Greetings and welcome to the Vuzix First Quarter 2019 Financial Results and Business Update Conference Call. [Operator Instructions] As a reminder, this conference call is being recorded. Now, I would like to turn the call over to Ed McGregor, Director of Investor Relations at Vuzix. Mr. McGregor, you may begin.

Good morning, everyone. Welcome to the Vuzix's First 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 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 certain qualified personnel, as well as changes in legal and regulatory requirements. In addition, any projections as to the company's future performance represents management's estimates as of today, May 9, 2019. Vuzix assumes no obligation to update these projections in the future as market conditions change. After the market closed this afternoon, 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, 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 will now turn the call over to Vuzix's CEO, Paul Travers, who will give an overview of the company's first quarter 2019 financial results and business outlook for 2019. Paul will then turn the call over to Grant Russell, Vuzix's CFO, who'll provide an overview of the company's first quarter operating results. Paul will then return to provide some closing remarks, after which we will open the call for Q&A. Paul?

Thank you, Ed. Hello everyone and welcome to the Vuzix's Q1 conference call. Over the last 3 years, Vuzix has made good progress in growing our business and expanding our foundation, with full year revenue growth almost quadrupling, rising from $2.1 million in 2016 to $8.1 million in 2018, as sales of our enterprise AR Smart Glasses have steadily risen year-over-year. Consistent with the indication we provided on our March conference call, our Q1 results were admittedly soft. And I'm pleased to report that this softness is now behind us, as Q2 revenue bookings through the first week of May are off to a solid start and already exceed the Q1 revenue total. It is taking more time than most expected, but we are witnessing firsthand an accelerating shift in the enterprise smart glasses market in terms of investment and commitment of resources, from chip suppliers like Qualcomm, to supply partners like Verizon and Eaton, to Fortune 500 global leaders across multiple industries that have trialed and are now starting to move to broader deployment of smart glasses. The inflection point for this industry is rapidly approaching. The payback numbers are very compelling. Avoiding just one trip by connecting a remote worker, instead of sending a skilled worker, delivers an immediate ROI, not only from the cost and time associated with travel, but more importantly, the lost production value, which can be hundreds of thousands of dollars. Equipping remote workers with smart glasses and connected devices facilitate the retention and transfer of knowledge, supports faster on-boarding, saves money, improves worker operations and safety and drives efficiency. In the warehouse, picking can be 60% faster and more accurate at the same time. The list goes on and on. It should come as no surprise that recent studies have indicated that 90%…

Thank you, Paul. Before I begin, I would like to encourage interested listeners to review our 10-Q that we filed today with the SEC for a more detailed explanation on some of the quarterly year-over-year variances, as I will be highlighting just a few. For the 3 months ended March 31, 2019, Vuzix reported $1.4 million in total revenues, as compared to $1.5 million for the same period in 2018. Our product sales rose slightly year-over-year, led by a 6% increase in Smart Glass sales, when the discontinued sales of our former iWear Video Headphones were excluded from our 2018 numbers. We did not realize any engineering services revenue in our first quarter of 2019 versus $0.2 million in last year's first quarter, which resulted in the overall year-over-year decline in total revenues. Of note, we're pleased to report that we've already commenced work in Q2 on a new $275,000 engineering project. Our gross profit from sales in the first quarter of 2019 was $40,000 versus a gross profit of $177,000 in the 2018 period. There were several reasons for the decrease. First, on a product cost of sales basis only, our product direct cost was 52% of sales in the [2019] period as compared to 46% in the prior year's period. We earned slightly lower margins on the Blade Smart Glasses, we experienced lower selling prices of the original M300 model after the M-300XL was introduced in late 2018 and we have increased manufacturing overhead costs. Our research and development expense totaled $2.5 million for the 3 months ended March 31, 2019, compared to $2.1 million in the prior year's period. The increase in R&D expense was primarily the result of additional R&D headcount as compared to Q1 2018, increased consulting fees for external software contractors, related to the…

The tailwinds in underlying momentum for Vuzix continues to grow and have never been stronger. Our enterprise sales pipeline continues to expand as our engagements with repeat customers broaden. Blade is just starting to emerge as a usable and a volume-available product from both prosumers and enterprise. We continue to see an influx of multiyear OEM waveguide-based projects coming in from numerous market verticals, representing business opportunities for Vuzix that we expect will expand significantly in 2019, and finally should develop into high-margin, high-volume production programs into 2020 and beyond. Overall, 2019 is going to represent another year of robust revenue growth for Vuzix and we're going to do it with a leaner and meaner organization that is focused on servicing our customers, our partners and converting as many opportunities as possible into wins. We've been at this for a while, but I don't think I can stress enough that the opportunity in enterprise for smart glasses is right now, in the future for Vuzix and this industry as a whole is much greater than most can imagine. Finally, in May, Vuzix will be attending the Craig Hallum and Ladenburg Thalmann Investor conferences and Augmented World Expo and Display Week. We look forward to seeing you at these upcoming events. I would like to now turn the call over to the moderator for question and answers.

[Operator Instructions] The first question comes from Christian Schwab with Craig-Hallum.

This is Tyler on for Christian. Thanks for letting us ask a couple of questions. So, with your M400 set to ship in the second half here, I guess, how quickly or what will the mix be between the M300 and M400? Will it be a long tail of M300 continuing over the M400 largely to replace that product? And then on that -- that same line, do you think that it's possible some of your customers may be delaying some of their orders in the first half of the year and waiting for the launch of the M400 coming in second half?

I don't think they're delaying right now, Tyler. In fact, our expectations for revenue in the second quarter are I think in line with previous discussions that we might've had. So I think people are really excited about the M400, without a doubt, but there has been a lot of work put in on the M300 series. And these guys, they are approved devices and they're looking at moving into production with them. So, I think we're in good shape in that regard, and at least at this juncture the M400 has not gotten in the way of the M300 -- the M400 has not gotten in front of the M300XL just yet.

They are at materially different price points. I mean, the M400 is going to retail for [$2,000] and 300XLs at [$1,500] and the 300s at [$1,000]. So we think it will take through to the end of 2019 to probably sell all our M300 models, but -- and thereafter it would all be M400. But for -- so far people are seeing useful deployments with each of the M300 series right now.

Yes, it does the job and we responded to a fair number of tender offers for the M300XL and that's what the documents and all of the efforts have been built around. So we were quite confident the M300XL is in a pretty good position. But again, there is a lot of anticipation around the M400. It's a hell of piece of work, frankly. And for streaming video and a lot of the things that people like to do and including some of this XR-related stuff, this processor is just beautiful.

That's great. And then maybe a larger kind of summary question here. Can you comparably size your different opportunities, I guess, your go-to-market avenues, your traditional VARs and distributors and now this agreement with Verizon and Eaton, and then maybe the OEM and other opportunities, can you size those maybe at a point somewhere in the future where Verizon and Eaton are at a fuller ramp?

I mean, we know what the business looks like that's directly part of Vuzix is value-added reseller and VIP partner channel. We have a feel for what we think Verizon is going to do, based upon our conversations with them and the market that they're going after. The Eaton Crouse-Hinds business, there is a pent-up demand for this ATEX-certified device from Vuzix. We've gotten a lot of inbound requests for it, but I don't believe we have it scaled very much into what they would look like through the year.

Alright, that's perfect color. And then my last one on the OEM, the potential different OEM agreements, it sounds like the focus here is now kind of on this aerospace, defense and then maybe like some automotive display opportunities. Is that kind of the right way to think about the opportunities for that, is there still other end markets that you guys are looking at?

Yes, I would suggest that the consumer marketplace is still there. I would also suggest that the consumer marketplace is trying to figure out where it's going and what's the right next product and there has been some challenging other products in the marketplace that aren't doing so well. And so, nobody wants to have egg on their face in that space. These others space is their enterprise, there's clear value and there's not very many companies that can deliver waveguide solutions in them. And that is just right for the picking for the Vuzix I think. I mean I have to say a lot of this was inbound to Vuzix, requests from these companies saying, we really need to have this, your stuff is great, would you please respond to this RFQ? So, it's I think easier lower hanging fruit, because there's an obvious demand for it. It's really focused, there is dollars in R&D budgets for these efforts. So, yes, I think the more immediate opportunities you're going to see them be in these kind of enterprise-ish oriented kinds of things, because you can flip the switch and go with it today.

And we're also seeing some growing strong interest in the first responder market, particularly with some police forces around the world. And we can't say too much just yet, but we're seeing some good uptake there with some of our products.

Our next question comes from Brian Kinstlinger with Alliance Global Partners.

When you say the book of orders already exceed 1Q, by what magnitude, or can you maybe quantify those orders for the quarter-to-date? And then, you've also said the softness in revenue is behind you. Maybe it'd be helpful if you provide some guidance, so investor expectations can be set appropriately.

So we don't give hard forward guidance. I think we've been there before. I will say, Brian, I think we're going to talk with you later tonight, maybe can fill you in on some of the details around what you're asking. I can tell you that the business here in the second quarter is robust in comparison to what we all predicted what the first quarter would be. There's OEM business, engineering fees in it that weren't in the first quarter. The M300 itself with the programs that are now coming back saying, hey, let's go, let's go, let's go, which we anticipated and then we realized these guys are off a little bit, but they are coming. So, it's just going to be -- it should be a pretty robust second quarter.

Okay. And then you mentioned capacity have now reached demand. So maybe reconcile that with the inventory build and then maybe, can you talk about how much of that inventory is the M300, where discounting might happen and how that might impact the P&L in the next couple of quarters?

Well, on the M300 Series, we already -- in November, we decreased the price of the M300s. So, we've already made that adjustment and we did say that our gross margins came down a little as a result, because it's just a product mix. I mean we're still making the same margins on the M300XL. The M400 is going to be a higher margin product. The Blade will make a little less. We're not currently contemplating a lot of discounting is going to be required to -- for the 300 -- 300XL, We're looking at some bundling opportunities which can add value without affecting margins negatively.

And some of the inventory is solid for the ATEX-certified device. And on the ATEX-certified device, it's a significantly more expensive device for a lot of reasons. But the margins are still -- they're actually quite good on this device.

And to be frank, I mean the supply chains still have a cost to pay [indiscernible] Blade component inventory. I mean, we'd indicated previously, it's taken us time to get the yields and production rates up. And we're now at a position where we can deliver against orders. So, we got to rebalance them more there. But that shouldn't mean any discounting to achieve that.

There is -- nobody is getting discounts on Blades at the moment.

No, I was talking more of discounting on the 300, but that's okay, the older version. In terms of Verizon, my last question is, have they communicated, or have you been able to estimate what the sales cycle is, and when you expect material benefits to your business from this relationship?

We should see sales happening here in the second quarter.

And will they be material by the second half of the year? Or will they be still pretty small early on?

I think the intentions are they are going to go pretty quick. I mean, these are cookie cutters solutions. They have customers that need the stuff that it does today, that runs over their network, because their sales teams are all motivated to be part of this and to make it happen. So, I think we should see some nice contribution from Verizon.

One follow-up from that. In your solid orders you had so far, have you had an order yet from Verizon?

Yes, we have had some orders from Verizon. They are not significant yet, though.

Our next question comes from Jim McIlree with Chardan Capital.

To follow up on Brian's question about the bookings, Paul, when you were talking about orders for Q2, were you talking about the entire product suite, so the Blade, the 300s, the XLs, engineering, you're talking about all orders or we just referring to specific product line?

No, we've kind of just [rolled] the batch in.

Total revenues.

And the phrasing that you've used, I was a little bit confused. Were you saying that it was the orders received or the orders received that would be delivered in Q2?

This is all stuff that would be delivered in Q2.

Okay, great. That's helpful. Also in your commentary, you remarked about the capacity in Blade is now at a place where you can start responding to RFPs. And I'm just wondering if you can just characterize size of those RFPs or the number of RFPs, or maybe end markets, just if you can characterize in any way those RFPs that you are more capable of responding to.

I can a little bit. I mean, Grant had mentioned this -- the police side of the business kind of a thing, and just in some of the very early orders, they're in the -- north of 50 and 150 kinds of numbers. There's other folks that we're talking with that are putting together software and ecosystems to work in Asian kinds of markets that could represent many thousands of pieces. And these guys are -- when you sit down to talk, well, people like, well, how soon can you deliver? What's the delivery rates? How am I going to be able to fit this into the rollouts that we would do in the fall and into next year. And having production, so it's starting to crank up like it is, it's making a lot easier to have those discussions with people.

And then my last one is, can you just update the manufacturing status for the M-Series and what your strategy is, let's say for the next 12 months?

Well, as you know, we work with [Jedo] today and with [Jedo] if you need to make 5,000 a month, you just got to give them enough lead time to get the parts to do it, and they can do it for us. The Blade is done locally here in the States, but for Vuzix to do 2,000 to 4,000 a month out of our current facility to full-up production we could do that. Vuzix could handle that kind of business. The M400 is getting a lot of stuff done in China, but I will say right now for the first round of final assembly, I think we're going do it here in Rochester, New York. In fact, I know we're doing it here in Rochester, New York. With that transition from first units to full-up production is flat with issues and it's difficult to do it remotely. And when we do it here, we can have it all in hand and get it all square around. And then when the volumes pick up, we would of course move it appropriately to an offsite location. Maybe. I would tell you that with automation equipment, you can make a lot of them and we've got some great automation equipment here in Rochester now. We're an ISO certified shop now too, Jim, and there is -- built into ISO are feedback systems in QA improvements, and all of those things and they seem to be working quite well at Vuzix these days.

Ladies and gentlemen, this ends our Q&A session for today. I'll now turn the call back to Paul Travers for closing remarks.

I would like to thank everyone for your interest and participation on today's call and we look forward to speaking with you again in August when we report our second quarter 2019 results. It's an exciting time at Vuzix, looking forward to this fall. Thanks everybody.

This concludes today's conference. All parties may disconnect. Have a great day.