Ladies and gentlemen, good afternoon and welcome to VirTra's First Quarter 2020 Earnings Conference Call. My name is Jim, and I will be your operator for today's session. Joining us for today's presentation are the company's Chairman and CEO, Bob Ferris; and CFO, Judy Henry. Following their remarks, we will open up the call for questions from VirTra’s institutional analysts as well as 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 session. 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 would 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 would like to turn the call over to VirTra's Chairman and CEO, Mr. Bob Ferris. Sir, please proceed.

Good afternoon, everyone, and thank you for joining us today. When we held our last call on March 23rd, shelter-in-place and social distancing orders had just been issued across the United States. The impact on businesses and employees has never quite occurred at this level and on this timescale since our country was founded in 1776. Almost everyone has seen their daily routines uprooted. I know this is an extreme challenging time for many, personally and professionally. I sincerely hope you and your loved ones are healthy and safe and our deepest sympathies go out to anyone within the VirTra community who has been adversely affected by COVID-19. We view our employees, customers, shareholders and vendors as all part of the VirTra team; and if one of us hurts, we all hurt. Due to VirTra's government contracts which require continued performance, we are an essential business and have continued to operate in a modified format, whereby almost all staff have been working from home. We recognize the importance of VirTra not only surviving this pandemic, but ensuring we succeed into the future for all of our stakeholders. Therefore, we have taken any and all prudent measures to secure our future including applying for government assistance intended for businesses with fewer than 500 employees who are willing to maintain employment levels during this time. I am pleased to report that due to the exceptional work of our CFO, Judy Henry, VirTra was just notified about our loan application for $1.32 million under the CARES Act has been approved. Please note that our plan is to fully comply with the law so that this loan will ultimately be forgiven as we increase our corporate stability during this uncertain time. During our last call, we spent a good deal of time discussing why we were optimistic about our ability to continue expanding our reputation as a leader in simulation training, and continue supporting the essential needs of our law enforcement and military personnel despite the complications that may have arisen from the COVID-19 pandemic. I'm pleased to report that as evidenced by our first quarter financial results and operational progress, that was indeed the case through the first quarter of 2020. As you'll recall, we ended 2019 on a high note with a $9.6 million backlog, a strong pipeline of potential new business opportunities, and the most expansive and advanced product line in our company's history. Thanks to the adaptability of our team, and as always, the hard work of many prior quarters and years, we were able to carry this momentum into the start of this year. During the first quarter ended March 31, 2020, despite the onset of a global pandemic, we actually increased our revenues 9% year-over-year to $3.3 million. While the growth in the first quarter was encouraging, especially given the current state of the world, it's worth noting that our first quarter financial results were on track to be considerably more impressive if not for COVID-19. For most of the first three months of this year, our business was progressing extremely well. Unfortunately, we have several orders that were set to be delivered and installed in March. And as shelter-in-place became the norm in many states across the country, several of these orders were suddenly delayed or pushed into subsequent quarters. The unfortunate news in the short-term is that these delays negatively impacted our first quarter financial results. They had depressed the top-line. They also impacted our margins since we've been ramping up to meet the increasing demand expected in 2020 and beyond. The good news is that none of these orders were lost. They simply shifted into our backlog. As of today, we haven't seen our orders canceled due to changes in budgets. Although this shift is not ideal, but as those of you who have followed our story are aware, we have always suggested evaluating the business over a longer time horizon than a single quarter. Improved sales and marketing efforts, plus our finest product lineup in our history helped our company exit the quarter with a record backlog of $11.3 million despite the reduced activity forced by COVID-19. We still fully expect to recognize a majority of these revenues over the coming year. This is based on expectations that the coming months will witness an increase in travel and installations, but we are also prepared to endure longer than expected delays. Of the contracts we secured so far this year, there are two in particular that are worth highlighting. In March, we received our first order through a new distributor in Europe, which is valued at $1.1 million. The order is for multiple simulators, including V-ST PROs and accessories, including drop-in recoil kits and Threat-Fire devices. Although dollar value is material, this contract carries particular strategic value for us. In most domestic law enforcement circles, VirTra is already known as the highest quality simulation training on the market. Surveys completed by our customers are showing our products and our customer service are consistently rated at the highest level and are among the primary reasons we continue to grow. The distributor that partnered with us is highly regarded and known for being very selective. In fact, they spent several years vetting suppliers and products before choosing to work with us. Their decision to go with VirTra is a great stamp of approval that should help us improve our brand within our established territory. We have over $1 million in order so far through this distributor, but we are hopeful that the opportunities to leverage this channel to expand our presence among European law enforcement and military communities will only grow. Subsequent to the quarter end, we received a new IDIQ or indefinite delivery/indefinite quantity contract from the Department of State for the Republic of Mexico. This $1.6 million contract criss-crosses our product lines, including driving simulators, marksmanship simulators as well as use-of-force simulators, drop-in recoil kits and accessories. The products are set to be delivered in numerous state police agencies and correction facilities throughout Mexico. It's also highly encouraging for us to see such a material follow-on order for our newest product line, driving simulators. As a reminder, we launched this product just a year ago. The first order which we received in March of last year was similar to this latest one. It was for 11 driving simulators through the Department of State for the Republic of Mexico. All of these have since been successfully delivered and installed. To see our first customer come back for more VirTra's state-of-the-art driving simulator speaks louder than anything I might say. However, perhaps what's most significant about this contract is it validates the optimism we expressed in our last call and which continues despite COVID-19. This contract was awarded in early April at a time when uncertainty was rampant and both supply and demand had stalled in many industries. Clearly, this hasn't been the case for VirTra. Even with the current travel restrictions, we fully expect to deliver and install this order and therefore recognize revenues in 2020. To be fair, we faced our own challenges with COVID-19, but this contract hopefully helps demonstrate why we continue to believe the demand for simulation training that saves lives and saves money is robust and why we are optimistic about our ability to continue supplying the essential needs for first responders regardless of a macro environment. I'll add to this theme in a few moments, but first I'm going to turn the call over to Judy to walk you through the financial results for the first quarter. Judy?

Thank you, Bob, and good afternoon, everyone. Our total revenue for the first quarter of 2020 was $3.3 million. This was a 9% increase from the $3.1 million of revenue we recognized in Q1 of 2019. The increase in recognized revenue for the three months ended March 31, 2020 resulted from an increase in the number of simulators and accessories completed and delivered compared to the same period in 2019. Our gross profit for the first quarter of 2020 was $1.6 million or 47.8% of revenue, compared to $1.8 million or 59% of revenue in the first quarter of 2019. The change in gross profit was primarily due to increased cost of sales and the product mix, and the varying quantity of systems, accessories and services sold. Our net operating expense for the first quarter of 2020 decreased 7% to $2.1 million from $2.3 million in Q1 of 2019. The decreases in net operating expense was due to reduced selling, general, and administrative costs for labor, benefits, travel, and professional services. Turning to our profitability measures. The loss from operations for the first quarter of 2020 was $512,000 compared to a loss from operations of $457,000 in Q1 of last year. For the first quarter of 2020, the net loss totaled $389,000 or $0.05 per diluted share. This compares to a net loss of $313,000 or $0.04 per diluted share in Q1 of last year. Our adjusted EBITDA loss, a non-GAAP financial measure, was $326,000 in the first quarter of 2020, compared to an adjusted EBITDA loss of $278,000 in Q1 last year. Turning to our bookings and backlog. We define bookings as the total of newly signed contracts and purchase orders received in a given time period. For the three months ended March 31, 2020, we received bookings totaling $5 million. We define backlog as the accumulation of bookings from signed contracts and purchase orders that have not started or are uncompleted and cannot be recognized as revenue until delivered in the future period. Backlog also includes extended warranty agreements and STEP agreements that are deferred revenue recognized on a straight-line basis over the life of each agreement. As of March 31, 2020, our backlog was $11.3 million, which is up from $9.6 million at December 31, 2019. Finally, to our balance sheet. At quarter end, we had approximately $3.8 million in cash, cash equivalents, and certificates of deposit, which was up from $3.3 million from the end of the period December 31, 2019. Accounts receivable and unbilled revenue combined totaled approximately $5.2 million at quarter end, compared to $5.9 million at December 31, 2019. From a working capital standpoint, we ended the first quarter 2020 with $6.7 million in working capital, compared to $7.2 million in working capital at December 31, 2019. Financially, we believe VirTra remains in a healthy and strong position. But given the uncertainty that exists currently in the world, we opted to take precautionary measures to further strengthen our balance sheet. Subsequent to the quarter's end, we applied for the Paycheck Protection Program or PPP loan through Wells Fargo under the CARES Act. On May 8th, we received notice that we've been approved for a $1.3 million PPP loan. The proceeds were received yesterday. The details of the PPP promissory note are available in our 10-Q. It is our intention to use these funds to fund payroll costs and for the other permitted expenses, and to apply for forgiveness in accordance with the terms of the PPP loans. With this additional funding in place, we believe VirTra is in a better position to weather the current storm and emerge in a position of strength. For additional details of our financial results, please reference our 10-Q, which was filed earlier today. That concludes my prepared remarks. I'll now turn it back to Bob.

Thanks, Judy. And there's no doubt that many industries have been hit incredibly hard by the pandemic. Because of the increasing demand we've seen over the past few months, we've been adding staff and increasing R&D efforts to ensure we're prepared to capitalize on the opportunities ahead of us. We are fully aware of the imperative need, especially now to be conservative with cash and improve liquidity. In many instances, what we've done is reallocated personnel and budgets to ensure they're as effective as possible. For example, we've repurposed some funds from our travel and trade show budget to digital marketing. We're fortunate to have a highly flexible and adaptive group of employees. In fact, portions of the staff are actually cross-trained so they can work on whatever is most needed, which helps us better scale in accordance with changing demand. However, given the uncertain nature of so much of the macro landscape and our need to preserve our talented and trained staff, we made the prudent decision to pursue additional means to fortify our balance sheet as Judy just mentioned. With the additional financing we secured subsequent to the quarter’s end, we can rest assured knowing we have the means at our disposal to take care of our staff and customers and ensure VirTra continues supplying the necessary training to law enforcement and military personnel should economic conditions deteriorate. Of course, there's still a great deal of unknowns in the world today. But other than some customer delays like the ones that occurred at the end of March, we've yet to see a decline in sales. Some orders will be taking longer to deliver and install, which in turn delays revenue recognition, but the demand in the market doesn't seem to have diminished. In fact, from a new sales perspective, April was an incredibly productive month for us. We'll obviously know more as we progress through 2020. But even after stay-at-home became the norm for me, we were continuing to land material contracts like the IDIQ contract I mentioned through the Republic of Mexico. For the time being, we are continuing to push ahead in pursuit of our long-term objectives. We continue to add to V-VICTA training curriculum to help law enforcement communicate and interact more effectively and positively with individuals with autism. We're still working to enhance our product suite by refining current solutions and developing new ones. And we continue to make progress to better position our products to suit the needs of the military market. During the stay-at-home order, our teams showed tenacity for success by actually increasing our progress on product development for the military market. Similar to the law enforcement market, the military does not appear to have substantially altered its appetite for new training solutions. We continue to make progress here and hopefully we'll have some good news to share in the coming quarters. At this stage, no one can say with certainty what the world will look like as policies change and we all work to return to what we previously called normal. But regardless, based on the most recent of events, VirTra’s future seemed stable and bright. We're fortunate that approximately 87% of our customer base is government and essential to the well-being of all of us. As such, there's relatively little risk at the moment of customers encountering challenges with cash flow or becoming insolvent. Many departments already have budgets allocated for the year. So, spending behavior was not materially diminished so far. Of course, it is possible that customer behavior could change later this year or in 2021 and we plan to carefully monitor and quickly adjust. Should the return to normal take longer than current projections or should economic conditions remain challenging, it is important to bear in mind that VirTra is a remarkably stable company with a clean balance sheet that we've just strengthened and a history of successfully navigating challenging economic environments. We emerged from the last recession stronger than we entered it. We've added to our cash position since the end of last year. We currently have $3.8 million in cash. We've taken precautionary measures to ensure we have the resources in place to take care of our people should the need arise. And we have a long history of keeping an extremely clean balance sheet. We know how to conservatively and effectively run our business during times of prosperity and scarcity. So, overall we remain confident in our ability to weather the current storm and emerge in a strong position. Properly trained law enforcement and military personnel is in everyone's interest, especially during periods of unusual tension. We intend to be here to ensure our critical first responders have access to the best simulation training possible. And with that, I'm going to wrap up my prepared remarks and I believe we're ready to open the call for your questions. Operator, please provide the appropriate instructions.

Mr. Ferris and Ms. Henry, thank you for your remarks today. [Operator Instructions]. Our first question today comes from the line of Jaeson Schmidt at Lake Street. Please go ahead, Jaeson.

Hey, guys. Thanks for taking my questions. Just curious if you could quantify how much revenue was pushed out of Q1 into kind of Q2 and Q3?

We've not quantified that. But as a general number, it exceeded $1 million.

Okay. That's helpful. And then, Bob, I know you mentioned some of the traction you're seeing specifically with the IDIQ order in April, but curious if you could expand on that and just talk about some of the order patterns that you saw in April, and then now here in the first part of May?

Yes. Thanks for the question, Jaeson. We've not noticed a shift in the order patterns. Like I mentioned, we have seen some modifications on the delivery side and that is unknown exactly how that will work in the future if that was the linear to stay-at-home orders easing up or if there's going to be additional conservative approaches from customers. We have had a couple customers that are actually more aggressive and want installation, even though we are more cautious right now with obviously air travel. But -- so I think there could be a bit of a spectrum where some customers will be a bit more aggressive and others will be more conservative. But on the order side, I think the combination of having a larger product mix this year than we've had in previous years, having an enhanced reputation this year after doing a lot of hard work in previous years and decades, I think all of that is really benefiting us right now. So, I think it's a result of a lot of our website updates and our digital marketing capabilities has made us a better choice during this time of stay-at-home orders.

And the last from me and I will jump back into queue. It sounds like you're not seeing it today. But given the potential for constrained budgets in the future, are you seeing any pushback from customers from a pricing standpoint?

Thanks, Jaeson. Not any different than we've seen in the past. So, I -- we always have the potential to encounter people that are very price sensitive. We do our best to explain that sometimes you get what you pay for and being a department that has selected the lowest cost simulation provider that may have the weakest training potential in life and death situations is not a great position to be in and actually can be counterproductive. We think we are in an area where effective training can many times win the argument over the lowest cost provider, and we certainly work hard to explain that. So -- and we also -- for those who do want quality training we also have the STEP program, the subscription arrangement so that they don't have to put a large amount of money upfront, can pay a small amount of money over just 12-month period and have access to the world's best training. So, we have a lot of options for those that have some budgetary constraints and I think that seeing the world with COVID and the concerns of potential budget constriction that our STEP program is even more relevant and we're extremely pleased that we introduced that about a year ago and that we've refined that program to really pay dividends to get great training into more people's hands with the COVID-19 situation.

Thank you. Our next question will come from the line of Allen Klee at National Securities.

Could you provide an update on how you're thinking about your strategy to break into the military market?

Thank you, Allen. Thanks for being on the call and asking that question. So, our strategy really is focused on having the right product that meets the military needs. And so, in some cases that is being some adjustments to our pre-existing products and then making sure we get in front of the right people. And so that's really been a big focus of ours, is have the right product and get in front of the right people. And we continue to make headway on that plan to eventually end up with more and more military units using VirTra and eventually VirTra becoming a standard in the military like we have done in law enforcement.

Thank you. And then you spoke about the European distributor that got you a win. Can you provide a little more color on them in terms of kind of where they're -- what the opportunity and focus is that they have?

Sure. So the focus is really on penetrating the European market with VirTra technology. And I think there's areas in Europe that groups don't -- haven’t even heard of VirTra, or only know that simulation is technology that's 15, 20 years old and stale. And so having a reputable agent group like the distributor in Europe that has contacts and is able to introduce VirTra into areas that we would not be able to get into with our own sales staff and that we are not as accustomed to the culture over there, many times don't speak the language, that having a foreign distributor assist us in the international realm, particularly in Europe is very helpful. So it's the beginning. It was a great initial order. We were happy to see that. That's an excellent way to get started. Reminds me quite a bit of how we got started in Mexico, which was our -- actually our very first international installation and the distributor there was strong enough to place an order and get product into the market right away and be able to show it and demonstrate it and then was extremely successful at doing that. So we're looking forward to the group in Europe doing something similar. But it's one of those things that it grows over time and you don't see the results of that in the first month or the first year but it can be incredibly lucrative and it can increase the footprint of our training. We're really hoping to train those in Europe at the same level that we've been able to train people in the U.S. and other countries.

Thank you. Can you talk about the factors that affect the gross margin in the quarter and kind of, is there a good range to think about where that could run in 2020?

Yes. So Allen, a couple of factors on gross margin. The biggest one being that we -- one of the factors in cost of goods sold is the staffing level. We had increased our staffing level to prepare for the sales pipeline that we saw coming. And so, first quarter included a bit more staffing in cost of goods sold than we’d had in previous years, but it was intended to be there so that we would make sure and fulfill orders for customers. And when COVID-19 hit and we actually ended up not being able to ship and install as much as we were hoping in the first quarter, and as we looked at the CARES Act and our own internal need of deciding that we wanted to keep our staff employed even if we weren't going to be able to go do installations, that ended up creating a higher cost item in cost of goods sold for the payroll piece, which created a lower gross margin for that quarter because of that combination. Going forward, to the second part of your question, as far as a range for gross margin, as you know, our historic gross margin is right around 60%, and we've been able to on average keep about 60% gross margin that can and does fluctuate. We remain hopeful that we are able to maintain a 60% gross margin into the future, and of course that can be impacted in various ways, either potentially more gross margin or potentially less depending on a lot of factors. But definitely, we can speak to the factors involved in the numbers that we just reported, the first quarter numbers. We can speak to that. And that was a situation of staffing up in our production installation area and then not being able to fully utilize that staff due to COVID-19. We believe that's hopefully a temporary thing and that people will be getting back to work in the coming weeks and months.

Thank you. And then my last question is, as you've expanded your offerings, so now you have driver simulation and a lot more different scenarios. Can you help us to understand kind of -- in terms of your sales, do you think that a lot of the opportunity is in expanding with existing clients or are we more targeting new clients and new opportunities?

That's a great question. So to answer it properly, I'd have to say both. Obviously, we've had success in keeping and growing with current customers as you can see from our previous press releases of having follow-on orders from groups like Customs and Border Protection, Secret Service, U.S. Marshals. We've had a lot of federal clients who have not just bought from VirTra but then continue to buy from VirTra. One of the most recent is FLETC, which is the Federal Law Enforcement Training Center, and they've been a great customer. So, there is a lot of opportunity and growth within. And you're right, there’s -- when you already have a client and they decide, hey, they want to add a driving simulation and they already are happy with your firearm or your judgmental use of force training system, there is opportunity that they would want to stay with the same vendor and then add in driving simulation. However, I also should underscore, VirTra has not penetrated the FBI. We have not penetrated the U.S. Army to a large extent or the U.S. Marines. There are certain countries that we don't have large install bases, such as Britain, Spain, and France, and the list goes on. So, while I believe we’re in 33 countries internationally currently, there's still a lot of room to grow. I would -- I think most people would say though that VirTra has enormous room to grow in the military market. Even though special forces in different groups have been attracted to our products for many years and have successfully used them for multiple years, there's still several opportunities out there on the military side that we have not succeeded at. So, we have not succeeded in securing the projects. That’s something we're working on, and we think a lot of our products would actually be superior to some of the products that they've used in the past. But there's a whole process of proving that and getting in front of the right people and ensuring that the products we're offering fit their needs. But definitely, there's a lot of upside opportunity we have and nowhere -- in no way have we saturated markets on any of the products that we offer.

[Operator instructions]. Next we'll hear from Richard Baldry at Roth Capital.

With the backlog at a record level, I am sort of curious, once travel restrictions open up a little bit, can you talk about how much bandwidth you have and what the timing would look like to sort of clear that? How much could you play catch up in a short period of time or are there bandwidth constraints that would sort of spread that out by necessity?

Thank you, Richard, for that question. So, that's the silver lining from what I had mentioned earlier on how we had increased staff for cost of goods sold for the installers, that the silver lining is, is that we are ready and raring to go to install systems should the customer start to allow us. Now we are still doing some installs, I need to be clear. If it's a location we can drive to, if it's a place that we can have proper social distancing, and if the client is okay with it, and if we are okay with it, we still will do some. We are still actually doing some installs even during this time, only when we feel like it has ample safety for our staff and for our customer. But you're right, once things start to go back to normal, we believe we have some pretty good bandwidth to be able to get installations done quickly and effectively.

And could you talk a little bit about the sales cycle now it’s sort of changing, any early feedback from the digital marketing, which I assume is front of the funnel? And how deep you feel you can go into the sales funnel toward the closing stage in a virtual manner and any challenges inside that funnel?

I think the real challenge there for us is that we just don't know some -- the answer to some of these questions and I -- frankly, nobody quite knows because this COVID-19 world is unlike anything we've encountered before. It seems like our sales pipeline is progressing well, that our digital marketing strategy that we set up is working as we had hoped. And you're right, we do have a longer sales cycle. So, we are monitoring the front of the funnel, we're monitoring the back of the funnel. So far it's looking good, but we reserve judgment until we have a little bit more time and experience in this world. If things start to go back to normal, where for example, let's say a customer likes digital marketing but really has decided they want to do personal demonstrations, which by the way, we highly encourage anyone interested in this type of equipment should do personal demonstrations. Don't trust a company to say they have 800 great scenarios, do -- actually do the training, experience the system, do the scenarios for yourself, that's really where VirTra is able to shine because it shows the clear differences between check-the-box training and VirTra’s training in our opinion. So, there is a chance that when if things go back to normal and people are allowed to travel to our facility to get hands on our equipment, that will help our close rate. But right now I think we have some momentum and some wind at our back because of our reputation. A lot of those agencies I mentioned, Customs and Border Protection, U.S. Marshals, Secret Service, FLETC, these are really thought leaders in many regards and the fact that they've all selected VirTra is very reassuring to a lot of other agencies that are looking for the best solution. So, that helps us maybe because we're the leader in this part of the market. It might help us more than others. But we really, really enjoy competing head-to-head and showing our product and features directly against competing products. And there's many times a world of difference.

And Mr. Ferris, at this time we have no further signals from our audience. Sir, I will turn it back to you for any additional or closing remarks that you may have.

All right. Thank you so much and thank you. Before we close, I'd like to point out that it is National Police Week in the U.S. It's especially important given the circumstances this year. I'd like to extend our sincere thanks to the brave men and women who are putting their own safety at risk every day to help ensure our communities are safe. It's an incredible privilege to have a career that serves those who serve us. And at the end of the day, it's what keeps us never satisfied and always pushing forward to create an even more effective simulation training product and a growing to benefit us all. We look forward to updating you on our next call. In the meantime, be safe, take care and God bless.

Ladies and gentlemen, this does conclude today's teleconference and we do thank you all for your participation. You may now disconnect your lines and we hope that you enjoy the rest of your day. Be well.