Greetings and welcome to the Vuzix Third Quarter ending September 30th, 2021 Financial Results and Business Update conference call. At this time, all participants are in a listen-only mode. A brief question-and-answer session will follow the formal presentation. [Operator Instructions]. As a reminder, this conference 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 third quarter 2021 and September 30th, 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 the legal and regulatory requirements. In addition, any projections as to the Company's future performance represent management's estimates as of today, November 8th, 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 this 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 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 will now turn the call over to Vuzix's CEO, Paul Travers, 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, will provide an overview of the Company's third quarter financial results. We will then move on to the Q&A session and finally wrap up with a few closing remarks by Paul.

Thank you, Ed. Hello, everyone, and welcome to the Vuzix Q3 2021 conference call. We grew total revenue both sequentially and year-over-year for Q3. Total Q3 sales was up 9% over the same period and up 34% for the 9 months ended September 30, 2021, versus the prior year. This increase was led by Smart Glasses sales growth of 12% and 51% as compared to the quarterly and year-to-date periods of 2020 as we continued to see steady demand from some of our largest repeat customers, which continues to be a driving force of our base business on a quarterly basis. While the quarter came in on the low end of our expectations for a variety of factors, including logistics, shipping challenges internationally, and the exact timing of some of our expected larger customer opportunities, our competitive position has never been stronger, and our growth prospects never brighter. In addition to repeat customer orders, we also continue to expand our distribution channels across multiple regions, including the EMEA, Latin America, and Canada to support industrial use cases, applications, and customers. We saw continued strength in our healthcare business segment, specifically in the operating room related to patient surgeries, and we have made steady progress with our software partners towards what would be the largest deployment of Smart Glasses ever with some of the leading companies in the world to support their warehousing, logistics, and training for on-boarding new employees. We have already shipped initial orders against programs that are rolling out and we expect follow-on orders to be significant as the deployments expand into 2022. Additionally, our OEM prospects continue to grow as new engagements are being added with follow-on NRE programs commencing and with multi-year product supply agreements being negotiated that should generate important business in 2022 and beyond.…

Thank you, Paul. As Ed mentioned, the 10-K 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. Our third quarter, total revenues for the 3 months ended September 30th, 2021 rose 9% over the prior-year's period to $3 million. The increase was the result of the 12% gain in Smart Glass sales led by continued growth in our M400 and M4000 Smart Glasses. We had no engineering services revenues in the quarter versus $0.1 million in the prior year's period. There was an overall gross profit of $0.6 million for the 3 months ended September 30th, 2021, as compared to a gross profit of $0.3 million for the same period in 2020. Overall, net gross profit margin was 19% for Q3 2021 as compared to 13% for Q3 2020. The increase was related to an improvement in product direct margins and the fact that the prior year's period included a $0.2 million inventory reserve for obsolescence. R&D expense was $3.3 million for the 3 months ended September 30th, 2021, compared to $1.9 million for the comparable 2020 period, an increase of approximately 74% and consistent with the spending guidance we provided on our last earnings call. The higher R&D expense was primarily due to increases in external development expenses related to our next generation Smart Glasses, higher salary benefits, and non-cash stock-based compensation due to headcount additions and increased product compliance testing for new markets and higher R&D consulting fees. Selling and marketing expense for the three months ended September 30th, 2021 rose 70% year-over-year to 1.6 million due primarily to increases in salary benefits and non-cash stock-based compensation expense from headcount additions, more foreign sales…

Thanks, Grant. Nice job. Let's now turn the call over to the operator for Q&A.

Thank you. And ladies and gentlemen, at this time, we will be conducting a question-and-answer session. [Operator Instructions]. Our first question comes from Tyler Burmeister with Craig - Hallum. Please state your question.

Hey guys, this is Tyler on for Christian Schwab. Thanks for letting us ask a question. Paul, first question, it seems like the healthcare end market you are clearly the most excited about now and into the future. So, framing comparatively to that, maybe I was wondering the retail warehouse logistics as well as the OEM product development is kind of 2 other pieces of your business. Relative to healthcare, how should we think about those three businesses as we focus going forward?

First of all, let me say that healthcare is pretty immediate. It's -- the good thing about it is it's been in place, it's been accelerating, thanks to COVID. I mean, hate saying it that way but it's changed a lot of things in the AR space COVID. That whole retail picking space is going to be very big, Tyler. As big as the healthcare is, there are thousands of people and organizations that move boxes around, logistics. How you get something from point A to point B, it is a massive industry. Healthcare on the SaaS model perspective, which is some of the things that we're working with our partners and stuff, I think that there's lots of opportunity to grow, and of course we're going to sell lots of hardware at the same time, but I think you'll probably see -- I don't know if it's an order of magnitude, but that picking side of the business is significant. That will start to move and grow for Vuzix, especially into 2022. It's nice to see these companies after all this time finally making commitments. They are beyond pilots now. They're -- how do we roll these things out, kind of things. So, 2022, I think you'll see a significant contribution and growth to that side of our business, which I always felt was going to be there, but it's nice to see it really coming around. So, Healthcare versus the logistics side of the business, Healthcare is going to be bigger in the end. , and right now it's clearly healthcare. On the OEM side of our business, we -- so it's interesting. Earlier on in the game, we would get larger dollar values from an engineering perspective to make custom solutions and those kinds of things, we have some standard stuff now that a lot of folks are able to just use. And so they're buying stuff from us. They are building it into their programs, and we're expecting volume programs out of those things as we roll through the next years or so. So, it will grow. It's going to take longer. I will say that it can also be a really significant decent business, but it's going to take a lot longer perspective to be there. The broader markets take forever before they are there. And these -- all these depends guys, you know what it's like until you finally get the program kicked off, and when you do you are in. So, number 1 is the enterprise logistics on-boarding training, it's going to be the biggest market by far, I think at least to get started. Number 2, the medical space and then number 3, the OEM today. But in the long run, we will see where that goes.

Thanks, Paul. That was perfect. Then a follow-up question on this Fortune 50 customer that you've announced a couple of orders during this quarter to the degree that you can provide any more color on what business, what end-market, geography that customer would be in, and then do you expect future orders from them imminently or how far along on their total deployment though would you suspect there?

It's more than one Fortune-50, Tyler, in fact it's probably bigger than a handful, and it's from onboarding to logistics, warehousing, and some of it's in retail and some of it's in the big distribution channels that have warehouses all over the U.S. and world. So, it's a continuing thing from them right now. These are follow-on orders that are part of deployment orders, not well, let's try a test PLC here. So -- and what we're working through are the logistics associated with doing the rollouts to those companies, so they can do them in a bigger way throughout their organizations. We are up against companies that have been incumbent that for the last 75 years, they've been using their tools to pick out of the warehouse. From voice picking to bar scanner picking kinds of things, and our Smart Glasses with vision picking brings a lot to the table. But it takes a bit of time to do the final changes around the processes and procedures to implement those things and go live. That said, they've been working on this for darn long time. COVID put a hole in it for a while, but these guys are back with a vengeance. It seems like with all these logistics problems going on in the world, that has lit a fire under a lot of these companies. And like I said, there's more than 5 kind of a thing that are in this boat.

That's great. I appreciate the color there. And last one, and I'll let others ask questions. I don't think I really heard too much of an update on your M&A pipeline, any color there? I think we were talking earlier about some potential software, M&A opportunities that were close, any update there would be great.

We actually we have a list of folks, Tyler, and it's true there are a few of them that are, I would like to think very close. There's been lots of due diligence done. The progress has been going down the road. It feels great, but they're not done yet, and we're not done until they're done. That said, we have high expectations that these would be good relationships and opportunities for Vuzix. As I said, there's more than a few though, and we'll be as we move forward with those over time, we'll be selectively sharing where it's appropriate. I wish I could share more than that right now. I can just say that things are moving forward.

Yep. Completely understand. It sounds great. Alright, that's all from us. Thanks, guys.

Thanks, Tyler.

Our next question comes from Rachel Freeman with BTIG. Please state your question.

Hi this is Rachel, I'm on for Matt VanVliet. Thanks for taking my questions. Just firstly, on the next-gen products that you're planning on introducing next year, what sort of visibility do you have into sales for these products, and when you expect that to start flowing through to the model? Just any color you could give on timing or projections will be great.

Let me say that between now and the first quarter in the due course, I think people will learn a lot more about when and how those products will be coming out. I would suggest that product will be available on first quarter. We have no doubt about that. These products are designed, they look cool. I mean, they look closest to a -- not that were in the consumer marketplace, but these are close to high fidelity glasses. But they're really are designed for enterprise. They got more sensors on them than we've ever had in the past, but they look sleek and they're designed to go to work still, their safety glasses form factors, but they have this really nice-looking feel. We have high expectations, but it's in different parts of the marketplace. For instance, we wouldn't necessarily expect this to be used in a warehouse picking application, but because of the way this thing is built and pharma, there's a lot of good applications for it and there's applications for testing QA because of the sensors that are built into these glasses, they're designed to measure things in front of you and take data and record in real-time and take the data that's -- not that use of phrase everybody is using these days, but then information in the Metaverse and connect it nicely to the real world. We see some significant business. It's in different areas but we don't expect it to be competitive to our current products other than the blade. But I have to say right now the blade is also coming into its own. There's lots of places that are starting to pick up pace. And in fact, in our third quarter here, we had some supply chain problems that we could have shifted a lot more Blaze's than what we did because the demand has been growing a bit for it.

Okay. That's great. And then just on the internal solutions development unit, just beyond what you mentioned in your prepared remarks just on customer engagement. Can you provide any more details on the progress that this group has made before and maybe an update on what your expectations are for how quickly it can start to ramp just a meaningfully contribute to sales moving forward?

Yeah, these guys are good at doing this, they've got multiple opportunities and irons in the fire. They are just getting started in fairness to these guys, but they got multiple proposals that they put out. It's an interesting group. Part of what they're doing is providing a service for software solutions that solve problems from -- with companies that there's just nothing available today. So there's going to be some engineering fees I think you'll see coming out of that group for a while, and then out of that, they're also building our own solutions that will fit into certain verticals, and I would suggest that in 2022 you'll see some revenues at some point during the year where that portion of it starts to come onboard. So you will see recurrent revenues, and engineering revenues rather, and then you'll see the software development side of the house also kick in in 2022.

Thank you.

You're welcome, Rachel.

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

Appreciate the update. Thanks for taking my questions. So, Paul, I'm hoping you can provide some additional color on your monetization strategies or just ideas your guys are maybe thinking about in terms of rolling out of software and maybe organically. So, regard -- somebody talked about acquisitions, but if you were to roll out in organic software offering, just what are you guys thinking about in terms of how you monetize that. Are there various -- are there -- is there a wide range of possibilities you're thinking about? Is there a core software offering you are thinking about? And how close are we to seeing that be grilled out?

So, that kind of goes hand in glove, Jack with Rachel 's question, that last one. The Vuzix solutions group is a developing custom solutions. These are -- these are solutions that solve a problem and we've got a bunch that we've identified. There's a few that are really cornerstone that we think are important, but it takes time to get that core software developed. In between now and then, they are also working with select companies. We get this all the time, Jack. Companies come to us and this is what I'd like to do. And there are no way to do it today without having custom software built. And so. They're going after the market in a 2 pull strategy, 1 of them being we are going to help these guys solve these problems. But in the process of doing that, that's going to be building out the core software that we need for our own solutions. And so you will see over time there will be engineering services coming in from these guys. And then you will also see us start to offer and generate revenues on a recurring fashion based upon some of the software that we built around some of those engineering activities. What's nice about that is it helps fund the activities. At the same time, it's nice to have tactical customers that really want to sell problems. So, you can test the software to make sure it does what it's suppose to.

Okay. That's helpful. In addition -- maybe I'll touch on because this is a theme impacting every Company and every industry. And you kind of touched on already, but are you able to quant -- finance is a question for Grant as well, but are you able to quantify in any sense what the global semi shortage -- what the impact was on your revenue for the quarter, or just how your momentum of sales throughout the balance of this year. Is there any way to quantify that?

It's hard to know the future per se, but let me just say in the 3nd quarter, our blade had silicon supply shortages and that was part of the reason why we didn't ship more. And it's hundreds, several hundreds plus more that we could have shipped. And on the other side of the coin, there's also tight shipping problems around the world today. And sadly, Vuzix had stock sitting in a warehouse that was unable to get out the door due to shipping problems and logistics associated with that to the tune of another couple of 100 plus and 400s. So, it wasn't insignificant necessarily. We're hoping that that's not going to be the case here in the fourth quarter.

I mean, we're good other than the 1 product that Paul has referred to. So, we are well positioned for 100 sales and that's our -- the bulk of our revenue So -- We're good.

Understood. And then just in terms of the Metaverse, obviously, quite the buds lately, it's quite pull the rising. Where do you guys -- where would you see yourself fitting in beyond VR and AR and gain in general, there's also the aspect of conference, virtual conferences and kind of business use cases. Do you think you guys have a natural utility or placing in the Metaverse when it does get rolled out or however that transpires? Where is your place in the Metaverse and how you see it or is it too difficult to pin it down, or the use cases are endless? Just any more thoughts you can provide will be helpful.

It's interesting, you coined the phrase Metaverse and I think that our friends over at Facebook did that because they're into the VR side of it more so in the virtual world that you can step up inside of, but the reality in the Metaverse is it's about the entire world of the internet creating virtual worlds inside of it, but also connecting all that virtual Medidata into the real world. And this is really the part of the Metaverse that Vuzix plays in. Example, a cool video coming here in the next couple of days, you should keep an eye out for. But the bottom line is Vuzix already is a player in the Metaverse. You've heard of digital twins before, you've heard of the internet of things. I mean, these are all these internet base devices that literally are connected through the cloud. Our Glasses are designed to take that internet information, the Metaverse datasets, and connect it to the real world. And this is where the Metaverse gets exciting. When you look at Apple's paradigms in top processes about it, it's about changing the way people do things in the real world, not necessarily stepping inside to a virtual space. And Vuzix does that today, we do it in so many different ways. Now, standardization around how the Metaverse might work would be great. And if you look at even Microsoft just in their last conference call, they reported about how they are doing things to standardize how the Metaverse will work, and how those digital systems can be connected into the real world. And so, I think it's great that these bigger companies are building these standards and stuff because it will only make this stuff happened faster.

Well, sounds exciting. I appreciate the update. I'll hop back in the queue. Thank you.

Yeah, you bet, Jack.

Thank you. I will now turn the call back over to Paul Travers for closing comments.

I'd like to thank everyone for their interest and participation in today's call. We have a lot in the calendar over the coming months, including multiple investor conferences, AWE this week, CES is coming. I think that should be a very exciting show for Vuzix. So, we're on the main Hall. We're back at it again, it should be interesting. The world's finally coming back to work. We look forward to our next call with you in margin. And again, thank you very much everybody for joining the call. 2022, here we come. Thanks again.

Thank you. This concludes today's conference, all parts may disconnect. Have a good evening.