Greetings and welcome to the Vuzix Fourth Quarter and Full Year ending December 31, 2020 Financial Results and Business Update Conference Call. [Operator Instructions] As a reminder, this 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 afternoon, everyone and welcome to Vuzix’s fourth quarter and 2020 full year ending December 31 financial results and business update conference call. With us today are Vuzix CEO, Paul Travers and CFO, Grant Russell. Before I turn this 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 and 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, March 15, 2021. 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 financial results and filed its 10-K with the SEC. So, participants in 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 filing under the 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 and full year financial results. Paul will then return to make some closing remarks, after which, we will move on to the Q&A session. Paul?

Thank you, Ed. Hello, everyone and welcome to the Vuzix Q4 and full year 2020 conference call. Our final quarter of 2020 was our strongest of the year and in fact the best in our history as a smart glasses supplier. Total Q4 revenue of $4.2 million represented a comparative year-over-year quarterly increase of 117%. Our sales of both smart glasses and engineering services more than doubled in the period. Demand for Vuzix smart glasses, which I will expand more on shortly, was broad-based, both in terms of industry verticals and geographies. And we’re off to a good start in 2021 as our customer list continues to expand and average order volumes continue to increase in size. Despite 2020 being a very challenging year for many due to the global COVID-19 pandemic, Vuzix smart glasses continue to be called upon by our enterprise customers and healthcare providers to solve operational challenges caused by COVID across a variety of market verticals and use cases. I have to say, we are pleased to see our products being used in new and innovative ways across our expanding client base to assist customers in solving the complex issues associated with today’s business environment. For Vuzix, despite the disturbances caused by COVID, we delivered against multiple key operating objectives that we outlined on our Q4 ‘19 conference call one year ago. I’d like to quickly review a few of them. First, we grew the sales and order size of existing M-Series Smart Glasses as our enterprise customer base for M400 expanded in size to over 1,000 new customers, and we witnessed a continual increase in our sales volume metrics as more and more companies place multiple follow-on orders throughout the year. These factors drove a 106% gain in our smart glasses sales to $10.1 million…

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 am just going to provide you with a bit of color on some of the full year as well as quarterly numbers. For the full year ended December 31, 2020, Vuzix reported $11.6 million in total revenues as compared to $6.7 million for the prior year, an increase of 74% year-over-year. The revenue increase was due to increased sales of our M-Series Smart Glasses, primarily the M400 and higher engineering services revenues. For the full year, total sales of our M-Series Smart Glasses increased by 112%, while Blade revenues decreased by 14% in 2020 versus 2019, largely due to the lower average selling price of the Blade Upgraded model introduced last September versus the prior year. Sales of engineering services for the full year increased 123% to $1.5 million from $0.7 million in 2019. We did not realize any revenue of our OEM products in 2020 versus $1 million realized in 2019. For the 3 months ended December 31, 2020, Vuzix reported $4.2 million in total revenues versus $2 million in the prior year’s fourth quarter. Sales of our M-Series Smart Glasses rose by 155% quarter-over-quarter, and sales of our Blade increased by 6% in Q4 2020 versus 2019. In total, product sales for the quarter ending December 31, 2020, rose 113% as compared to the same period in 2019. Engineering services, thanks to new programs for the 2020 fourth quarter, was up 145% versus the comparative 2019 quarter. For the full year ended December 31, 2020, there was an overall gross profit of $3.2 million before $1.3 million in inventory obsolescence provisions that were recorded during the 2020 year. The net gross margin for…

Thanks, Grant. In summary, COVID-19 is expected to become less of an interruption to business going forward for many market verticals that were put on hold over the last year. For Vuzix, this means that market verticals, including warehousing and logistics, in-store picking and certain areas of manufacturing are already coming back online in 2021. At the same time, ongoing demand for our products across enterprise remote support and telemedicine usage has not slowed down and is here to stay as the many benefits of sending pair of glasses instead of a person have been clearly demonstrated to a growing population around the world. On the capital front, due to the recent conversion of nearly 99% of our previously outstanding warrants, Vuzix has its strongest balance sheet in the company’s history to support operations in our efforts to accelerate revenue growth and R&D, including new product development. Finally, Vuzix is well positioned to achieve another year of solid year-over-year revenue growth on our first quarter and throughout 2021. I would like to now turn the call back over to the operator for Q&A. Operator?

[Operator Instructions] Our first question comes from Matt VanVliet with BTIG. Please state your question.

Hi, guys. Thanks for taking the question. Nice job on the quarter. I guess from a high level, maybe just walk us through kind of the demand at the top of the funnel that you are seeing now as you walk into 2021, couple of months in here. I guess, what areas or verticals of the market do you continue to see the most strength in? And then also between the M400 and the M4000, maybe just walk us through kind of why demand for one product versus the other comes from some customers and maybe the best use cases for each of those that you are seeing the most traction on right now?

Yes. Hey, Matt. Sure. The highest demand product that we have right now is the M400 by far. And the reason why is it’s been out there the longest and it’s the one that has most of the software and most of the certifications and gone through the gauntlet as it were as companies approve and then finally start to deploy the product. The whole medical space is just really not slowing down for Vuzix right now. I mean, from the knee surgeries that I’m sure folks have heard about with guys like Pixee, our relationship with Medtronic that we wrapped out up earlier. It’s an expanding piece of our business that I think still COVID is affecting. But there is so many things that are happening now because these guys are just using it, and it’s so helpful for teaching, training. There is just a ton of them. It’s a recurring business, and it keeps growing, which is nice. On the field service front and remote support and remote training, a lot of that was driven originally by COVID, but it continues for Vuzix. There are companies that are reordering and reordering now that are starting to expand. They are doing it more for onboarding, but it works so well. Again, we’re not seeing it slow down. So M400, it’s going to be the flagship for us here in the first quarter. I’m sure of that. The M4000, it’s a new kind of device, right? I mean, you put it on – even though most of it is the same, the optical system is really cool. In that when you open both eyes, you’re seeing the real world. And then when you put virtual information up, it gets put on top of the real world. So you might imagine…

Yes. Sorry, helpful. And then I guess on the OEM side, obviously, the development with Jade Bird is, I think, a good long-term driver there. But curious if you have any updates on the other four projects you are working on. Have you reached any additional milestones? And any help in terms of either magnitude or timing of when those might have additional impacts on 2021 results?

We expect follow-on, like next-generation efforts. Next-gen is not the right choice of words there, Phase 2 and 3s – if you look at the little Gantt chart we put up, you can see things are done in phases with these projects. And we delivered on a lot of them here towards the end of last year and into our first quarter. And so I think what you’ll see is a continuation of the engineering revenue side of it. And we’re hopeful here, shortly, at least within this year, we’ll start to see some step that points towards production programs. It’s really hard to nail that stuff down now, Matt, because it’s dependent not just on what Vuzix does. You have other companies that – they are in the mix, they have got their own engines and systems they are building them into that all have to come off the ground, too. So...

Alright, great. I will hop back in queue.

Our next question comes from Christian Schwab with Craig-Hallum Capital Group. Please go ahead with your question.

Yes. Thank you. Grant, can you elaborate on – I think I must have missed it or maybe you didn’t say it. What’s your planned revenue growth for ‘21 was – that was part of the justification for the increased investment in research and development and marketing opportunities in Asia, etcetera. Can you give us an idea of what that planned revenue growth is?

I didn’t actually quote any numbers. And historically, we don’t announce our revenue plans. I mean, we’re continuing to grow. We’ve got new products, some of which we didn’t have last year. And we’re seeing customer reorders and all the seeds that Paul said we planted are about to sprout. So I mean we don’t – the business is still in its rapid growth stages. And it can still be a little rough by quarter, so I’d prefer not to come up with any estimates, but clearly, we plan on growth.

Can I assume – Paul and Grant, I assume that there is operating leverage in the bottle, so your growth rate is better than the increase in your operating expenses?

Absolutely. Absolutely.

Okay, great. And then for you, Paul, just a further elaboration, if I could, on Matt’s question earlier, instead of looking at whether it’s the M400 or the M4000 product line, the type of strong growth rates that we’re just talking about and referring to in the previous question. Can you give us the – either by customer opportunity sets, what are the top two or three things? Is it more back-end loaded and perhaps something taking off with Verizon? Could it be some of the previous defense contractor OEM developments that we’ve talked about in the past that come to fruition? Or is it an expansion of opportunities with 1,000 new customers that we had in the M400. I guess it just isn’t clear what we should be monitoring and possibly keeping a close eye on. If you could help there, that would be great?

It’s such an interesting thing about where Vuzix’s business right now is Christian it’s really broad-based. And the cool thing is, all the stuff that we talked about going into Q1 last year that disappeared, much of it just seems to be coming back on board. I think you’re going to see some of the old stuff finally kick in. I think you’re going to see continued growth of the M400 and these remote support and medical applications. And I think you will see some select partners start to deploy in a much bigger way as the year goes – it goes through. I mean I can’t say very much about Q1. I mean we’ve already mentioned a little bit about the fact that it looks like it’s going to be a nice quarter. But I would tell you, it’s typically one of the slowest quarters Vuzix ever has, and that’s not at all the case for this year. I know that’s expletive poor guidance. I apologize for that. It’s – we’d like to get it right. And it’s as Grant said, things are lumpy. It’s just broad-based with – I believe you are going to see some of our larger partners start to buy in a bigger way.

Okay, great. That’s very helpful. No other questions. Thank you.

Our next question comes from Jim McIlree with Bradley Woods. Please state your question.

Yes. Thank you, guys.

Hey, Jim.

Grant, in your commentary, you talked about doubling the level of investment activity. I’m hoping you can clarify that. Are you talking about R&D and capital spending? Are you just talking about...

That was mainly on capital spending.

Okay.

In 2019, we’re like a little over $3 million. Last year, we went down a fair bit. So we’d be looking at, clearly more than a double in – for 2021. So trying to indicate that we’re going to increase our spending levels, and that’s related to all the new products we got coming and further investments in manufacturing and R&D. So it’s going to more than double. So it’s not going to be – we’re not talking $20 million, $40 million, $50 million. It’s modest. We’re still talking single millions.

Understood. And the sales and marketing increase that you’re looking for, is that similar to the R&D increase of about 50% or is it...

I think it will be less than that. I mean we see some market areas, particularly in Asia, that we think we could better address and even in the South America, Latin America. So we want to go there. We got a pretty good team in Japan, and we want to make some infill in Europe. So I would see a modest increase. Offsetting that, I don’t think there is going to be as many big trade shows still in 2021. So I think the increase will be under 50% year-over-year.

Right. Okay. And then...

I’m sorry, Jim, just on that trade show comment, I tell you, man – virtual – our stuff is all about virtual. And it is so much more efficient to sell our products through virtual meetings and virtual everything. It just works so well compared to some of the trade shows that we go to where you end up being the circus, where everybody just all line up and they play with it, but it doesn’t necessarily always turn to business. The virtual side of what we’re doing has been very, very effective.

Yes, I agree. Great. It seems that COVID is going to have a long-term positive impact on your business in that your customers are going to change the way they do business. But I guess I worry that in the short-term as the pandemic recedes, there might be a snap back to prior business practices. I’m just wondering if you’re seeing that or concerned about it. And does that – is that one of the reasons you’re talking about or referring to lumpy business?

No. Yes and no. It’s not really related to the COVID thing. Although nobody really knows 100% what’s going to happen. I will just tell you, though, I mean, I’m looking at what we do for a baseline business now in our baseline, and we could factor this in, and I could feel really comfortable where I know the bottom end, we – just the odds of us not hitting the numbers are impossible, it seems to me, our baseline has gone up by a factor of 3 to 4 over 2 years ago. That baseline is pretty darn consistent. It’s happening across the board, and it’s starting to be repeat customers. And it’s – with guys that – they are not talking about, okay, COVID’s over, let’s dismantle all this stuff. It’s a new way of people doing business.

Got it. And so when we look at the quarterly revenue progression this year, is it reasonable to expect that Q1 is better than Q4, Q2 is better than Q1, etcetera, throughout the year?

We anticipate that things should grow through the year. I can’t say that we wouldn’t necessarily, might have one that – because of the lumpy nature of an order that might come in or slip or get – brought in earlier and shift things a little bit, but generally speaking, you should see Vuzix nicely growing through the year.

Got it. Thank you. And just my last one, if you can just comment on anything you’re hearing or any thoughts that you might have on your position in the industry versus whatever Facebook and Apple are rumored to have now or in the future?

It’s really hard to know exactly what those guys are doing. I mean, I look at some of the things Facebook is working on right now. And I know they got a lot of money, they are throwing at it. But and – they are not close to what Vuzix is doing. We – over the years, Jim, we’ve built the big heavy, crazy stuff. And we know that, that doesn’t sell and it doesn’t sell at least in enterprise in the markets that we’re going after. I think guys like Facebook are trying to hit every average Joe on the planet. And from what I can tell, the products that they are making are – don’t even have displays in them, quite frankly, and they look odd as hell. And because they are trying to put all this other technology in it at the same time as opposed to – quite frankly, they are failing at it. I mean they don’t even have hardly audio in the darn things. Vuzix has a different approach to the problem we’re making systems and solutions that solve problems. And these microLED displays that we’re working on, they are pretty game-changing if you have the Waveguide optics that Vuzix has to put with them. And so that’s allowing us to make these little tiny engines. You might have seen the beautiful video that we put out that shows how small that little micro engine is the size of a pencil eraser. You put these two things together, and then we can add to the tech that we’ve already got an easy step forward to make really cool looking glasses. When it comes to Apple, I mean, I really think their first products are not going to be augmented reality, really cool looking pair…

Alright. Very good. Thanks a lot. Appreciate all the answers and congratulations with all the progress and good luck with everything going forward.

Thank you.

Our next question comes from Jack Vander Aarde with Maxim Group. Please state your question.

Great. Hey, guys. Congrats on the quarter and all the latest positive developments. So just a few questions for me, Paul, let me start with the question for you, just as it relates to the OEM engagements. You had five pretty solid engagements here. The one I want to touch on is the one I touched on, I think, last quarter, and that’s the one that’s made through all four phases in negotiating the high-volume production and the pricing. Just wondering, is there an update – a specific update on that? And are you able to, I don’t know, pin down when you think that might actually translate into revenue?

I wish I could do that for you. It’s with a defense partner, as everybody knows, it just takes time for them to get through all the gauntlets that they got to get through, too. We’re hopeful that 2021 starts to bring some forward momentum there that people will be able to see. But – sorry, Jack, I just can’t offer more than that right now. It’s – they are sensitive negotiations that go on between companies on these kinds of supply agreements. And there is phase gates and stuff that they are even going through inside their own organization. So I can only say it continues to move the ball forward.

Okay. No, that’s fair enough. And then maybe could you just help then from an illustrative kind of hypothetical perspective then, just as it relates to all five of these engagements, you have a – not a one by one and allocate what you think each revenue opportunity could be from each one. But just in general, maybe if you could paint a picture of the range of revenue in a given year from each of these? Like what would be the average or is it just too early on paper to tell?

The range from – when it finally got there, right, you could see a range from 2,000 to 5,000 pieces, all the way up to 60,000 to 100,000 pieces based upon what it is. And some of them are medical, some of them are state up defense, some of them are – the aviation industry. And the kind of price points, some of them are like $2,000 to $5,000, some of them are full up systems that are probably going to be $20,000 systems.

Okay, got it. That’s very helpful to understand then. Okay. And then maybe just a question for Grant on gross margin, just can you help me understand the fourth quarter product margin. I think it kind of ticked down to 7%, if I’m doing this correctly, which would be down sequentially despite the increased product revenue. Maybe it’s noise, but just trying to understand why that was?

Well, end of – a year or a quarter, we also do deep scrubbing of our inventory obsolescence provisions and tighter considerations, what our plans are for 2021. So there are some additional adjustments that often sometimes hit our Q4 results regarding obsolescence provisions. But other than that, I mean, it’s – I don’t think it really dramatically changed. I mean our quarterly numbers are not audited, right? So it’s the annual total that we would focus on. And the gross profit, I mean, from a product standpoint, was good through that period. It’s just there is some other items that get flushed out.

The gross margins, Grant, on the products itself was upward to 28%, right? Did I get that right?

They are even higher than that before overheads and other adjustments, we write off minimum royalties. We have a warranty adjustment over the end of every quarter. There is all these things that impact the total cost for the gross profit. But when you strip it out and just look at product gross margins against what we sell them for, there was no variance negatively in Q4.

Right. Okay. No, that’s helpful. And then I guess, just – is there a certain magic revenue number you could – product revenue number that you’d have to hit until we start seeing that product gross margin actually reflect that actual 28% or whatever the unit margin is? I mean, was that to be $7 million plus of revenue per quarter? Is there a number?

By products, and I think it’s around for 46% currently. We have to sell enough that all those other costs that are listed out would be – would get fully amortized. And of course, you got to gross it up a little bit. I mean, our long-term goal that we continue to repeat each year is to get to a blended rate of 40%. And that’s going to require a doubling plus in sales to achieve that. But then you got the impact of if the business grows, there might be some increase in manufacturing overhead costs. We might need a little more plant in other space. And additional equipment we have for manufacturing, that increases depreciation charges. But I mean our goal still is to try to get as close as possible to 40% long-term.

And product gross margins in the fourth quarter actually were pretty good.

Got it. Okay, understood.

Maybe regroup on the 7% because I’m not sure where that came from. It’s a much bigger number than that.

Sure. No issues there, sounds good guys. That’s it for me and I wish you the best. Thanks.

Thanks, Jack.

Our next question comes from Steve Weiss [ph]. Please go ahead.

Hey, Paul, Grant congrats on a good quarter and strong growth. A couple of questions for you. Going back to the customer side of the business, in terms of – you mentioned over 1,000 customers, just focusing on the larger customers because I realize it’s impossible for you to stay on top of all of them, what would you say is the incidence of repeat business or larger ordering from the big enterprise customers that they have gotten their initial shipment whether it’s the 400s or the other products?

I can answer part of that, and then Grant might want to chime in, too. It’s 1,000 new customers around the M400. We actually have more than 1,000 customers of Vuzix that are using our products. We even still sell a fair number of M300XLs, quite frankly. In the Blade, we mentioned it, but the Blade has been picking up here. We’ve got some big pharma guys that like that look and feel and the comfort that it gives for a guy that might be in the lab working all day long. So – and I can give you – I’d love to give you hard numbers, Steve, but it’s hard to do that without giving kind of inside stuff that we don’t share with everybody. But we have multiple...

I am just interested directionally. What the recurring and building business levels are [indiscernible] key customers?

Yes. When we first got started with the M400, if you sold 3 to 5 of them to any given account, that was pretty good. And now we have certain accounts now that are like, 40s, 50s, hundreds at a time kind of things. And the number of those just keeps increasing.

I mean, for instance, Paul mentioned Medtronic buying, I mean they are now deploying our glasses around the globe. It’s still on a pilot basis, and they keep saying they are going to expand that greater. But each month, we get several new countries come on board and try it. And there is some that are really starting to rock and roll and others that are coming a little slower. So they are all learning the capabilities of what the product can do, how to best use it and then it just kind of snowballs from there. So it’s – some people move faster than others, but it’s – we’re seeing just nice, continued upheld growth.

And the returns – you might imagine if somebody didn’t like it, we have return policies that allow people to return these things. It’s practically nonexistent for the M400. People get them, they like them and they come back and buy more.

Got it. And just a follow-up question, again, triangulate to what you typically don’t give, which is revenue guidance, if you looked at your business, and I know you don’t, on a book-to-bill basis, would you say the trajectory on that book-to-bill basis is higher at this point in the year than it was in prior years at the same point or about the same?

Our first quarter...

I’d say it’s a little higher. Paul.

Yes. We – I would agree, Grant. And in fact, I mean, I just look at our first quarter, not that we’re telling everybody how great the first quarter is or isn’t, but the first quarter is an indicator for Vuzix and usually, it’s one of our slowest quarters. And we’re not seeing that at all.

Okay.

I mean – and Steve, the demand indication we’re getting from customers, particularly in the second half, is looking good. We are making sure we can get the components, extra components on order. I mean, we do source some of the ICs that are used in the mobile electronics industry – I mean, it’s just the demand. So we’re trying to react and plan. And I mean it’s looking positive, and we’re reacting. So we’re making sure we’re – we can handle the build that we’re expecting out of the book. I mean, I hope that’s not too circular in like – by conversation.

No, no, no. That’s – no, that’s very helpful. Thank you very much.

Yes. I think just to add a little bit more to that, only that our 2021 repeat business is already kicking up in a comparison to what – if you take any given account that was buying them in small volumes, they are across the board – I shouldn’t say that because not everybody is going into overdrive. But most companies are coming back with repeats and repeats orders.

Thank you. And ladies and gentlemen, that’s all the time we have left for questions. I’ll turn it back over to Mr. Paul Travers for final remarks.

Thanks, everybody, very much for joining our conference call 2021. As we said, we’re looking pretty good for Vuzix. We look forward to continuing to share with everybody the good news as the company grows. And have a nice afternoon, everybody. Thank you.

Thank you. This concludes today’s conference. All parties may disconnect. Have a good day.