Greetings, and welcome to the Vuzix’s Second Quarter Ending June 30, 2021, 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 the Vuzix second quarter 2021 ending June 30 financial results and business update conference call. With us today are Vuzix’s CEO, Paul Travers; and CFO, Grant Russell. Before I turn the call over to Paul, I would like to remind you that on this call, management’s prepared remarks may contain forward-looking statements, which are subject to risks and uncertainties and management may make additional forward-looking statements during the question-and-answer session. Therefore, the company claims the protection of the safe harbor for forward-looking statements that are contained in the Private Securities Litigation Reform Act of 1995. Actual results could differ materially from those contemplated by any forward-looking statements as a result of certain factors, including, but not limited to, general economic and business conditions, competitive factors, changes in business strategy or development plans, the ability to attract and retain qualified personnel, as well as changes in legal and regulatory requirements. In addition, any projections as to the company’s future performance represent management’s estimates as of today, August 9, 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-Q 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 measure calculated and presented in accordance with GAAP can be found in the company’s Form 10-Q quarterly filing at sec.gov, which is also available at www.vuzix.com. I’ll now turn the call over to Vuzix’s 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 second quarter financial results. We will then move onto the Q&A session and finally wrap up with a few closing remarks by Paul. Paul?

Thank you, Ed. Hello everyone and welcome to the Vuzix’s second quarter 2021 conference call. 2021 has and will continue to be a transformative year for Vuzix. Product revenue over the first half of 2021 is up approximately 80% year-over-year, units sold are up 53% and revenue from our top 20 customers are up 73%. We ended the second quarter with roughly $138 million in cash. So our balance sheet remains in excellent health with ample cash to grow our business, drive ongoing product development and pursue strategic initiatives that expand our participation and business model. We’re seeing growth in all our major geographic regions driven by customer success within healthcare and the broader enterprise market segments. As we look to the back half of 2021, we expect growth of smart glasses adopting to continue as the industry continues to mature, despite the slightly lumpy nature of adoption. The smart glasses industry is expected to grow to millions of units on an annual basis over the next several years, the enterprise adoption is happening today and we’re witnessing earlier successes in stickiness across a variety of market verticals concentrated across numerous large organizations. And we are actively engaged in expanding and evolving our solutions and technologies to best capitalize on this projected growth. We recently established a new software integrated solutions business unit, which I’ll discuss further shortly and we’re evaluating potential strategic acquisitions with due diligence of these targets already under way. We posted 21% year-over-year growth of our core smart glasses business in our second quarter. Going forward, we expect sequentially stronger smart glasses revenue in our final two quarters of the year and beyond. We are seeing this growth coming from the medical space along with increasing momentum with our larger commercial customers as pre-COVID business opportunities…

Thank you, Paul. As Ed mentioned, the 10-Q we filed this afternoon with the SEC offers a detailed explanation of our quarterly financials. So I’m just going to provide you with a bit of color on some of the numbers now. Sales of smart glasses for the three months ended June 30, 2021, rose 21% in the period to $2.8 million led by at 22% increase year-over-year in unit sales in the M400 smart glasses and a 77% year-over-year increase in Blade smart glasses revenues. Engineering services for the second quarter of 2021 declined by $0.6 million to $0.1 million as prior development contracts were completed earlier and no new ones have commenced as of yet in 2021. Our overall second quarter’s total revenues for the three months ended June 30, 2021 declined 4% over the prior year's period to $2.9 million. There was an overall gross profit of $0.6 million or 20% for the three months ended June 30, 2021 as compared to a gross profit of $0.8 million or 26% for the same period in 2020. The decline was mainly due to a gross profit decrease of $0.5 million from engineering services for the 2021 period versus 2020, our revenue segment in which the company currently earns its highest margins. Direct product gross margins before overheads and other items have its 53% of sales in the 2021 period as compared to 50% in the prior year's period. Research and development expense was $2.7 million for the three months ended June 30, 2021 versus $1.18 million for the comparable 2020 period, an increase of approximately 50% and consistent with this spending guidance provided on our last earnings call. The rise in R&D expense was largely driven by increases in salaries due to additional headcount, increased non-cash stock compensation expense…

Thank you, Grant. I would like to now turn the call over to the Operator for Q&A.

[Operator Instructions] Our first question is coming from the line of Matt VanVliet with BTIG. Please proceed with your question.

Hi, good afternoon guys. Thanks for taking the question. I guess wanted to follow-up on the recent announcement about the Integrated Business Unit and the potential for ad-on SaaS development and products in conjunction with that. And looking over the next several years, I guess how should we think about the way you're going to monetize that, ultimately or kind of mix of revenue is that potentially going to represent? And does it impact in any way the pricing mechanism that you're going to go-to-market with the glasses or is that all be additive at this point?

At this point – yes, Matt, thanks for the question. At this point, it's – I would look at it as if it's additive. Who knows as those business units unfold and the software and the SaaS-based applications just come out. There could be certain areas because they're selling things as a bundle where it might look a bit differently than that. But currently, I would just think about it as additive. It's the easiest way to do that. The ISBU will actually have a couple of kinds of revenues there you might imagine for there's lots of ways to identify a vertical market to be in. And then some of them, we have customers coming to us saying, we need a solution that does this. These customers are willing to pay to get the engineering done. So it solves that problem. But then ultimately, that's going to be part of a base software application that use excels that has recurring revenues that will be recurring on an annualized basis on a monthly run rate across the year. And that will all be on top of a piece of hardware that gets sold.

All right. Very helpful. And then, you've talked a lot about the success you've been having recently in the healthcare group. I guess, as we think about the specific units skews that are showing the most volume there I think some of the examples have used the Blade as an integrated model, but looking in the queue quickly, it looks like the MSeries are still the significant portion of sales and really driving the most growth. So curious in terms of what the longevity of the Blade and some of the relationships you have in the healthcare industry there and how we should think about the overall mix between the MSeries and the Blades on a go-forward basis?

In an operating theater, there's some really nice features that the Blade has – excuse me that the M400 has that works well with the PPE equipment and the rest of the equipment guys that are operating, doing open heart surgery or endoscopic surgery and the likes. So the M400 is the flagship still. With that said, the Blade also has some features in certain areas where it kind of stands out on its own because of certain aspects of its wearability and the see-through nature of it. The bulk of the business that we're seeing in medical is M400, and we think M4000, ultimately, especially with some of the newer software applications that are coming in around it. So we should look at the MSeries. That's really the lead horse in medical.

All right, great. Thanks for taking my questions. I'll jump back in the queue.

Okay. Thanks, Matt.

Thank you. Our next question comes from Christian Schwab with Craig-Hallum Capital Group. Please proceed with your question.

Hey, good afternoon guys. Thanks for the slide presentation. I guess when I'm looking at Page 4 of the slide presentation and in the commentary and the prepared comments, I'm just trying to figure out, can you give us a range of revenue outcome that you expect for the year in 2021 and what type of growth rates we should really be thinking about in the second half of 2021 versus the second half of 2020?

Yes. 2021 should continue to see consecutive growth as we move from our second quarter. Some of the business in the second quarter was timing related, frankly. That said, none of the SaaS-based software that we expect ultimately will start to add to the revenue stream. I would count in a second, especially in the third and fourth quarter of this year, even though some might be there. So you're probably going to be a little bit softer match. I think it's right in line, Christian, with the numbers that we discussed in the past. I think you look at the 3 million to 4 million units for the kind of a numbers, and then more in the fourth quarter.

Okay. Okay.

That’s hard forecast there. Sorry.

Yes. No, I appreciate that. I guess if we sum up those numbers, I mean, could Q4 be big enough to do $20 plus million this year? Is that a little bit too optimistic and it may take too many things going in the right direction right now?

It would take some things going in the right direction. I mean, it's not impossible to see that some of the business we had could do that, but I mean, I can't, we certainly would not give that advice right now, because there's question marks on the timing for it. And unfortunately, this industry is zero down. It's coming. You can see it, our business continues to grow and move forward. And the size of some of the things that we're talking about are getting bigger and bigger without doubt. It's only a question of, is it this month, the next month, in and out based upon the timing. Yes. It could be there Christian, but we'd have to really work to make that happen.

Okay. That's fair. And I guess my second question has to do with strategic acquisitions. At this, can you give us any direction of what you think the company could tremendously benefit from as far as a technology or a path to increase revenue yourself with new customers? Can give us a little bit more color about what you guys are thinking about in doing due diligence on?

I would tell you that the two things you just asked about are characterized exactly by the acquisitions, we’re looking at. One of them is a software oriented solution. You sell as an example, you might sell an M400 for x amount of dollars, and you would get on a recurring revenue basis on an annualized basis, six to seven times that for the use of the software and this solution that it brings to the table. So you could consider that pretty accretive on the top line. And it's also got great margin, as you might imagine for the software. On the technology side, Vuzix is going to make glasses ultimately that look like Oakley's, it's been our mission for the beginning, since we've been working with the special forces [indiscernible] and we don't have the budget that some great, great big companies that are out there, but we're really smart with how we spend our money. And we've been looking at technologies for a long time. And on that front, some of the tech areas I think is, owning a catapult forward, what we're trying to do to get to that those form factors. What we have today is already really pretty amazing, but some of the stuff that we're looking at I think takes it to another level. To a level, I think Christian, that you could almost anticipate what we're doing being in the bulk of the smart glasses systems that might be on the marketplace because it's that game changing, I believe.

Great. Thanks. No other questions. Thanks guys.

Thank you. Our next question comes from Jim McIlree with Dawson James. Please proceed with your question.

Thank you, and good afternoon. Paul, in your remarks, I think you mentioned a couple of times OEM production revenues, is that the Tier 1 defense supplier that we've been waiting for and it has a contract to be signed? Or is that you anticipate a contract to be signed in production revenues to occur?

It is exactly the one. And we're literally at the point in the game where the devices that we're delivering are being looked at as if they're production devices, and we are knock on wood very, very soon should be in a position to where we have the supply agreement signed.

Well, that would be fantastic. I'll pre congratulate you on that. The services revenue, I know it's lumpy, and I know it depends on when you sign things, but is there – are there more service contracts coming this year? Or is it reasonable to think that there are more service contracts coming this year?

There should be. I will say that some of the base optics and engines that we’re delivering now are getting good enough, that folks are not really asking for much of a change in it. So they might be looking more like their products and ask or whatever, although they’re going at the very early gizmos. But that said you should expect some more before the year’s up.

Can I rephrase that and see if I understand what you’re saying correctly? So you’ve built up enough of a base of let’s call it standard equipment that customers don’t need to customize something.

Yes. They can get going with what we have.

Got it. Okay. And Grant your comments on head count increasing in the second half. Can you tell us what head count was at the end of Q2 and what you think it might be at the end of Q4?

Well, I think we’re just now total of about 110 people globally. And we could see that probably increasing by good 15 people by year’s end. And to well over 75% of them will be on the R&D softwares side of the house, which includes the new integrated Software Solutions division.

And that 75% number you just mentioned that applies to the increase, not to the total.

Yes. I’m saying, of the 15 people we expect to add by then, 75% of those individuals in the R&D for software development, customer support, part of that deal that we have.

Got it. And just, I know you’re not going to give me too much on the two potential acquisitions, but maybe you can talk a little bit about the philosophy you have on acquisitions. If it’s – I’m just going to throw some softballs here. Is it product driven? Is it financially driven? Is it strategically driven? Is it competition driven? If you can just flesh out a little bit what you’re looking for when you think about acquisitions.

We don’t do it just for the money. I will say that it’s nice to see that there’s a business model that that makes sense, but we’re doing it based upon business models that have a long-term play opportunities to be in organizations that could go into the potential to be in the billions even. If you look at the medical space today, it’s for smart glasses, Jim, it’s really high. It’s growing all over the place and the number of analysts that are predicting, billions of plus dollar industries being created out of it. So that’s why we have an interest in that space. And we wouldn’t acquire a company just because it had some revenue level that it could add to our top line right now it’s moving as we’re building a business that we want to own the smart glasses industry. And so it’s really got to be connected to what we do. And on the technology front, we’ve seen a lot of stuff. We can add this for years now. It’s got to be pretty darn special to ring the bell for us. And there’s some stuff – when you’re here long enough, you get to see a lot of things that are behind closed doors and in people’s closets. And some of the stuff – there’s a little bit of stuff out there that’s quite amazing. And that’s the stuff that Vuzix looks at.

And can you frame it in a – can you frame the size? So if somebody came to you and said, we want $50 million of your pot of gold, you would tell them no way in the world. But $20 million, might work, can you phrase it, can you frame it for us?

Are you talking about the dollar sizes we might spend on an acquisition?

Yes.

So let me say that the two transactions that we’re looking at right now there’s a significant portion of the acquisition component that comes from equity. So it should not impact much the cash position that Vuzix is now. A bunch of reasons for it, I mean, these guys, like the Vuzix’s, it isn’t like, a takeover kind of a thing. These are folks that really believe in our vision and we believe in theirs. And so they’re in it to win it with us. So a fair amount of it’s not going to come out of our bank account. And then, the dollars to operate that’s a whole different story, I don’t want to get into all that.

Just one further thing, Jim, on the equity component that Paul’s referring to, well over half in both cases is entirely based on performance. So, if they don’t achieve their revenue targets or milestone developments, they’re not going to receive the equity. So it’s...

But we are – sorry, go ahead, Grant.

That’s fine. I’ve made my – I’ve said my piece, Paul.

Being supportive of the faults, we have every expectation that they would be successful, obviously.

Okay. Those are very helpful answers. Thank you so much and good luck with everything.

Thanks Jim.

Thank you. Our next question comes from the line of Jack Vander Aarde with Maxim Group. Please proceed with your question.

Great. Hey guys appreciate the quarterly update. Thanks for taking my questions. So Paul, I’d also like to just touch on the OEM projects. Aside from the comments you already provided on the main one that comes to my mind that Tier 1 aerospace customer, they completed all four phases. But maybe could you share an update on those – I think last quarter, the other four OEM products that you had discussed, there were at various stages last quarter. Do you expect any of those other four or if there’s any more to reach Phase 4 or Phase 3 or beyond in the next six months, 12 months, whatever you can share would be helpful. Thanks.

So there’s – I’ll be frank, I can’t remember exactly everybody that was in that last box. Okay. I’d have to go back to give you an accurate answer. I can tell you that there have been zero folks that we’re working with, come to Vuzix and say, we’re moving on, so all of these things are there. There’s been a couple more, come on and saying, can you get us this, can you get us this, we’re quoting on that business, so there’s a bit new. And then some of those folks out of that group are coming back saying, I need more please. So it’s a portion of those folks for sure. And it’s one or two new folks and the bulk of it, by far as, defense-oriented folks.

Okay, cool. That’s helpful. I appreciate that. And then just sort of similarly, but separately can you maybe – you obviously have a ton of cash. You talked about some acquisition plans. Can you remind us of your existing production capacity and the number of facilities? And then, maybe what your plans are for building out future production capacity ahead of demand. What does that mean expanding an existing facility or building out a new facility all together? Just anything you can provide there and give associated timeline of what that might mean.

Yes, it’s funny. I talked with the landlord about more space, so that you probably would see that on our future. That said, the current facility with moving some things around has the ability to expand our production. We’ve got some areas that are being used for other things right now that we can move. The capacity, they’ll depends upon what you’re making, but if we’re running multiple shifts somewhere between 50, 75 upwards of a 100,000 gizmos could get made. If you figure the average selling price is about $1,000 to $1,500 per that can easily get you the run rate. So we’re sitting in a pretty good spot right now to get revenues to between $50 million and $100 million with our current facilities.

And that’s just on the hardware side, but exclude any anciliary software derive revenues. Okay, cool. I appreciate the additional color. I’ll hop back in the queue. Thanks.

Thank you.

Thank you. At this point, I will turn the call back to Paul Travers for final remarks.

Thank you everybody. We really appreciate the support of Vuzix. We appreciate the enthusiasm. We know it’s an interesting industry to be in. I can tell you without doubt, Vuzix is in one of the coolest, hottest, it’s going to be the fastest growing industries coming. It’s talked about by everybody, and we’re seeing it all over the place. We look forward to the second half of this year, sharing a lot with you. There should be a lot of press releases and exciting things as the next two quarters unfold. Thanks again, we’ll talk in the future.

Ladies and gentlemen, this does conclude today’s teleconference and webcast. We thank you for your participation and you may disconnect at this time.