Greetings. Welcome to Summit Wireless Technologies Fourth Quarter Financial Results Conference Call. At this time, all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation. Please note this conference is being recorded. I will now turn the conference over to Kirsten Chapman from LHA Investor Relations. Kirsten, you may begin.

Thank you, Rob. Good morning, everyone. I'd like to welcome you to Summit Wireless Technologies fourth quarter and year-end 2020 update call. With us today are Summit Wireless CEO and President, Brett Moyer; and CFO, George Oliva.

Thank you, Kirsten, and good morning, and thank you, ladies and gentlemen, for joining us on the call today. So we're looking forward to it. Hope we have some good questions, discussion afterwards. We did notice because we are tracking shareholder growth through the SRAC acquire program. There's about 1,200 new shareholders, so we'll do two slides of catch-up overview and then there's a good number of new slides in terms of performance and growth that I think you all find interesting. Summit just as a catch-up for the new shareholders both businesses. One is the core business developing technology, so on chips, modules, IP for the wireless home theater space. The other is the WiSA standard. Now the WiSA standard is the interoperability and the marketing of products that transmit and can receive interoperably between each other, and we have talked about WiSA being more than 70 brands.

Thank you, Brett. Q4 was the strongest quarter to date. We see continued improvement in key metrics, revenue and gross margin. Revenue for the quarter exceeded $1 million. That represents a 141% increase over the same quarter in 2019 and a sequential increase of 71% over the third quarter '20 the gross margin was approximately 24% for Q4. That's compared to 17% in the third quarter. So that's a seven-point increase in margin, mainly attributable to scale as volume increases. Total OpEx was $3.9 million for the quarter. That included $955,000 of non-cash charges compared to Q4 '20 was $2.9 million. In 2019 which included $222,000 of non-cash charges. The Q4 2020 number included $250,000 of advertising expenses relating to the wave. Cash at the end of the year was $7.4 million at December 31. Cash projected at the end of March 31 this year is between 9, it will be above 9, it could be up to 10, depending upon the timing of customer payments late in the month. That increase in cash is mainly attributable to the warrants that were exercised in January and customer prepayments relating to orders for the balance of the year. In terms of revenue guidance for Q1, we expect to exceed 100% growth over the same quarter Q1 '20, again. Revenue in Q1 '20 was approximately $400,000. So, we're projecting over $800,000 of revenue for Q1, and the margin should be again in the mid-20s. OpEx -- total OpEx is forecasted at $3.2 million that will include $600,000 of non-cash charges relating to stock comp expense mostly. And that also includes about $200,000 for advertising relating to the wave. And as I said, the gross margin will continue in the mid-20s as we see improvement from scale. And with that, I'll hand it back to Brett.

All right. Thanks, George. And so, if I summarize where I think we are, you're going to see very shortly more TVs have engaged with the WiSA system. Clearly, you're seeing more consumers coming into the WiSA Wave websites. There's a lot more speaker brands that are shipping products. And lower prices to the consumer are rolling out, all of which we think drives revenue for us this year and next year. And with that, I'll open up the call for questions, operator.

Our first question comes from the line of Suji Desilva with ROTH Capital. Please proceed with your question.

Hi, George, great work on the progress here.

Thanks Suji. Thanks for joining.

No problem, my pleasure. So first question here, Brett, rep George. What percent of your design wins, your product design wins are ramping today versus still on the come to launch, just to understand kind of how full the pipeline is for you?

So in terms of launching this year or launch in next year, I'm not sure the time frame you're looking for in terms of what's in the market...

Sure. Launching -- yes, launching calendar '21, which of your wins have not yet come to market? Like what percent of your wins have not come to market yet versus the ones that are already in the marketplace?

From the consumers' perspective, from a brands perspective, I would say, 60% are now in the market, I mean, very shortly will be from a project perspective, yes, I'm not sure. I mean we're -- total projects that will be in the market are close to 95 -- in the high 90s. So each brand -- a lot of the brands have multiple projects.

Okay. That helps. And then, is there any way to quantify the -- or qualitatively describe the shape of the unit ramp in calendar '21? And what are some of the key factors there are as you go through the year, how the quarters literally shape up in the ramp?

So, let's just -- I mean, the classic seasonality of component to a consumer electronic business as Q3 is strongest seasonally. June through October is when you'd hit most of the shipments? Because you got to build it, get it on the water and get it to Europe or North America for Christmas, right? So certainly, we are seeing strong demand already certainly from a historical perspective. And I think that's how I'd calendarize it. Now to a small extent that we have the product, the Platin product line, that's going to be a Q4. But as I said in my guidance, I wouldn't be building a big model around that. That's not our objective.

Right. Understood. Is there any -- in your ramp in '21, is there any customer concentration among two or three large customers driving the units? Or is it fairly diversified?

Our largest customer is Harman, which is division of Samsung. Our largest WiSA Ready TV is LG there will be a second one that is really a very high Tier 1 that will diversify that. And I think by the time you get to the end of the year, all those brands that we saw earlier in the presentation, will start to heavily diversify Harman.

Okay. That should be a good year for you guys. And then lastly, just the IP business model, I want to understand that a little better. Just what the business model is there and what the opportunity for what mix of revenues there is?

Yes, Suji, can I just qualify one thing on the Harman discussion?

Of course.

There is a recitation on Harman, but there is not a concentration around a particular product in Harman. We have any project under the Harman world, right? So if you go to the project level, there's no one concentration anywhere.

Okay, great. Appreciate that clarification, Brett. And then lastly, just the IP business mall, I want to understand that better, what the business model is there, and what the opportunity as a mix of percent of revenue is longer-term, if it's strategic to grow revenues there?

So it is strategic. We think it's the largest market by far. The 2.4 gigahertz is a four channel. So that is targeted to your sound bars with sub woofers or wireless rears. We think it is really -- now, we like our side of the margin of the business, but it is an aggressive price compared to current solutions in the market for that market segment. We're highly encouraged. We think it because -- if you go into a sound bar, you're talking 30,000, 40,000 systems on a design, right, or more. So these are higher volume products, we see it impacting our 2022 significantly and made the two solutions have a good solid race.

Our next question is coming from the line of Jack Vander Aarde with Maxim Group. Please proceed with your question.

Good to see solid fourth quarter growth. It sustained momentum based on that first quarter outlook, good to see. I'll start with a question for Brett. Just regarding the revenue outlook, again, you're forecasting this more than 100% year-over-year growth. You just came off over 100% growth in fourth quarter. You're expecting over 100% again in the first quarter, which is very exceptional growth, clearly. Can you provide maybe additional color on -- you touched on the drivers, but as it relates to the first quarter, what are the key drivers outside of just I guess, SoundSend? And then, when you include all these new speaker partners and licensed certified systems. How do I just think about which ones are driving the most growth? I imagine the WiSA partners and then also just thinking about retail versus online e commerce, anything you could provide there?

So -- well, that's a big dump truck full of questions, Jack.

Pick and choose.

All right. So, for our brands that are in market, it may not be a surprise. We haven't talked about it, but I think almost all the brands are seeing strong demand, right? And the brands are benefiting from a surge of buying and outfitting the house from COVID certainly in Q4 and Q1. It would be interesting to see how it goes, but for us, we have quite a few projects coming on. So it's not a factor in terms of how we see the year. We see Q1 -- well, we talked about this to Suji a little bit, but Q3 is traditionally the big quarter seasonally for the industry. We have a steady stream of products rolling out between here and September, which should make a good consumer selling season in Q4.

Got it. That's helpful. And that's expected, and it's good to see that your view remains there. And then just going back to prior quarters, I know you talked about sometimes level of visibility as you look beyond a given quarter, a couple of quarters, plus the design process takes a while. Just what's your level of visibility right now? Like how far out is there visibility in terms of what your potential production ramp is throughout this year. And then keeping in mind maybe some external supply shortage factors on semis?

Yes. So, we -- when you see the K filed, we have increased our inventory levels. You'll see an inventory increase at the end of Q1 as well, right? And we made a decision back in December, we were very concerned about the tightness of the silicon industry versus all these projects that were coming online. So we placed orders around the turn of the year to ensure that we are in the food chain to make sure we had all our long-term chips, right? So, we can -- conversely with that, we told the brands, our customers, that we were going to 21 lead times, 21 week lead times. Now that gives us some visibility. But in fact, when new customers come on board, they're going to put POs in the matter when you told them the lead time lines, right? If customers sell down, so for example, if you try to buy a Klipsch, speaker system, they have been sold out since mid-December. There's a piece here or a piece there, but you cannot get a 5.1 or I don't think you can get a 3.1 anymore. So if you're sold out, you're going to put an order in regardless. So, we're seeing both longer-term demand POs come in lead times, and we see POs coming in because they're sold out.

Got you. That's helpful. And then maybe just a question for George on the gross margin front here. The fourth quarter gross margin result was exceptionally strong, definitely relative to consensus and my estimate, which is good to see. And it sounds like it's benefiting from that ramp in revenue now at the $1 million level. So I guess, as you look for the balance of 2021. If revenue continues to remain at $1 million or above per quarter, just can you talk about how you'd expect that to impact gross margins what kind of range we're looking at? I know you provided for first quarter, but for the rest of the year as revenue really scales.

Well, I would expect to see continued improvement. I don't want to overpromise, but I would look at it in the mid- to high 20s over time.

Okay. That's fair. And then maybe just one last follow-up back to Brett, kind of relating to the gross margin and the long-term opportunity with Gen 2 technology. This is my understanding, has a much higher gross margin profile or potential. So just you think -- I guess, just to review your comments, you expect the Gen 2 to really be based, I guess, in next year. Did I hear that correctly? Or am I misunderstanding that?

Well, let's just clarify the data points. Because it could be both, right? So we did launch the 2.4 gigahertz. We look for that to start impacting Q4. We do expect a 5 gigahertz chip out of our module chip partner that we can use to expand our IP to more than four channels in Q3, which means we will probably launch it at year-end, and it should impact next year's revenue as well.

Got you. And a margin kind of profile dynamic of this, still early stage on paper here, but is there opportunity for upside relative to the Gen 1 technology?

The answer is yes. But we're not going to disclose that to customers. The price is going to be set based on the volume in performance versus Bluetooth or other wireless WiFi solutions.

Our next question is from the line of Ed Woo with Ascendiant Capital. Please proceed with your question.

Yes. Congratulations on the quarter again. My question is. What are you guys seeing I'm hearing from your customers, your partners in terms of what they're seeing in consumer demand for this year? Obviously, it was very volatile last year. How do they feel right now? Obviously, looking towards the holiday season of this year?

Well, I think if I summarize the majority of our brands in Q4 and Q1 is strong for them. I think anybody can guess on what will happen during the summer. But I think it's sad to say, I think COVID, though, really created an awareness of what you can do from home entertainment in your house cost affordably, both from large screen TVs to wireless audio surround sound. I think it pushed and part of that and it's going to be a permanent shift to adoption in the home, particularly because it also pushed the streaming services to step up. I mean Disney Plus crossed 100 million users, right, or is about to. I saw in the press, right? So all those streaming services, and there's been a lot of streaming, but streaming first run movies. First run action movies, content movies? That's just begging for a good audio system around the 65-inch TVs and 70-inch TVs, et cetera.

Great. And then are you seeing any difference between your European market customers and North American customers?

Consumers or brands?

Consumers and brands.

So when you look at the brands that we say, are shipping or about the ship, those brands cut across all segments. So, some brands are much stronger in Europe, some brands are stronger in China, some brands are stronger in North America, right? From a consumer demand, I do not know enough to say what the difference between the European and the U.S. consumer. We have more debt on the U.S. consumer, primarily because I can see what the lower-priced solutions being Enclave and Platin are doing. And there the European brands are dominant in the mid-tier and higher audio file categories or style, right? So if you look at Harman, if you look at Bouchard, if you look at System Audio, Bang & Olufsen, those are audio file products. And in the case of Harman and Bang & Olufsen, they're highly artistic.

What percentage of your business right now is international? Can you tell?

Well, from where we ship, we ship almost everything to China. It's almost everything is built there. There's some stuff that goes into the Europeans for low running stuff. From a consumer brand, I would guess this fairly distributed between Europe and North America. I think the consumer -- the brands that are strong in China, they're coming online in Q2 and Q3.

Our next question is from the line of Kevin Dede with H.C. Wainwright. Please proceed with your question.

Good morning, Brett and George. Thanks very much for taking my question. Appreciate it.

Thanks Kevin. Good morning.

Sure, yes, no, no. Please to be here. Very happy. So, I apologize. I'm still a little confused on your current module, the Gen 2, and I guess, the Gen 2a. Can you talk about how you to plan on integrating those technologies into SoundSend, just so I understand. I mean I get that the Gen 2 and Gen 2a model -- module, I guess, which is the 5 gig. Those get integrated into television, but I just wanted to make sure I understood how you planned on migrating SoundSend?

Well, so let's talk Gen 1, Gen 2 families first. So, the current generation that SoundSend is using and all certified products are using. That is of the highest performance, and that continues on for years, right, years. The Gen 2 softens the spec to good enough for the broader consumer market, but it is not in any way an audio file technology, okay.

Yes, no, understood. Given your few supported channels?

Yes. Well, even when we get the 5 gigahertz, and we think we could do 8 or 10 or 12, that's not an audio file quality of performance, right? I mean, what you get out of Gen 1 is 5 millisecond latency and 24-bit uncompressed audio, right? Now, we'll still use uncompressed audio on it. The 5 gigahertz lets us get more channels off the same module. And I think both of them it's not just going into a TV. I mean they're all applicable to either a PC or a sound bar or a TV or any high-volume product, right? From -- you had one more question, I forgot, Kevin, I'm sorry.

No, no, no problem. I just want to make sure I understood how you plan on bringing these to market, right? And how SoundSend…

SoundSend, right.

Yes, yes. Just your thinking behind how because there's -- I mean, it leads to my next question, Brett. And so let me prelude that.

I am going to suggest one. We see at least the 2.4 gigahertz. I don't think that will go into SoundSend. We don't have that planned. We see the 2.4 going into sound bars. We see that being a product with four channels that can displace the current WiFi vendor and displace the current Bluetooth vendors, right, and the WiFi vendors. And those solutions are generated like a home theater box. They're sold integrated, right? So, we have not made a part of the WiSA standard. If you want a WiFi performance, here's a lower cost, higher-performing solution. Now, the 5 gigahertz will address an interoperability market. We think the TV needed -- we think the speaker brands needed at the consumer level. But again, at this price point, we still think that at $749 or $699, you're selling a solution in a box, primarily. But a brand that wants to turn a WiSA Ready TV into an integrated solution and stream directly to their sound bar or their speakers, they do need to still have interoperability at some level, we think.

Okay. So in your prepared remarks, Brett, you mentioned moving customers up the technology ladder. And it begs the question, right -- the price ladder, okay. Yes, but it begs the question on, I guess, replacement cycles for lack of better definition. I was wondering if you could speak to that a little bit. Given there's a huge installed base, a COVID nothing new. So large screen TVs have been selling well. And that's sort of why I was curious about how you're going to position SoundSend. You can drive price -- the price point of that lower, maybe you get more wireless surround sound adoption, given such a large big screen TV installed base?

Yes. So, TVs have had a phenomenal run last year, which creates with the streaming service, a great opportunity for aftermarket audio sales, number one, right? From a replacement cycle, most of these design wins are two- to three-year cycles at these price points, right, for the Gen 1 stuff. That stuff doesn't get cycled out every year. Those are long-term design wins.

What I meant is really at a consumer level, right? So I think everybody is pretty much used to buying a new iPhone every 18 months or maybe 24 months now that they're $1,200. I'm just wondering how you see -- or the way that we should -- listen, I know you've been in this business a long time, and there's nobody on this call that knows it better than you do. I'm just wondering, how you'd expect consumers to react to this new technology coming to market and their willingness to change out what they have?

I don't think it's a replacement cycle issue at all, right. I think what's being sold now is prosumer audio file category of products. And as a 5 gigahertz solution comes out next year, that's a whole different consumer market. Preference between the TV world, and LG OLED versus an LG led right? You got a $1,500 price point versus a $350 price point. So we totally see Gen 2 as opening a market that we're not even addressing.

I see, okay.

They're not oil and water, Kevin, but I don't truly think the two markets between Gen 1 and Gen 2 mix.

Okay. Okay. Thanks for that clarification because I clearly didn't get it.

Gen 1 has a performance level that no solution has. And that is if you're going to spend $1,500 on an audio system, you're not going to take any other solution. Unless you want to take wires and spend another half a day or day wiring your house, right?

Yes. No, I wouldn't be speaking to you if I thought that was the ideal adoption, that's another historical statement for historical question. Okay. Let's take a step back and look at Platin Okay. Give us a sense on how you've seen your constituents, right? Your partners, the TV brands, the speaker brands sort of react to that introduction, I know part of it was sort of a kick with the spurs, oh, I'll let you know. I mean, like Jack, I have a dump truck full of questions, too, but I promise I want to keep you all day. I'm just kind of curious on how you see that reaction now and whether or not you think, you'll see a response to that sometime this year? Or do you think it might take some of the bigger players a little bit longer to react to that. What's your take on that?

Was your question on how they're responding to the Platin product line?

Exactly. And not so much the line per se, but the concept, right? It's really about the philosophy. Let's to your point, open up a market at a lower price point and address a market that hasn't been addressed. And I know -- at least my understanding is that you part of driving that was introducing this line, if I'm not mistaken.

100%. 100%. So if you look at the customer base, if they're selling a $2,000 solution, they could carry less about a $799, $699, $999 solutions, right? If they're selling the $1,500, $1,100, they're a little guarded at the moment. But the proof is in the pudding a year from now, do I have 1 million consumers coming through? Am I able to funnel those consumers? I mean, we send as many people off to Enclave in a lease, as what we think their monthly website traffic is. Now you can be not about a $999 price point, but in the end, if I'm driving consumers to you because if you break it down, say, 1 million consumers come into WiSA it doesn't matter what products are there. It's a 0.3 to 0.5 sales perspective on close rate. At least a 99.5% of those people to buy a different solution is no different than retail. So if they see value in the traffic that gets driven their way, then they'll be okay by the end of the year. I have -- if they've seen the show up in 25 retail store fronts. They'll be met. But I'm not -- I don't have any intention to do a full brick-and-mortar launch. This is all about the consumer awareness, the consumer traffic and at least the e-commerce part of retailers structured around WiSA. And to be perfectly honest, the reason I'm not encouraging people to model out the speaker business because with at one brand came in and said, look, ODM, we want to buy to those systems next year. I'm done. Have it. That's why what. On they're going to modify it, they'll do whatever, right? So that probably won't happen. But right now, I'm one of that. We've been so lower price customer not the price to get to $999, we won't do it. So, on a $999 price point for WiSA, I want a $799 price point. Nobody else is going to have a step in then I will step in and establish it, at least in the Internet world.

Okay. Okay. Understood. Thanks you for that clarification. On association fees, when do you suppose you might have to break those out? Or can you give us any indication of their contribution to annual revenue at this point?

I do not believe they will cross 10%. So we would not have to break them out. They're pure margin. Obviously, some are you the association fees plus the gross margin of Platin to cover my life and marketing expenses. So the association fees are -- so fundamentally, any association fee, I'm going to drive to use to support the WiSA Wave.

Okay, thank you. George, you mentioned a sort of a target operating margin in the high 20s. I'm wondering, if you expect that this year, what's the time line associated with your thinking on that?

I would say the next several quarters.

Obviously, so your change with the top line seasonality?

Yes, I mean, there's some contributing factors of mix when Gen 2 comes in and so forth. But as volume increases, we should see some continuous improvement.

We have time for one additional questioner today. It will be the line of Jim McCory with Bradley Woods. Please proceed with your question.

Brett, on Slide 12 of your deck, the one that's WiSA Wave accelerating web traffic,

Yes.

The projected visitors in 2021, is that based on just the product launches that have been announced so far? Or does that include anticipated product launches in 2021?

No, it includes a full look at our 2021.

Great. And then, if I were to try to map the slope of this projected visitors to the slope of revenue, would it be similar or would be -- or would one of those be steeper than the other?

Well, if you mapped consumer traffic versus our quarterly revenue is there at least off by a quarter, right? Kind of somebody's buying in Q4 at retail, that product was shipped -- I shipped that product in Q3 most likely, maybe October. And we saw in Q4 this year, past year, in 2020, that between Christmas and December 15 or 13, but never Amazon cut off big box shipping and time for Christmas. There was a lot of consumer research going on, on the website, return visitors, which generally run in the 8% to 12% and jumped to 20% for that three-week time period and some days. It was up 24%. So, there would be a cycle -- there would be a quarter lag between one or the other depending which way you're referencing it, right?

At this time, we've reached the end of our question-and-answer session. I'll turn the call over to Mr. Brett Mayer for closing remarks.

All right. So I really appreciate all the questions today. I appreciate everybody attending the call. We've speaking for the team. We are very excited about our opportunities in 2021 and building WiSA as that wireless category for the consumer and bringing great audio around those great TVs that all you guys have and girls. And with that, I'll close the call.

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