Greetings, and welcome to the Vuzix Fourth Quarter and Full Year ending December 31, 2022, Financial Results and Business Update Conference Call. [Operator Instructions] As a reminder, this conference is being recorded. It's now my pleasure to turn the call over to Ed McGregor, Director of Investor Relations at Vuzix. Mr. McGregor, please go ahead.

Good afternoon, everyone, and welcome to Vuzix's fourth quarter and 2022 full year ending December 31 financial results and business update conference call. With us today are Vuzix's CEO, Paul Travers; and our 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 the legal and regulatory requirements. In addition, any projections as to the company's future performance represent management's estimates as of today, March 1, 2023. Vuzix assumes no obligation to update these projections in the future as market conditions change. This afternoon, the company issued a press release announcing its final 2022 financial results and filed its 10-K 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 certain 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-K annual filing at sec.gov, which is also available at www.vuzix.com. I'll 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's CFO, who will provide an overview of the company's fourth quarter and full year financial results. Paul will then return to make some closing remarks, after which we'll move on to the Q&A session. Paul?

Thank you, Ed. Hello, everyone, and welcome to the Vuzix Q4 and Full Year 2022 Conference Call. On this call, we're going to review our results and recent developments and then give you some perspective on where we see things headed. It bears repeating that the use of augmented reality by most business organizations and, ultimately, consumers remains the wave of the future. Despite the technical challenges encountered when making AR glasses and their uneven and unpredictable adoption curve seen to date, most entities around the world are realigning their future strategies around AR glasses with AI. The expected ubiquitous use of AI across applications in areas such as education, e-commerce, health care, communications, defense, security and more that hand the glove with AR smart glasses, examples like visual search, language translation, voice control, the list goes on and on. This marriage of technology will accelerate the need and use cases for lightweight wearable displays. Vuzix is an AR smart glasses optics and display engine pioneer. The company was built from the ground up over the last 25 years to deliver on the larger promise of AR and, as such, is well positioned to participate in this emerging market. Vuzix, as a recognized leader in smart glasses, now also offers OEM solutions that utilize Vuzix optics, waveguides and display engines. Over the next 3 slides, I'd like to first give you some color on our 2022 results, followed by our 2022 achievements, which collectively were significant. This will then allow me to paint the bright picture we see for 2023 and beyond. Speaking of which, our first quarter of 2023 is lining up to be one of our best in a decade in terms of revenue. In fact, based on current Q1 2023 shipments and confirmed orders received to date,…

Thank you, Paul. As Ed mentioned, the 10-K we filed this afternoon with the SEC offers a detailed explanation of our annual financials. So I'm just going to provide you with a bit of color on some of the full year as well as quarterly numbers. For the year ended December 31, 2022, Vuzix reported $11.8 million in total revenues as compared to $13.2 million for the prior year, a decrease of 10% year-over-year. Sales of engineering services for the year increased 250% to $1.3 million from $0.4 million. Smart Glass revenues decreased 18% compared to the prior year due to larger volume sales discounts, negative foreign exchange comparatives and to expand spend lower unit volumes. For the 3 months ended December 31, 2022, Vuzix reported $2.9 million in total revenues versus $3.3 million in the prior year's fourth quarter. Current economic uncertainties and continued geopolitical tensions we feel resulted in the deferrals of some customer purchases in Q4. For the full year ended December 31, 2022, there was an overall gross profit of $1.5 million or 13% as compared to $1.6 million or 12% for 2021. The improved gross profit percentage was a result of decreased depreciation and amortization expense in 2022 versus 2021, as more of our current manufacturing equipment became fully depreciated and an 8% expense reduction in unapplied manufacturing overheads. Research and development expenses for 2022 rose 9% to $12.7 million as compared to $11.7 million for the 2021 period. The increase was largely due to a rise of $0.6 million in external development expenses primarily related to our Blade 2 and Shield Smart Glasses and a $0.4 million increase in wage costs due to additional personnel hired in 2022. Sales and marketing costs for all of 2022 rose 32% to $8.1 million from $6.1 million…

Thanks, Grant. Vuzix investments in our future are paying off in spades. We have diversified our product portfolios, and with our waveguide products hitting the market, we have formalized our OEM group, and they are opening up multiple new revenue streams for the company. More and more enterprise organizations are embracing wearable technology, and 2023 will see this momentum accelerate. And as Grant just said, we have all the resources we need to execute on our plans. With that, I'd like to turn the call back over to the operator for Q&A.

[Operator Instructions] Our first question is coming from Matt VanVliet from BTIG.

I guess, first on -- Paul, the comment you made around a couple of the hiccups with some rollouts with customers. I wanted to maybe get a little more detail there. I know Grant mentioned some geopolitical issues maybe having some impact. But wanted to hear maybe more details on what those hiccups have been and maybe, more importantly, sort of how things have trended over the last 2 months in relation to some of those. Or are they just delays? Or are you still working on some of those deals? And then how that maybe impacted the pipeline, which sounds positive, but just curious on maybe what impacts you estimate some of those issues had on the forward pipeline as well.

Yes. So the fourth quarter, when you're in the logistics industry, where you're moving boxes around, it's not a good time to actually be potentially putting hiccups in your supply chain. And a lot of these deployments are brand new, but they're just getting started. In some cases, they're actually rolling out. They're in multiple places. But some of the companies that we work with were like, look, we're going to wait until the first quarter to do this and the second quarter. So there's part of the reason why Q1 is as strong as it is. Some of that happened, but some of that got pushed also after Q2, quite frankly, is -- it doesn't look bad either for Vuzix. Everything is kind of coming along nicely. The other thing, it's just the world was, in the fourth quarter with the markets going the way they were, people worried about making sure that they had capital availability and stuff, they were just decisions that pushed things a little bit. It's not lost business at all into the contrary. Guys like Ryder and the like, I mean these guys are -- they're just moving forward. It's strictly timing-related.

Okay. That's helpful. And then when you look at the potential of the OEM business, in particular, the waveguide component of that, as you talked about large consumer electronic companies and other tech companies, I guess, how should we think about maybe over the longer term what the potential mix of business between OEM sort of component manufacturing versus full complete shipped glasses coming from Vuzix? If you have kind of a general thought or a couple of different scenarios, I would love to hear that. And I guess, for the -- wrapped within that, have the large scale sort of layoffs and cutbacks at some of these large tech companies -- and they've talked about maybe concentrating on what more of their core business looks like today. Is that impacting the potential for the OEM business to grow over the next couple of years?

First on the latter, I personally think there was a lot of hiring that was overdone during the pandemic period. I will say that it's made some opportunities for Vuzix an acquisition of new talent a little bit. I don't believe that -- those letting people go at her Vuzix. In fact, in some cases, less staff mean they have to be more efficient. So in those areas where they're letting people go that are part of the supply chain and stuff, we're seeing the need for our products starting to grow. So kind of a mixed bag there. But primarily, I think it helps Vuzix. As far as the mix between product OEM solutions versus pieces and parts, I have to say that the reason why we built Ultralite is so we could have a platform that they could then get rebuilt into -- you might imagine a bunch of different brands. I mean you go into a sunglass hut today, right? There's 500 different pairs of sunglasses out there. And so this platform most likely is going to be with somebody else's plastics and brand on it. And they have these look and feel that they all have. They're very proud of the brands that they've built. So those guys are going to be buying pieces and parts from Vuzix. But these guys aren't software companies. They don't know how to make electronics. They don't know how to make waveguides. This whole idea of an integrated waveguide with a prescription, these are all things that Vuzix brings to the table. So the pieces and parts won't just be a waveguide. It's probably going to be a bunch of stuff in there. Some of it will be licensed, and some of it is literally going to be us supplying…

Yes. No, very helpful. And then, Grant, quickly one question on Moviynt. You talked about a 7-figure contribution in ‘23. What kind of growth does that represent? Or how much revenue was allocated to that pre acquisition? And just kind of making sure we understand what you guys are bringing to the table there.

Just one sec. I mean, last year, they did 20,000. 70,000 of it is when they were part of Vuzix. Next year, we’re looking at a couple of million-dollar contribution from them. I mean, over the last several years, they’ve been in a developing mode, working with their customers, and they’re getting ready for some deployment. So it should be a nice contributing factor next year.

Means 2023, by the way, for next year, we’re also doing that a little bit here.

Sorry.

That’s okay, Grant.

Next question is coming from Christian Schwab from Craig-Hallum.

So just I appreciate the color on the different product revenue opportunities, modules, just waveguides or product sales. Ex the acquisition, what type of product sales growth rate should we be thinking about? Is the target broad range in '23?

I think we're going to see a fairly consistent move through 2023 where each quarter should be the previous quarter. And we'll have, I think, a really nice 2023. In 2024, I think it's going to start to kick in to overdrive because that's where all these guys start rolling out on the OEM side of -- that really starts rolling out into the market. But I will also say our expectations on the product side, we've been working for a long time with some of these folks in supply chain. And in that side of the business, I mean, we're talking about many thousands of units worth of deployment. So I mean, '23, 50%, I guess, would be an easy way to --

Okay. Okay, fabulous. And then as we begin to ramp and get ready for these other potential OEM type of ramp, should we expect engineering services to have a good year in '23? Or am I thinking about that wrong?

The bulk of the revenues, I think, is going to be choppy because that's the nature of engineering revenues, right? I mean you're doing something, you do a lot of work, you deliver in a quarter, and then they're evaluating. And then the quarters later, you're rolling on the next piece just trying to get into production. So the but we have a bunch of those things that are happening, Christian. So I would suggest that you'll see continued choppy growth, but it will get bigger and bigger over time, upwards of 100% to 200%.

Okay. That's perfect. And then my last question, kind of given that back-of-the-envelope outlook for revenue and the capital investments we're making, what should we -- what is the fair assessment that we should assume for cash burn this year?

It should be similar to '22, I think.

It shouldn't be any worse between -- our plan is to be better than lose less cash than --

I'm sorry, forgive me, 20% because the revenue size is climbing.

I mean we're still making some big investments in 2023, as mentioned on the call, regarding expansion of our waveguide capabilities and manufacturing. And if you dig into the K, there are some further investments we're making related to our Atomistic technology licenses.

Next question is coming from Jim McIlree from Dawson James.

In the K, you talked about the Atomistic agreement being, I don't know, amended or changed. And my question is what was the genesis of that. And then, secondly, does that change the cash obligations or timing that you have with Atomistic?

It really doesn't. I mean I think we've got a bit more of a window on one piece of it, but for the most part, it doesn't change anything. There's no extra cash needed. It's just -- there was a way for us to get some more technology that we could bring on board, and we thought that, that was important. So we made some modifications around it to do that.

And so the change was around getting the additional technologies. Is that right?

Yes. That's 100%.

Got it. And so when does that investment, that partnership with Atomistic, when does that turn into a product -- or a revenue-generating product?

That's a good question, Jim. Let me say that between now and when it does, there should be a lot of data points that we're going to be able to share along the way. I'm been saying that, but things are starting to come together now. We're, knock on wood, about ready to file the intellectual property pieces on the stuff that we need to do. And we'll be able to share a whole lot more coming up. I will say that they are doing around some other things that we're also doing, may bring revenue generation sooner rather than later. But there's a lot in the air that I'd rather not talk about just yet on this one.

Okay. So is it reasonable then to think that this is a 20 -- let's put it this way, not a 2023 impact.

Correct.

Your next question is coming from Jack Vander Aarde from Maxim Group.

I appreciate the update. It was great. It was also great to -- I was at CES this year. So it was great to test out your latest products and the new platform at CES. A couple of questions. I was wondering about the multiple OEM purchase orders you announced in early January of this year. There's a press release with the 3 defense firms and the one commercial customer. I know you mentioned some of those orders were at least partially shipped in 2022, and I think the rest would be in 2023. But just a couple of related questions here. Could you give any more color around maybe the size of these deals or just relative -- if you can't give -- talk about the size of the deals themselves, maybe just talk about how much percentage-wise shipped and was recognized in the fourth quarter versus what you expect in the first quarter of '23? And then are these shipments included at least $3.5 million of product revenue you've locked in, in the first quarter?

There's precious level versus of defense revenues in that $3.5 million, there's precious level. Not all of it shipped in the fourth quarter either, though. These are programs that they'll contribute throughout 2023. And the size of them range from $50,000 to $200,000 to $300,000 kinds of numbers.

Got you. Okay. That's helpful. And then it sounds like there is a follow-on and expansion order opportunity for, I guess, for all 4 of these particular customers.

Yes. And by the way, the 4 is -- we have a reasonably large number of defense companies that are coming to Vuzix either buying our standard waveguides and engines or having us build custom waveguides and engines for them. And we anticipate that this number will -- it'll -- I don't know if this account number will grow, I expect it will but more so the amount of business that we're doing with these customers will grow through '23.

Okay. Great. And then just another follow-up question on the acquisition of Moviynt. Aside from the strategic perspective, which is -- it's a great addition, it looks like -- it sounds like it's also a low 7-figure revenue contributor to 2023. Can you maybe just -- I know analysts asked a question on this, but can you just maybe talk about the seasonality of that business and particularly what you expect in the first quarter from that?

It's not really very seasonal. This is SaaS-based revenue. Once you start billing, it's a quarterly revenue stream that comes in. So I don't think it is seasonal at all, frankly. It does take time to implement in a new facility. So there'll be engineering components that we will build for upfront. And those things come and go over time, but it's engineering services and then SaaS-based revenues that just keep rolling. Just to elaborate a little bit more on that. These guys have been -- every single place they've installed their stuff in has been a success, in fact, not just a success. It's replacing many of the things that are in those facilities. And as they grow, the number of customers we expect to fully ramp through this year, that helps, not just this year. This is the beginnings, I think of -- I mean you know how big supply chain is. I mean there's a number of companies that could utilize this thing is pretty significant.

Thank you. We reach the end of our question-and-answer session. I'd like to turn the floor over to Paul for any further or closing comments.

Thank you, Kevin. I would like to thank everyone for your interest and participation on today's call. We look forward to speaking with you again in May when we report our Q1 2023 quarterly results. Have a nice afternoon, everybody. Thanks again.

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