Greetings, and welcome to the Vuzix Corp's First Quarter 2020 Conference Call. At this time, all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation. [Operator Instructions] As a reminder, this conference is being recorded. I would now like to turn the conference over to your host, Ed McGregor, Director of Investor Relations.

Good everyone, and welcome to the Vuzix' First Quarter 2020 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 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, May 11, 2020. Vuzix assumes no obligation to update these projections in the future as market conditions change. This morning the Company issued a press release announcing its financial results and filed its 10-Q with the SEC. So, participants on this call who may not have already done so may wish to look at those documents as the Company will provide a summary of the results discussed on today's call. Today's call may include non-GAAP financial measures. When required, reconciliation to the most directly comparable financial measures calculated and presented in accordance with GAAP can be found in the company's Form 10-Q, filed at sec.gov, which is also available at www.vuzix.com. I will now turn the call over to Vuzix' CEO, Paul Travers, who will give an overview of the company's operating results and business outlook. Paul will then turn the call over to Grant Russell, Vuzix' CFO, who will provide an overview of the company's fourth quarter financial results. Paul will then provide some closing remarks, after which we'll move to Q&A. Paul?

Thank you, Ed. Hello everyone, and welcome to the Vuzix' Q1 2020 conference call. Let me start by saying that all of us here feel deeply for those who have lost loved ones or whose health and wellbeing has been impacted by this viral outbreak and the disturbances it has created to all of our lives. We wish security and health for all of you as we collectively face this unprecedented challenge. It has only been about eight weeks since our last conference call, but I think it has been the most world-changing eight weeks we have all seen for a long time, if ever. For Vuzix, we feel this has put us out in front of one of the largest technological transformations to occur in the world since the onset of mobile communications. I'm talking about the remote worker revolution that has been spawned by the travel restrictions and social distancing practices being implemented across the world in response to this novel coronavirus. At Vuzix, this has driven us to refine and adapt our sales strategy. We've been able to empower and service our customers and partners through informational marketing event webinars demonstrating the solutions provided by our smart glasses and related applications, which is evidenced by the growing uptick in sales we are starting to experience. We cannot be sure how long this current uptick will last, or how large it will become, but at the onset it does feel like a paradigm shift in the way many firms must do business. It's as though we are out in front of a rather huge wave that's just starting to build. Before we get into some of the specific deals and aspects of the past quarter, and because you can all review the financials in our recent press releases…

Thanks, Paul. As Ed mentioned, the 10-Q we filed this morning with the SEC offers a detailed explanation of our quarterly financials. So, I'm just going to provide you with a bit of color on some of the numbers. Our first quarter revenues rose 12% year-over-year to $1.5 million, largely due to increase engineering services revenues, and secondly, due to strong sales of our M400 smart glasses, which drove at 35% increase in overall M Series glasses' revenues. Sales revenues of Blade smart glasses decreased by nearly $0.3 million, or 55%, primarily driven by a 20% decrease in their average selling price and lower unit sales. As Paul mentioned, the pandemic did slow the program of certain customer developments in the periods. So, while we began, the quarter with somewhat higher sales expectations versus the one we achieve, we were generally pleased with our results of operation, given global pandemic situation. There was an overall gross profit of $81,000 for the three months ended March 30, 2020, as compared to the gross profit of 40,000 for the same period in 2019. On a product cost of sales basis only, product direct costs were 54% of sales in the 2020 period, as compared to 52% in the prior year's period. The change was primarily the result of lower selling prices for the M300 XL in the first quarter of 2020, versus the same period in 2019, and that was before the M400 was introduced. Manufacturing overhead costs for the three months ended March 31, 2020. As a percentage of total product sales increased to 37% from 30% in the same period 2019 with a majority of this increase representing additional personnel year-over-year all to support the movement of M Series smart glasses production back from China to Rochester. Our operating expense…

Thanks, Grant. In summation, as you can see from the orders we have been receiving, the partnerships we have been striking, the use cases we have been creating, and the overall breadth of customer interest we have been seeing, Vuzix is emerging to become a critical go-to supplier of smart glasses during a period when the world is turning to them as a needed solution. While many other suppliers in our space continue to struggle, some increasingly so, our solutions and market positions continue to get stronger and stronger. We're more excited than ever about what the future holds for our industry and more importantly our place in it. And we intend to keep pushing the envelope in terms of our industry-leading products and technology. We're a team here at Vuzix, and this has been a team effort to get us to where we currently are. So I'd like to thank all of our employees that might be listening in for all of your time and effort, particularly during these most challenging of times. Expected revenue growth in the combination with expense management measures discussed will reduce our cash burn as we grow and execute upon these opportunities. That being said, there is presently much uncertainty in both the financial markets and the global business environment as many companies continue to reduce scale or shut down operations and unemployment soars to record levels. Given the volatile and unpredictable scenario, we have decided to strengthen our balance sheet. As just announced, we have entered into a stock sale agreement whereby we will be selling five million common shares of Vuzix at a price of $2.25 per share. This sale, expected to close this Wednesday, May 13, is a common stock offering only, with no warrants attached. And the stock will be distributed among six existing or previous institutional shareholders of Vuzix. This is a de-risking move that better positions Vuzix for greater growth, and provides additional financial security in uncertain times. Our business is currently accelerating, and we want to be able to expand and deliver to it to meet expected customer demand. Management and the Board feels that this move will be supported by a vast majority of our stakeholders as well as by our employees and customers, and will provide us the ability to grow, innovate, and deliver world-class solutions throughout 2020, and well into 2021. I'd like to now turn the call over to the operator for Q&A.

At this time, we'll be conducting a question-and-answer session. [Operator Instructions] Our first question today comes from Brian Kinstlinger of Alliance Global Partners. Please proceed with your question.

Great. Thanks so much for taking my questions. We've seen a number of press releases discussing demand for the telemedicine industry for smart glasses, and you've talked about it a bit here. Can you quantify roughly how many smart glasses have been sold for telemedicine purposes in 2Q? Are we talking several hundred, are we talking tens, just if you can give us a magnitude of the demand you're seeing?

It's many hundreds, and if you think about it, Brian, there's a new normal coming here, and even to go back to work in hospitals, today hospitals don't want anybody in their facilities that might be carrying the virus. And so, these big medical firms that make medical products that have their equipment sitting in the hospital, they all need maintenance, they all need support on a daily basis almost, and it used to be the only way to do that was to send a person from that firm into the hospital, and what's happening now is literally they are sending a pair of glasses. The tech that already is qualified to be in the hospital is doing the remote support from some of these bigger companies. So, the kinds of volumes we're talking about here, it's not like one or two per hospital kind of a thing. That it could be a significant number ultimately in all of these hospitals going forward. Hospitals are only one example. I mean it's going to be the same thing in industry. People don't want to send their employees, and in fact you can't get an employee on a plane to China today and back and forth without 14 days of quarantine when you land. So this is becoming a new thing, and quite frankly, for smart glasses, we've been saying this for a long time, but people were dumb, fat, and happy spending a ton of money putting people on airplanes and wearing out their staff when they could have simply used smart glasses all along. This is forcing that change, and I think we're going to see a big move towards this direction in the future.

Great. And then I think Grant intimated as much, eight weeks ago, you had thought revenue would build sequentially every quarter, and there were only three quarters left -- sorry, three weeks left in the quarter. So what was the biggest inhibitor to growth, that sequential growth for those three weeks?

You're talking about the last quarter?

Yes, I think that Grant said in his prepared remarks, and I think in the last conference call you said you'd expected sequential growth first quarter compared to second quarter, and there were only three weeks left. So in those three weeks what happened, was there massive -- some large orders that got delayed that you thought would be backend loaded? I'm just trying to understand.

So the first quarter was about $1.5 million in revenues, and then the second quarter, and almost just all in April, it's about $1.5 million in revenues also, maybe a little bit more. It's bigger than what the first quarter was. So, we are seeing sequential growth here Q1 to Q2.

And Brian, all kinds of business is being deferred by companies that are just trying to figure out how they're going to adapt and what they're going to do next. Decision makers are just not getting together, and initiatives have been suspended. We got not to name any automotive companies, but I mean they haven't been building cars, so they're not interested in deploying smart glasses in parts of their operation, et cetera. I mean it's -- yes, we had positive demand coming from hospitals, seniors' homes, et cetera, but the majority of everybody else is frozen trying to figure out what to do. So that was the shock, and I don't think anybody fully contemplated it.

Okay. And then can you speak to the supply chain. Last quarter you said there was a few prospects here from China, it's not having a significant impact. Has anything changed from a supply chain perspective?

Right now, no, I mean to be frank. I mean there we did say it has slowed down some of our new product introductions. There was a period in the last couple of months when all new mould base, the steel bases in China had to be allocated to building mass and TPE. So we had to wait our turn to get them, but that pushed out our new product introduction about three weeks. It's not the end of the world, and it's on track, and we're getting samples now, but I mean there's been little glitches like this in the chain, as well as it takes longer to clear products through customs going into Europe, stuff has got to sit in quarantine material. So everything is taking a little longer along the supply chain.

Okay. Last question in terms of liquidity, ahead of this morning's announcement on the raise, I'm curious how much cash you had as of today. I mean by my math where you ended and your burn before it went down significantly, I'm figuring $3 million plus the federal loan puts you at about $4 million and change. Is that where you were, maybe a little bit lower?

We're about that. And we don't issue monthly cash balances to anybody.

Okay.

We were above that.

A fair bit.

Thank you.

The next question comes from Jim McIlree of Bradley Woods. Please proceed with your question.

Thank you, and good morning. It sounds like the increase in sales that you've seen in April has been concentrated with the M-Series. Has there been an increase with the Blade as well?

We don't break it down that way, Jim. Sorry. I think - we just don't break it down that way, we --

M-Series products has been stronger for sure, they're the biggest portion of that. That's where we're seeing the demand in the -- related to telemedicine and videoconferencing. The Blade participates in that, but to a lesser extent.

The Blade doesn't have autofocus cameras, so it has a bit of an Achilles heel in a comparison, and it will certainly have autofocus cameras; that's what this new upgrade is all about. The M400 has got a broadcast quality camera in it; it's amazing how good it is. You can record 4K video with it. And so when you're streaming HD it's just so easy to see and resolve issues because you can read the text on the page, the fine print, et cetera.

And when you refresh the Blade, I think Paul, you said it was this quarter, is that with the same price, or is there a price change as well?

We haven't fully finalized, Jim. I think you're going to see it start at least at 1,000.

So, that would be a smaller increase. It could be back to where the Blade originally started in 999.

Right, got it. I think in the press release, and in your commentary, you talked about engineering services improving in Q2 and that's part of the bullishness you have on the quarter, can you indicate what you think engineering services revenue would be this quarter either a range or a percentage increase or…

I think we say in the Q we got about a little over $600,000 in previously booked engineering services expected in Q2, we put in our last Q, I mean, we're expecting the award of one and perhaps two new programs before quarter end. I mean, how much we work will get done on them by then, but I mean, it's whatever we put in here, I think it was a little over 600 gram, we said we had to complete, just try to find it…

I will dig it out. You don't need to.

Okay. We do make a statement.

Yes, okay. I'll look at that. Thank you. And then, I'd like to understand a little bit better the price delta that you're contemplating, the M400 versus the M4000, as well as what different applications or end markets that you are intending to address with the 4000 that you don't with the 400, I mean I'm really trying to get at that the product transition or how those two products are going to live together when the 4000 gets introduced?

So, the M4000, which is the one with the optical see-through, will carry up. It's about a 2,499 price point. We haven't finalized that either, but that's what we're thinking right now. So, it's a significant rise in price. It'll do a lot of what the M400 can do. However, with the optical see-through display, sometimes it's not as handy to do remote support, in fact, it's not; it's probably not as good, because an occluded display is better there, but there's other applications where you're looking at stuff in the real world and you want the digital world to be overlaid on top of it and seeing it, so that you're not having to think about picture and picture kinds of things. So, if you think about looking into an occluded display, or even at a laptop, right, you look over at the laptop and then you decide what you're going to do based upon you're seeing there, and then you go back to the real world, and you're going to try to remember it. Even though your eyes are just moving a little ways, that's what happens on an M400 today. The M4000, you'll look out in the real world, and the information will be floating out in front of you in the real world, and so, it makes it so that the odds of getting something wrong go down a fair bit, but it takes time to write software to do that kind of feature set, that AR kinds of advanced feature sets. So, out of the gate, the M4000 and the M400 we think are going to coexist very, very well together. There's going to be people that want to pay for that ability to get higher performance and more accuracy, and there'll be people that absolutely love the fact that what they're getting on an M400 with this super bright, beautiful display that's occluded, that allows you to able to read it well for remote support kinds of applications, they'll be more than happy with that. So, they'll coexist. There'll be a reasonably large difference in price between the two, and people will pick based on their needs, we think.

And it's going to be through the same distribution partners, the same software partners, or you'd have to come up with a whole new set of memberships in order to get the product down?

Out of the gates, many of the same software works, right, so there'll be plenty of just slide it in and go with it. However, some of those advanced features I was talking about, some of our current partners want them and we'll enable them in the glasses, but it will take them a little bit of time to get that software written for it, but in the meantime with current software will just work with it. It'd be something they'll be able to upgrade to over time.

Got it, got it. And just finally, I would like to understand a little bit better about the improvement you've seen in demand and since at least in some segments due to the COVID lockdown, I'm assuming that these are with customers who have already gone through the testing and evaluation and now it's the lockdown that has pushed them off the decision point. So, one could you just say if that's, if my assumption there sure or not. And then secondly is, what about the new customers, the new testing, is that just all put on hold for now or is there what's happening with that portion of the selling and marketing process?

There's a portion of our business that is on hold right now. And it's all the stuff that you might imagine is not so critical to deal with when your plants are shut down. As Grant said in the car industry right now, since the plant floors aren't even operating. Nobody cares so much about trying to increase the efficiency there. There was a group of folks that these working all along that have been wanting to do remote support and in those cases often, it just caused them to move into overdrive. In the medical space, there were very few people that were using our products in that space, that that space moves like molasses to make a change there, you normally have to go through sometimes years of testing human, but this virus has completely changed people's mindset on how they need to operate. And so, they're doing things expeditiously now, and so in that space, it's been like an avalanche of new business and a lot of it's coming really fast, and when it comes to the medical supply side of it, the larger companies that make medical equipment they have to keep running in these hospitals, they're trying to solve some big problems here. I mean nobody wants to be in a hospital today because it's ground zero for the virus. This equipment everybody's like going back to work, right. We're going to go start doing operations again, we're going to do this stuff that's been put on hold, and the hospitals are running under extreme circumstances to try to make that work. They don't want anybody in the buildings. So they're all trying now to solve problems they've never had before. And it's happening very, very quickly in that side of it, Jim. So, those are people, companies that we haven't worked with before that have finally, they have no choice, they have to figure out how to make this stuff work and use this stuff works well for them. So, there's a part of our business that actually is on hold, even some of the in-store picking kinds of things and stuff that's on hold because those employees that work in that side of the business, they're at home, stuck in this, so you can't deploy something in a store when the people who would normally be doing that, can't even go to work yet. That stuff the brakes came on. All this other stuff about trying to bring the world back to life, those are the things that are starting to kick into overdrive, and new customers coming out of the woodwork for Vuzix.

Got it. Okay, great, thanks a lot.

Yes, thank you, Jim. When the world shuts down, that's around the world. It's extreme, only amazing how the impact and what people try to do to be creative to get back to normalcy.

Hey Jim, one last thing we have $695,000 remaining in the existing engineering services programs, which we the customer is in a rush and we're going to try to get done in this current quarter plus, we know we're going to get one more new job before the end of the quarter or so.

Fantastic, that's great, all right. Thanks a lot, guys. Good luck with everything.

The next question is from Jack Vander Aarde of Maxim. Please proceed with your question.

Hey good morning, guys. Thanks for taking my questions. I was wondering if you can, I know there has been a lot of questions on kind of revenue ramp, I want to just follow-up on the engineering services revenue, I just checked the 10-Q as well, so the revenue from engineering services was a result of just two waveguide in display engine development projects. And that began in 1Q 2020. So one is that correct? Is it just related to these two projects, and then…

Yes, correct.

Okay. And then I think you said $695,000 or so is remaining on these two contracts, so that would imply that the revenue produce from these contracts in Q1 is absolutely below what you expect for Q2, at least related to these two contracts?

Absolutely, I mean, they didn't really kick-off until in March. So I mean, there's, we recognize revenue on the basis of completion. So we got to ramp up and gear up. So that's how we booked this revenue in Q1.

Got it. Okay, that's helpful. And then I want to reference a specific customer example it was described in the January presentation. Can you share additional color on volume Blade shipments as it relates to Ride-On? I believe you are expected to expand that in Q1 2020 to fulfill their seasonal resell order. So, given COVID-19 has that played out accordingly, and if not, where is that if you could me a status up there in terms where you expect revenues to come from that particular relationship?

That's so likely March madness, basketball and all the other sports industries that has shutdown. You can't go to swimming pool today to swim either. So, you can imagine what happens to anybody who makes swimming products. I mean unfortunately for Ride-On this has impacted them. I mean we have sold them some, but -- and honestly we don't breakout by account who we sold and how much we have sold to. That said, they have had some challenges because of this.

Okay, and that's understandable. And then just lastly, last quarter you guys provided an update on waveguide manufacturing capabilities and production yields. They have definitely improved significantly at least quarter around -- I think exceeded 85% pretty consistently. Can you maybe talk about where that's trended over the last few weeks? And then kind of what your outlook is for that production yield throughout the remainder of 2020?

Yes. It's going great on the plan for waveguides, and in fact one of the reason why we are getting a lot of this OEM business is it's related to the fact that we manufacture our own waveguides. We can do them cost effectively. And we do them here in the United States of America, and that's a big plus especially on these defense-related activities. Our competitors that make these kinds of things are out of China for the most part. In fact, almost exclusively now, and that's very problematic if you are a U.S. defense supplier as you can imagine knowing the climate between us and China these days. So, the plant's flow is going great. We have now three replication pieces of gear on the plant floor. And our yields have never been better.

Okay, fantastic. And actually if I can sneak one more question in here, as it relates to gross margins, product gross margin I think it's negative here if my model is correct. Engineering gross margin was strong. I mean this is up, but very, very small not right now of course, but maybe can you talk about like what your expectation is for gross margin which came in around 5% this quarter? What it's going to take for that or how large can that ramp be? How quickly can it happen where gross margin gets some lift here due to hire higher volume shipments maybe? And is that 84% or so engineering gross margin indicative of what you would expect at higher revenue scales from engineering services? That's it from me.

I mean the daily 4% it's not going to be about that high on a long-term basis. It's just the way the work and progress billing did. That's primarily internal work and we didn't have external cost in contractors which we can make a lot less money on, but we do get to re-class some of our engineering wages and add it up to cost to sales, but yes, but product gross margins were less. I mean manufacturing overheads are -- they are over 30% of our sales, and it's all volume related. I mean we built this infrastructure. We have a ISO 9000 factory. We need the infrastructure. And it's all a matter of volume. So, our long-term goal is still to get north of a net 40% and not with any -- not with expected unusual big increases in engineering growth margin and we do to try to our best serve, but I mean it's strictly volume. So, until we can get our sales way up and that the fixed cost is listed in our cost of goods payable, we got to amortize those fixed overheads.

Understood. Thank you, guys.

There are no additional questions at this time. I'd like to turn the call back to Paul Travers for closing remarks.

I'd like to thank everyone for your interest in participation on today's call. We look forward to speaking with you again at our annual shareholders' meeting June 22. This year because of the virus, yet again the world changes, we'll be having a virtual meeting, and there are more details available on our Web site. So, again, we will talk with everybody then. Thank you everybody.

This concludes today's conference. You may disconnect your lines at this time. Thank you for your participation.