purchases for IVAS and our prototyping as well. So we're putting product out in each of those phases. So we are buying for that while we're still in production for our customer base that we have been for years.

Got it. I don't want to be too bogged in technical accounting, but you were EBITDA positive. The cash went down about $4 million. That same amount basically is missing from accrued expenses and other. It's sort of a random line. Can you walk through what's in that line? Why it fell to such a kind of dramatically low level is otherwise the cash would have been essentially sideways and wouldn't look like it was falling is why I ask.

Yes, it's all in our tax calculations and our tax provisions. We are sitting on a prepaid tax in both federal and state taxes, which is where the cash movement went. And then we were attempting to not hold as much accounts payable on the balance sheet for quarter end as well.

Got it. So then maybe from a higher level perspective, if you step back and think about the continuing resolution hampering budgets, can you talk about like activity levels outside of that or whether that's product pipelines or sales pipelines, the degree to which the sales people are engaged with either existing clients, new clients. And I'm asking is this a way to gauge once a budget situation improved, there's sort of a soft off the book backlog of activity that gives you some hope for sort of a reenergized growth rate going forward?

And I wish I had a crystal ball for that one, Richard, because there's so many indicators. One is just that they start putting us back in the process or they start opening up the competition. But I've stated the differences before. The military and police law enforcement sales are very, very similar. I understand both of them very well. The big difference that people do not understand is while it's a big chunk and very large contracts for the military, you're only dealing with a handful of people for 25 or 30 sites as they buy in volume. So you deal with one contracting officer and one person. Those are easy to determine when those come around. The harder part is there's different agencies that are putting out federal grants. And in each one of the law enforcement, you have state, local, federal, city municipalities, that all have different ways of releasing funds and purchasing processes and all of that. So I can give you a very good indication of when the military markets open, but it's state and local level, some have to go through accounting commissioners. We understand how all that works is just -- it's not very clear when that opens up because you're talking to different people in different cities, in different states. So what we -- the biggest indicator for us is the federal contracts because a lot of them are funding some of the small municipalities and police departments. And with that, there are sometimes they'll be matching funds. So when those start to move, we know that the funds are starting to release and we'll start getting the POs. And we're starting to see some of that now. I can answer your question specifically, but really is -- I wish it was that easy to tell you what the answer is.

Got it. Thanks for your help.

Thanks, Richard.

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

Thank you, Paul. VirTra is dedicated to our customers and their crucial missions is as strong as it ever has been. Our passion, hard work and dedication of our team are the cornerstone of our success, and I'm confident in our ability to provide that leadership to our customers and continue innovating at the top of the industry and making a meaningful difference. That's our priority. To our shareholders, I want to thank you for your continued support and hope to see you in October in Chandler. Paul, over to you.

Thank you for joining us today for VirTra's second quarter 2024 conference call. You may now disconnect.