VirTra, Inc.

Good afternoon, and welcome to Virtra's third quarter 2022 earnings conference call. My name is Keith, and I will be your operator for today's call. Today's call is being recorded. Joining us for today's presentation are the company's chairman and co-CEO, Bob Ferris, and co-CEO, John Givens. 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, and or otherwise make statements about the future, which are forward-looking and are subject to a number of risks and uncertainties that could cause actual results that differ materially from statements made. The company does not undertake any obligation to update them or 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.Vertra.com. Now, I would like to turn the call over to Vertra's chairman and co-CEO, Mr. Bob Ferris. Sir, please proceed.

Thank you, Keith, 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 and nine months ended September 30, 2022, along with highlighted business accomplishments. We also filed our 10Q with the SEC today, which is available for review at your discretion. The third quarter included several exciting milestones for Virtua that we are proud to update you on today. Importantly, we had a record quarter of bookings of 16.7 million, representing year-over-year growth of 52%, bringing our year-to-date bookings to 26.6 million. Our strong bookings in the third quarter allowed us to end the period with a record backlog of $28.3 million, up 30% year-over-year. This growth was driven by our continued penetration of our core law enforcement markets. Keep in mind, we still see massive upside in the military market for our shareholders, especially given Virch's technological leadership position with de-escalation and small arms training. We are increasingly convinced we can expand our military simulation market share through efforts spearheaded by John Givens that he will detail shortly. Our backlog growth was partially driven by lighter shipments in the third quarter shipping to customers prior to the close of the quarter, causing our year-over-year revenue to decline by a little over $1 million to $4.9 million. We do encounter quarter-to-quarter variations, and we recommend viewing Virtua on more of an annual basis. But given our strong performance in the first half of the year, our revenue for the first nine months of the year totaled $19.7 million, up 24% compared to the prior year period. We are set up for likely another year of record revenue in 2023, which would be 17 in a row, a rare record in any industry given the ups and downs of the general market for the past 17 years. Recall that we noted slower sales in our core law enforcement market in the first half of the year, but that slowdown is now reversed with government sales growth of 13% in the third quarter. Of note during Q3, we secured two orders totaling $9 million under an existing contract with the U.S. Customs and Border Protection, or CBP. Included in this order was a $4.3 million order attributable to the CBP and a $4.7 million order attributable to another U.S. federal agency. Also during the quarter, we received a nearly $1 million order for Canada associated with our standing offer We were previously awarded last December. Recall the standing offer we were solely rewarded streamlines the buying process for all federal, provincial, and municipal law enforcement agencies in Canada to obtain standardized training simulators. We are encouraged by our continued penetration in a foreign market such as Canada, and we believe no other company in our market has a foothold in so many countries. We have sold to 40 countries and we think due to our training value, reliability and service network, that more training occurs on virtual simulators worldwide than any other brand. I would note international sales were a bit lighter this quarter as this fluctuates from quarter to quarter, but we remain optimistic on our international business prospects. Especially since travel restrictions have been largely lifted post COVID. providing us better opportunities to travel, visit prospective customers, and demonstrate our world-class solutions. Lastly, we received an order from the Federal Law Enforcement Training Centers, or FLETC, for nearly $700,000 to cover 59 Virtua Simulators deployed in four locations across the country. FLETC became a customer in 2019 as the first customer to receive our ultra-high-definition 4K simulation systems. These systems support thousands of officers from over 60 federal agencies, making it a leading referral location whereby other agencies are introduced to Virch's industry-leading products. I will now pass the call over to John to give us an update on the build-out of our Orlando, Florida operations, our overall military presence, and to discuss our financial results. John.

Thanks, Bob, and hello, everyone. First, let me bring you up to speed on what we've been up to in Orlando these past few months. As you may have seen, on October 4th, we announced the opening of our Orlando, Florida facility to support military and market objectives. We hosted an open house on October 20th to showcase the facility and provide immersive training demonstrations of our world-class training solutions. The open house was extremely well attended by military members, acquisition leadership, government program managers, law enforcement, industry prime contractors, local and state officials, and even shareholders. The feedback from the attendees were overwhelmingly positive about our solutions and local presence in the Orlando simulation community. This 9,000 square foot facility, which we have an option to purchase, will serve as an extension of our R&D efforts, customer service, and as a demonstration and meeting site for our prospective customers. The office strategically provides convenient access and support for Florida and East Coast based potential customers. Orlando is considered the epicenter of the world's military simulation market, so the availability to demonstrate to our customers in their backyard is critical. Currently, we have the site set up to demonstrate our V300 4K and VST Pro simulators. Since opening the facility, we have been extremely busy with tours and site visits of prospective military customers, leveraging our local footprint and my relationships built over many years in the training and simulation market. As far as I know, no other direct competitor in the small arms simulation training military market has a similar facility. and convenient facility, providing us another advantage. On our last call, I talked about two of the three ingredients for success in the military market, which are a physical presence in Orlando and strong relationships. We now have definitely checked those boxes. The third ingredient is, of course, a great product offering, which we are confident Virtra has in spades. So now that we've opened the door, we just need to capitalize on the opportunity. We have been encouraged with our traction, but note these things can take some time to mature. We are optimistic that Department of Defense fiscal year 2024, which started October of 2023, is the year we will start to demonstrate more concrete traction in the military market. The other topic I want to briefly cover is an update on optimization of VRTRA's staff and operations. I have leveraged my experience scaling operations to optimize Virtra's systems, their organizational structure, and lean processes as I see immense growth in Virtra's in the coming years. I have been very encouraged by the team's buy-in to these strategic moves and the progress we have made these last few months, which I expect to generate long-term benefits and short-term success as we complete orders and ship backlog. Many have questioned the ERP implementation and the efforts to ensure filings and operations are on track and accurate. The team has worked diligently to identify all the items and processes which have caused issues, and we have developed processes to ensure immediate benefit and accountability. We have invested in an improved ERP re-implementation and are confident the next phase of Virtra's success will be tied to the system efficiencies and shorter purchase order to invoicing timelines. Lastly, as you may have seen, we filed a Form 8K on October 31st announcing the departure of our prior CFO, Danielle D. Rosa-Diaz. While it would be improper for us to go into more detail about her departure, know that it was not due to any disagreements on any manner of accounting principles or practices or financial statement disclosures. Virtua's finance and accounting team were able to step up to get the financials filed on time as demonstrated by our 10-Q filing today. We are in the later stage discussions with a qualified CFO candidate and will announce an appointment of a new CFO in due time. Given this, I will be covering the financial portions of the call today. Our total revenue for third quarter 2022 was $4.9 million. This was a 20% decrease from the $6.1 million of revenue we recognized in the third quarter of last year. The year-over-year decrease in total revenue was primarily due to unbilled sales not yet being recognized, something I'm focusing on for fourth quarter. For the nine months ending in 2022, total revenue increased 24%. to $19.7 million from $15.8 million in 2021. The increase in sales for the nine months ending September 30, 2022 resulted from an increase in the number of simulators and accessories completed, delivered, and revenue recognized compared to the same period in 2021. Our gross profit for third quarter in 2022 decreased by 12%, to $2.5 million from $2.9 million in the third quarter of last year. The decrease in gross profit for the third quarter was due primarily to the lower revenue I previously mentioned. Gross profit margins for the third quarter of 2022 was 51%, which was higher than the 47% in the third quarter of last year. For the nine months end in 2022, gross profit increased 28% to $10.9 million from $8.6 million in the nine months ending 2021. Gross profit margins for the nine months ending in 2022 was 56%, which was higher than the 54% for the nine months ending 2021. The increase in gross profit for the nine-month period was due to higher revenue along with a product mix of systems, accessories, and services sold. Our net operating expense for the third quarter of 2022 was $3.6 million compared to $2.6 million in the third quarter of last year. For the nine months ending in 2022, the net operating expense was $10.3 million compared to $6.9 million for the nine months ending 2021. The increase was primarily due to expenses related to the move into the new building, the Orlando location, and increased payroll costs. Turning to our profitability measures, for the third quarter of 2022, we recorded an operating loss of $1.1 million compared to $266,000 of operating income in the third quarter of 2021. For the nine months ending in 2022, our income from operations was $681,000, a decline compared to the $1.7 million for the nine months ending 2021. Net loss for the third quarter of 2022 totaled $803,000, or $0.07 per share diluted share, compared to net income of $1.3 million, or $0.12 per diluted share in the third quarter of 2021. For the nine months ending in 2022, net income totaled $562,000, or $0.05 per basic and diluted share, which compares to net income of $2.5 million, or $0.25 per diluted share for the nine months ending in 2021. Adjusted EBITDA A non-GAAP metric for the third quarter of 2022 was a loss of $214,000 compared to a positive $520,000 in the third quarter of 2021. For the nine months ending in 2022, adjusted EBITDA totaled $1.9 million, a decrease from $2.3 million in the nine months ending 2021. Turning to our bookings and backlogs, We defined bookings as a total of newly signed contracts and purchase orders received in a defined period. For the third quarter and nine months ending 2022, we received bookings totaling $16.7 million and $26.6 million, respectively. Furthermore, we defined backlog as the accumulation of bookings from signed contracts and purchase orders that are not started or uncompleted and cannot be recognized as revenue until delivered in future periods. Backlog also includes extended warranty agreements and step contracts that are deferred revenue recognized on a straight line basis over the life of each respected agreement. As of September 30th, 2022, our backlog totaled $28.3 million, which was up 72% from the prior quarter and 30% from September 30th of 2021. Finally, our balance sheet. As of September 30, 2022, we had unrestricted cash and cash equivalents of $15.7 million compared to $15 million at the end of the prior quarter. From a working capital standpoint, at the end of third quarter, we had $25.7 million in working capital, a slight decrease from the $27 million at the end of Q2. For additional details on our financial results, please refer to our 10-Q, which was filed earlier today. That concludes my prepared remarks. I'll now turn it back to Bob.