Greetings and welcome to the Vuzix’s Third Quarter 2019 Financial Results and Business Update Conference Call. At this time, all participants are in a listen-only mode. A brief question-and-answer session will follow the formal presentation. [Operator Instructions] As a reminder, this call is being recorded. It is now my pleasure to introduce your hosts, Ed McGregor, Director of Investor Relations at Vuzix. Mr. McGregor, you may begin.

Good morning everyone and welcome to Vuzix’s third quarter 2019 financial results and business update conference call. With us today are Vuzix CEO, Paul Travers; and CFO, Grant Russell. Before I turn the call over to Paul, I would like to remind you that on this call management’s prepared remarks may contain certain forward-looking statements, which are subject to risks and uncertainties, and management may make additional forward-looking statements during the question-and-answer session. Therefore, the Company claims the protection of the safe harbor for forward-looking statements that are contained in the Private Securities Litigation Reform Act of 1995. Actual results could differ materially from those contemplated by any forward-looking statements as a result of certain factors, including but not limited to, general economic and business conditions, competitive factors, changes in business strategy or development plans, the ability to attract and retain qualified personnel, as well as changes in legal and regulatory requirements. In addition, any projections as to the Company’s future performance represent management’s estimates as of today, November 7, 2019. Vuzix assumes no obligation to update these projections in the future as market conditions change. After the market closes this morning, the Company issued a press release announcing its financial results and filed its 10-Q with the SEC. So participants in this call, who may not have already done so, may wish to look at these documents as the Company will provide a summary of the results discussed on today’s call. Today’s call may also contain non-GAAP financial measures. When required, reconciliations to the most directly comparable financial measure calculated and presented in accordance with GAAP, can be found in the Company’s Form 10-Q quarterly filings at sec.gov, which is also available at www.vuzix.com. I'll now turn the call over to Vuzix CEO, Paul Travers will give an overview of the Company's third quarter 2019 financial results of business outlook. Paul will then turn the call over to Grant Russell, Vuzix CFO, who will provide an overview of the Company's third quarter operating results. Paul?

Hello, everyone, and welcome to the Vuzix's Q3 2019 Conference Call. The third quarter was an important one for Vuzix in terms of readying our manufacturing operations for larger-scale production of the M400 in the Vuzix Blade specifically with respect to our M-Series Smart Glasses, we have recently begun the processes of onshoring all of our final assembly from China to the United States and also began initial volume production of the M400 in our West Henrietta, New York facility. This relocation will lower the overall unit's cost compared to China, based on our current production volumes. Clearly, China can be less expensive for very high-volume production. Regarding waveguide manufacturing for the Blade, we implemented numerous process improvements and installed new equipment that have already demonstrated consistent yield improvements to better fulfill our current order backlog and anticipated new programs that we expect to go live in the coming months. We continue to make progress in the third quarter, positioning Vuzix as a pre-eminent supplier of AR Smart Glasses and related technologies. Over just the last 60 days, Vuzix has realized significant product, relationship and business developments. I will share those details shortly. Our efforts in the last quarter have been focused on several key areas: first, our highest priority has been to get our house in better order as it relates to production. During the quarter, we made significant changes to our entire production pipeline for both Blade & its waveguides. We have nearly completed our efforts to move all further production from our China contractors for M-Series products and bring up new production lines here in our West Henrietta, New York facilities. This was a big task for Vuzix, which should result in better quality, lower cost to manufacture, more control of our procurement and component flows processes…

Thank you, Paul. Before I begin, I'd like to encourage interested listeners to review our 10-Q that we filed with the SEC today for a more detailed explanation on some of the quarterly year-over-year variances, as I will be highlighting just a few here. For the 3 months ended September 30, 2019, Vuzix reported a -- reported $1.2 million in total revenues as compared to $1.9 million for the same period in 2018. The overall reduction in sales of smart glass products was driven by a combination of factors, including the delivery of a large order to a single customer in the prior year's quarter compared to this year's third quarter, which had no such delivery. Price reductions of 30% on the Blade as part of our Dads and Grads summer promotion, price reductions of 33% on the M300XL in the quarter, coincident with the launch of the M400, and a further 28% discount for those customers that took advantage of the special M400 early adapters program. Clearly, we also saw some customer order deferrals in advance of the M400 actual release, which we started shipping in late September, 1 month later than our original goal. Vuzix Blade Smart Glasses sales continue to grow and represented 38% of our branded product sales in the third quarter of 2019 despite their summer sale and product availability constraints. Engineering services revenues for the third quarter of 2019 were $0.10 million, roughly flat versus last year's third quarter, with no new programs officially commenced in the period. Our overall gross loss from sales in the third quarter of 2019 was $0.2 million versus a gross profit of $0.6 million in the 2018s period with the decrease caused by lower sales and a variety of other factors. On a product cost of sales basis…

[Operator Instructions] Our first question comes from the line of Tyler Burmeister from Craig-Hallum Capital Group.

So first, as we think out to 2020 with what visibility you have with some of these larger customer contracts or larger pipeline customer opportunities, is there anything we should be thinking about as far as seasonality or growth trajectory through 2020?

Tyler, this is Paul. First of all, I just want to let everybody know that's listening in, the Vuzix tried something a little different here with this conference call. We have got a slide deck that was also running if you went to the webcasting of it. If you guys then would like to see that slide deck, you've got some really good images. It shows the significant changes that have gone on our plant floor. I mean, many of you have visited Vuzix before. I'm sure many of you have seen some of the plant floor, you'll look now this thing is built up. It's got all the quality systems that are needed there. You look at the people, the engineering staff, I mean, this thing is really ready to go. And we show some really good pictures of what that looks like. Unfortunately, we couldn't show some real close-ups of some areas of the plant floor but there's enough in there, I think, people to get a feel for it. So I recommend going to the Vuzix's website and going through the IR section in our Investor section, you'll find a link to it. Tyler, for your question. As we said in certain sections of the call, we have upwards of 30 key accounts, let's call them that, that are accounts that are what we would consider beyond just pilots. These are folks that have plans, it looks to roll out a significant number of our products into programs, similar to something like you saw with the SWORD, but in different areas, from warehousing to field service applications. And from a seasonality perspective, I mean, it's always difficult from the perspective of going into the December time frame, so that's holiday times for folks. But you should -- it's not -- not a lot of these guys depend upon, well, it's January, so it's swimsuit time, so we're going to buy a lot of expensive swimsuits. So we shouldn't see too much of that, frankly. It's really just dependent upon when these guys get ready to roll.

All right. Understood. And then maybe for Grant on this one. You made a comment that once we make some of these improvements, you'd see a product gross margin above 50%. Could you help us understand at what revenue level could we maybe see a total company gross margin upwards of 50%?

Well, when I refer to 50%, that's at least on a product-only basis. Overall, we expect -- if we can achieve 40% with our overheads and other charges is warranty and freight, everything else that gets included in cost of goods. That would be a more mature level for us. To achieve that, we need revenues in the $5 million to $7 million a quarter.

Perfect. And then just work and offset, I guess, could you maybe update us on how you think about your breakeven level?

It's still going to be in the -- on an annual basis, it's going to be in the mid-20s. I mean we're continuing on our cost containment. So I mean, we'd like to bring that down a little further, but it's in line with sort of what we have been saying over the last 12 months, but it's come down a little. We still have to march forward with our new technology and plans. We're trying to bring that down.

Our next question comes from the line of Jim Mcilree from Chardan Capital.

Paul, in your prepared remarks, you were talking about this Fortune 100 retailer. And I was hoping you could elaborate on how many stores you're in there? And how long you've been at those stores?

The effort with this particular firm has actually been many, many months in the making, I mean, we have hinted to this, and customer -- and some customers -- very similar to this customer over the last 1.5 years kind of a thing. It's only been in the last 3 months or so, that they've been in a position where they've been getting ready and putting it in the stores. They've been doing test runs earlier, but these are actual live picking environments now. So they've gone from testing in previous off-line kind of things, et cetera, in the stores, but as test events, literally, probably for the last year. But it's been in a live situation now over the last 60 days or so, I would say. And as far as the cam goes, then, as I mentioned, it's -- they're only in their very first few stores. There are stakes tied in, in Europe, and it's all about testing to make sure that if they decided they could -- if they i wanted to do a global sort of launch, they could do it that way. So they're testing it in some of the key areas.

And the product they're using is the XL -- is the 300XL, correct?

That's correct.

Have you -- it seems like you've -- it seems like customers are delaying on purchases until the 400 is available. At least that's kind of what I'm reading between the lines of what you're saying. Is that a fair assessment?

Not all of them, Jim. I mean this is a particular case in point. What's going to happen here, the M300XL, it really has come a long ways. And unfortunately, the M300 have plenty of issues. We've discussed some of those in previous conference calls and the M300XL software has finally gotten to the point where it's functioning very, very well for people. And so what's happening as those people that have been able to make it work well, like the price point. It will be less expensive than the M400 is. So when you have somebody who's doing larger deployments, I think we're finding some of them wanted to stick with the M300 XL. And this is a case in point, and there's more than just one. There's a bunch of them that like the XL. On the flip side of the coin, the M400 is -- it's amazing in how much better it performs in so many areas. And when you're just picking out of a warehouse and you need a nice enough display, that the 300XL does a good job. When you are doing streaming video services and you are out and trying to get remote support, help the quality of the camera, the quality of the streaming, the quality of the display even becomes a big issue, and that's where the M400 shines. I think in the long run, the M300XL will certainly not be in Vuzix's product mix because of end-of-life conditions and all sorts of things. But right now, M300XL plays well, you'll see it being deployed in a fair number of cases. I think you'll see many more deployments, though, on our customer-by-customer basis around the M400 coming.

And the decision to develop M400 as the intrinsically safe device with Eaton, was that a new decision, an Eaton decision or a little bit of both or somebody else entirely?

Well, there was a little bit of both, and it was a little technically oriented. The M400 has some capabilities that M300XL doesn't. The M400 is designed to do higher performance HD video processing and the likes at lower power profiles, believe it or not, than what you can get out of an M300XL even at a wide VGA sort of resolution. And so when you look at all of the factors associated with the issues associated with qualifying for ATEX certification and the performance of the finished device and you get there, the M400, again, it's just, leaps and bounds, a better product. And when you look at all of the effort that goes into doing this kind of a certification, it just makes sense for us to really able -- when the M400 came out and they finally could get their hands on it and play with it and we all went through this analysis, it was like guys we should just be doing is on the 400 and get on with it.

And as far as the manufacturing moves or -- I think I heard you say that they are complete or mostly complete? Is that correct?

The M400 is up and running and being produced daily today, between 50, 75 in kind of a day. So we can make them. And they're coming off the line really well at this point in time. It's -- if you look at the slide deck, Jim, you'll see a lot of images of what the line looks like, you'll see product coming off of it. We are producing M400s now. The same thing, it's true on the waveguide side of it. There's a lot of improvements that have been done there. You'll see that also on the -- in the slide decks.

There are no other phone questions at this time. I'd like to hand the call over to Ed McGregor for pre-submitted questions.

Thank you, Doug. We had a number of questions here. So let's just get right to them. Considering your success with Gartner's strategic partnerships, with telcos like Verizon and Sprint, are there any plans to try to get any of them to open subsidize smart glasses similar to the smartphones?

So a lot of the efforts that we're doing with the telcos today really are on the business side, the B2B side of the business. And there's no doubt there's some stuff happening around the Blade -- in the Blade, even in the consumer side of it, but it's not the mass market product yet. So we haven't really gotten into those kind of conversations around the Blade series. And on the consumer side of what these guys do, I will say we've got some next-generation products coming, but these guys have seen that, I think they're looking at that could be right in line there. And it would make sense to have those discussions. But I can't comment further on that one.

We'll go to next. Can ATEX-certified version of the Blade be made?

Yes, it can. And as I mentioned earlier, our partners at Eaton is very interested in the line of products that met Vuzix makes to be certified in the long run.

Very good. Next, your main competitors, RealWear and Google seem to be growing fast, potentially double or tripling their annual revenue. Is Vuzix intending to keep up with their growth or potentially even grow its share faster?

Let me first say, it's really hard to know what the growth rate these companies have. They are in some ways very lucky that they don't have to deal with quarterly reporting and sharing all of that kind of information. They can fly under the wire and put up press releases and whatever they do, it's within their company. There's no cross checks. Nobody really knows how fast or which programs are unrolling, et cetera, with those companies. I don't know. I mean, I look at Google as a case in point and if you look at many of our partners, the bigger partners, we don't see them having the Google Glass Enterprise Edition 3 or 2 in many of their things even these days. I have to say that Google Glass, I still think it has many challenges it has not fixed. That said, I can tell you that Vuzix does see significant growth coming. We'd like to see quarter after quarter growth as we move forward here and significant at that. If you just look at the modest number of deployments we've had so far versus what the -- what's in front of us, I think you should start to see some pretty significant ticking on that box.

Next, moving to on one of Blade guide based in 400 could be available and does it have a high priority internally?

Yes. There's no doubt it does. We've gotten feedback from the Blade from some of our customers that it is the only device they will use in the picking operations that they have and in some of the environments, one for safety reasons, and occluded display that cover some of your vision system can, in some cases, especially if it's a larger occluded display unlike the Vuzix smaller ones, cost and safety concerns. But the see-through system allows a user consider in the world and have information in the real world and not have to go back and forth to look at another screen, even the occluded display on an M300 or 400, you look inside of it, you see what's going on. You make a decision, you try to remember and then you go back to the real world to make decisions. And in many places, we're hearing from people that, that disconnect makes the user try to remember or have to remember what this next function that he should be doing. Picking 5 out of box 1 or picking 5 out of box 2 is an example. And that when you are picking all day long, and those numbers are going up and down, you often can get accounts wrong and it can be a big deal for people. So I can tell you that the waveguides in enterprise are a big deal for Vuzix. It's a big push for us. And I can guarantee you that there is an M4000 actually is the part number for it. Anything with 1,000 typically at Vuzix, it's represents a waveguide style device, and that is well underway at Vuzix. I can't tell you when it's coming, though. And in fact, we've been very cautious about how we introduce this and the timing for it. We think it will sell alongside the M400 and 300 just the same, but we do think it's got some significant advantages, and we don't want people necessarily waiting.

Very good. Next. The recent company blog regarding working on a Global tier 1 aerospace firm to build a customized commercial avionics waveguide base HMV system, it's quite similar to the new top MAX product towers recently discussed. As we decide new products.

Yes. We really can't comment on the specific programs that this aviation customer is involved in. I can say they're really happy with what we've done so far. What we've delivered, they've been sharing with their customers already, and their customers are just like wow, this is just what we need, for a lot of reasons. With our waveguide systems, you can replace the waveguide in the field. It's much easier on maintenance. The display system itself is beautiful, et cetera. And I can say that what they're doing is pretty similar to the kinds of things that are in that blog but I can't comment further. I hope sometime in the new year, we'll be able to share more in that regard, though.

Okay. And our final question, and I think we covered a lot of this on the call in some of the things we've said, but are there any potential catalysts -- additional catalysts, I suppose, that you could share with us that would help investors exercise rotation with investment in the business.

Yes. I think we have made a nice announcement today with our partners at SWORD. And we mentioned there's a whole bunch of companies now that are representatives of some significant rollouts that we see coming. I think you ought to be able to look forward to a lot of that, there will be public announcements around those. It's really hard to comment when and how fast they'll be coming, but I can only say we're really excited about Vuzix, quite frankly, with the fact that our plant floor is able to deliver what we need, cost containment, et cetera, on the production side of it. And these companies now are coming saying, how can we get products. So you should see a lot of catalysts coming. And with Vuzix being able to deliver against it unlike our third quarter efforts associated with Blade and the likes.

And I guess that's it for the questions, everybody. Thank you very much for the -- for participating in the conference call, and we look forward to sharing with -- more with you as the coming quarters unfold.

Good evening.

Ladies and gentlemen, this does conclude today's teleconference. Thank you for your participation. You may disconnect your lines at this time, and have a wonderful day.