VirTra, Inc.

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, Alana Boudreaux, 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 final 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.virtua.com. Now, I'd like to turn the call over to Virtua 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 10Q 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 of 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 VXR 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 VXR training solution, we have further accelerated this momentum. Since its debut last month at IACP, VXR, an innovative headset-based training platform that transcends the traditional shoot, don't shoot scenario, has sparked a wave of interest. VXR provides unprecedented value to our law enforcement and government customers, but also the security agencies, the hospital security teams, educational institutions, and criminal justice academies. And by focusing on the development of critical interpersonal skills, these professionals will be better equipped to navigate sensitive situations, diffuse potential conflict, increase their cultural awareness, and build stronger relationships with the communities that they serve. VXR's extensive range of use cases gives it that unique position in the market. Following its debut in October, we received a strong response from the market with hundreds of inquiries already coming in from agencies looking to advance their team's soft skills. We are currently accepting pre-orders with deliveries expected to begin April of 2024. Bob will delve into the product and how it's transforming the sector, but we already see it as a considerable opportunity. As we roll out VXR, we have a longer-term plan of offering annual subscriptions for access to our training content library. Personally, we believe that our content library is the most comprehensive and effective in the industry, as made possible by our V3 technology. We expect over time this offering will enhance our predictable reoccurring revenue streams, bringing us closer to our goal of 30% of total revenue. Our commitment to innovation doesn't stop at VXR. We are actively advancing internal research and development projects surrounding the implementation of artificial intelligence into Virtra's content creation and data analytics processes. As we continue to push the boundaries of immersive training solutions, AI will play a pivotal role in enhancing our capabilities and driving further success. First and foremost, AI will transform our content creation process. By leveraging advanced algorithms and machine learning techniques, we will generate highly realistic and dynamic content assets at an unprecedented pace. This means that our customers will have access to a broader range of training content and scenarios, allowing for more comprehensive and realistic simulations. Furthermore, AI will enable us to analyze vast amounts of data collected during training sessions. With the help of sophisticated algorithms, we can extract valuable insight and patterns from this data, providing our customers with actionable feedback and performance matrix. This data-driven approach will not only enhance the effectiveness of our training programs, but will allow for targeted improvements and customization based on individual needs. Additionally, AI will play a significant role in enhancing the adaptability and responsiveness of our simulations. By continuously analyzing user interactions and feedback, AI algorithms can dynamically adjust and fine-tune the training experience in real time. This adaptive learning capability ensures that our simulators remain relevant, engaging, and effective for each user, maximizing their training outcomes. The utilization of AI in Virtua's content creation and data analytics processes marks an exciting chapter in our journey. By harnessing the power of advanced algorithms and machine learning, we are poised to deliver even more immersive and effective training experiences. Through AI-driven data analytics, we will gain valuable insight that will guide our decision-making and ensure we remain at the forefront of the industry. In addition to these product innovations, we are focused on revamping our sales and operation functions. On our last update call, I shared our plans to realign the sales force into designated territories. customers to cultivate important relationships and expand our footprint. We've since made substantial progress in this approach, successfully establishing our presence in all our outlined territories. We've placed particular emphasis on the international market, recognizing the need for dedicated international sales personnel to tap into the expanding global landscape. We expect this to bolster our total pipeline of opportunities. This quarter, we revised our sales initiative incentive program to not only attract the industry's top talent, but also reward performance to retain the best talent. We're fostering an environment that rewards performance and dedication. To further support this initiative, we've added sales support specialists to our team. Their role is to streamline our sales process and work in tandem with our sales representatives who are now more focused than ever on generating new business. These sales specialists are strategically located in Arizona and Florida, offering extended support to our customers and acting as a catalyst to move sales through the pipeline efficiently. In addition, we've refined our internal sales procedures to enhance monitoring and advancement of potential deals. These improvements enable more frequent and meaningful touch points with law enforcement agencies and military departments. Our goal is to provide unparalleled customer service, responding promptly to their needs and ensuring the seamless journey from initial contact to close. The enhancements we've made to our Sales infrastructure reflects a strategic shift designed to propel us forward. It's with this context of transformation that we welcome Tony Sanflone to the Virtus team as our new VP of Sales. With his rich history of sales leadership, Tony's already begun to infuse our sales strategies with new insights and proven tactics. As Tony joins the fold and gets acclimated to our operations, We look forward to his expertise to further hone Virtra's market opportunities. These significant changes with our sales functions are not just promising for the future, they're already having influence on our financial results. Our recent progress is beyond our initial projections and we're optimistic that as these initiatives solidify, our booking rates will escalate in tandem. While these enhancements were only recently implemented and not fully reflected in the third quarter results, we're seeing indications of future benefits. Just to be clear, all of these territories are now up and running, and there are sales individuals hired working these territories, along with the leadership and the sales support specialists. Looking closer to how end markets perform in the quarter, In third quarter, our government revenue increased by 71% to 7.3 million from 4.3 million in the prior year. This growth is attributable to a jump in design and prototyping revenue complemented by stronger simulator and accessory sales. Internationally, our revenue was 180,000, a decrease from 380,000 in 2022. This can primarily be attributed to the longer lead times for the international pipeline. And while our international pipeline has grown, the current geopolitical tension and U.S. government budgeting issues have affected the expected release dates of those opportunities. We do expect higher close rates in the next several quarters as that funding and those projects are released. We have reported continued growth from our subscription training equipment partnership and step program, which provides reoccurring revenue for Virtra and offers an easy on-ramp for the smaller agencies interested in our solution but are perhaps budgeted constraint for an outright purchase. This also gives our staff another tool in closing the sale. Currently, our reoccurring revenue including warranty revenue, represents 25% of the total quarterly revenue, but we expect this to increase in the future. Regarding our military operations, as of Q3, we continue to work ahead of initial expectations. Our nurturing of a strong pipeline of leads has resulted in military-related contracts reaching $4 million in year-to-date, an achievement that notably surpassed our goal set at the onset of the Department of Defense's fiscal year 2024 in October. While the competition and sensitive nature of these contracts warrants discretion in public disclosures, our confidence in Bircher's potential for further expansion in the military section remains high. Overall, the outlook for the military small arms training acquisition is likely to focus on modernization, technology-driven training, realism, safety, and interoperability. Military small arms training is shifting towards more realistic and mission-specific scenarios. Virtuous products and training programs are designed specifically to replicate real world conditions, including urban warfare, counterterrorism, and asymmetric warfare. As defense strategies evolve, the acquisition of small arms training systems and equipment that remain as important aspect of military readiness and effectiveness. As we tailor our products for this market, Virtra is positioned as a tier one provider of our revolutionary recoil capabilities for military weapons such as the M4 and the M249. I'll now turn the call over to Alana to further discuss the financial results and their details. Alana?

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 nine months of ended September 30th, 2023. Our total revenue for the first nine months of 2023 increased 42% to $27.9 million from $19.7 million in the prior year period. For the third quarter of 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 nine 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 three and nine month periods was due to increased sales while maintaining cost of sales in line with 2022 levels. Our net operating expense for the first nine 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 nine months of 2023, a 6.4 million increase from 0.6 million in the prior year period. For the third quarter of 2023, operating income increased by 2.8 million to 1.7 million from negative 1.1 million in the third quarter of 2022. Net income for the first nine months of 2023 was $5.6 million or $0.51 per diluted share, an improvement compared to the net income of $0.6 million or $0.05 per diluted share in the year prior. And net income for the third quarter of 2023 totaled $1.6 million or $0.15 per diluted share, which represents an increase compared to the net income of negative 0.8 million or negative 0.7 per diluted share in the third quarter of 2022. For the first nine months of 2023, adjusted EBITDA, a non-GAAP metric, increased to 9.4 million from negative 1.7 million in the prior year period. Adjusted EBITDA for the third quarter of 2023 increased to $2.9 million from negative $0.5 million in the third quarter of 2022. Now, turning to our bookings and backlog. We define bookings as the total of newly signed contracts and purchase orders received in a defined period. For the first nine months, we have received bookings totaling $20.1 million. For the third quarter of 2023, we received bookings totaling $7.3 million. As John mentioned, we anticipate that these will gain momentum as our sales success initiative begins to take effect. Now, looking at our backlog, which we define as the accumulation of bookings from signed contracts and purchase orders that are not yet started or incomplete and cannot be recognized as revenue until delivered in a future period. As of September 30th, 2023, our backlog totaled 16 million. The breakout of this backlog includes 7.3 million in capital, $5.9 million in service and warranties, and $2.8 million in step contracts. And based on current contract delivery dates, we expect the majority of new capital bookings received in the first nine months of the year to be converted into revenue in 2023. As a reminder, service warranties and step backlog is revenue that will be recognized on a straight line basis over the coming years. In addition to the backlog, there is about $6 million in renewable step contracts that would represent an additional revenue for the next five years. Historically, we have greater than 95% renewal rate on our step contracts. And finally, to our balance sheet. As of September 30th, 2023, we had unrestricted cash and cash equivalents of $17.2 million, an increase from $13.3 million at June 30th, 2023. And from a working capital standpoint, at the end of third quarter, we had $29.2 million in working capital, an increase from $26.6 million at the end of Q2. We did have an increase in our inventory, largely due to the development projects we've been working on. For additional details about our financial results, please reference our 10-Q, which was filed earlier today. And that concludes my prepared remarks, and now I'll turn it over to Bob to discuss some of the improvements we've made with our technology.