Greetings and welcome to the Vuzix Second Quarter 2017 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 call is being recorded. I would now like to turn it over to Andrew Haag, Managing Partner at IRTH Communications. Mr. Haag, you may begin.

Thank you, Brenda. Good morning, everyone. I would like to welcome all of you to Vuzix's second quarter 2017 financial results and business update conference call. With us today are Vuzix's CEO, Paul Travers; CFO, Grant Russell; and the company's COO, Paul Boris. Before I turn the call over to Paul Travers, I would like to remind you on this call, management's prepared remarks may contain forward-looking statements, which are subject to risks and uncertainties, and the 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 of these forward-looking statements as a result of certain factors not limited to general economic and business conditions, competitive factors, changes in the 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 projection as to the company's future performance represents management's estimates as of today, August 9, 2017 and Vuzix assumes no obligation to update these projections in the future as market conditions change. This morning, the company issued a press release announcing its financial results and this evening the company plans on filing 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 we provide a summary of those results discussed on today’s call. Today's call may include some 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 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 business activities and developments during the first quarter of 2017. Paul will then turn the call over to Grant Russell, our CFO, who will provide an overview of the company's second quarter results. Following Grant, Paul Travers, Vuzix’s COO will provide an update on key strategic initiatives and business development activity. Paul Travers will then call Paul Boris, to talk more about the company’s outlook, technology, and the programs for growth. We will then open the call up for Q&A after management update. Paul?

Thank you, Andrew. I just want to ask quickly, is the audio still sounding bizarre? Because I don’t think anybody is going to be able to hear me if it’s as garbled as it was with you Andrew.

It is loud and clear sir.

Okay, thank you. Thank you everyone and Andrew. Hello everyone and thank you for all joining our call today to discuss the company’s second quarter 2017 financial results and business outlook for 2017. Although it has taken longer than all of us would have liked, we are truly at an inflection point at the company. To support the growth and maximize the opportunities at hand at Vuzix, I’m happy to report that last evening we entered into agreements relating to the sale of 1.5 million shares of our common stock at an offering price of $5.75. The gross proceeds from the offering will be $8.625 million before deducting commissions and estimated offering expenses. This transaction was completed in a matter of a few hours and was led by our largest shareholder AIGH. The book primarily consisted of existing and new institutions and was done at only 5.7% discount to our closing price on Tuesday. With these added dollars of Vuzix balance sheet is strong and provides the company with the flexibility to maximize our business opportunities and continue to aggressively bring our Blade 3000 product to market. While at the same time accelerating our near term business results in the second half of 2017 as we move towards positive cash flow. During the second quarter of 2017, I’m going to paraphrase just a few numbers here because I think its important points to make. Grant is going to give you the full details in a bit of course. During the second of 2017, we recorded our second consecutive $1 million plus revenue quarter for Vuzix. Q2 sales of $1.3 million are a record for Vuzix and overall first half 2017 sales of 2.5 million are encouraging compared to 0.9 million in the first half of 2016 and 2.1 million for…

Thanks Paul. Good morning everybody. Before I begin, I would like to point out that many of the numbers that we are reporting dollars, I will be referring to them in thousands. And I also encourage folks to look at our 10-Q when it is filed. I must apologize, we don't normally like to have our conference call before we've filed our 10-Q with the SEC, but due to the timing of certain events, we felt that it is important to have the call. They will be filed tonight. So, if anybody has any additional questions after the fact, you can contact us through one of the various RI or IR forms and we will try to answer it. As Paul said, revenues for the quarter ended June 30 were $1.325 million, as compared to $1.56 million, 136% increase over the prior year, you don't have the benefit of this detail as of yet, but 63% of our sales were sales of Smart Glasses, primarily driven by sales of our M300 and that is up 147% over the prior year. Sales of Video Eyewear were up somewhat, so we have cut the price, so there is continuing to sell. Sales of waveguides were 116 there and a 9% of revenue, and Paul will update you a little bit about that. And sales of engineering services reached the bulk of [indiscernible] contract with 32% of revenues or $420,000. Well as I said, overall the M300 sales and Toshiba program accrued billings are on were the big drivers have increased revenue. Overall, we reported a negative gross profit for the quarter. That was primarily as Paul mentioned, due to the result of cost related to the decommission and transition from a California-based contract manufacturer, the M300 over to China. Those are one-time…

Thanks Paul, thanks Grant. So, as I wrap up the first 90 days here at Vuzix, I have to tell you, I am really more excited at where we're headed than ever and I will get into a few of the details as to why. In addition, I would like to talk about what we have been able to accomplish over the last quarter and KPIs we’re tracking that allow us to remain focused on advancing the business, as well as continually refine our processes. I will give you a few specific examples, but rest assured there are many, many more that we won’t be able to cover just in the interest of time and the confidential nature of the relationships just yet. First, let’s talk about where we’ve been. One of the best indicators of a successful organization bringing new tools and technology to the market is their ability to deliver a series of minimally viable products or MVPs into use, and then iterate on the findings rolling all that back into the solution with a series of rapid improvements. So Eric Ries describes this in his book, The Lean Startup. How today's entrepreneurs use continuous innovation to create radically successful businesses. So, I suggest if you’ve not read the book and you’re trying to make sense of emerging technologies like this and the company is driving it, I’d suggest you pick that one up. Companies like my former employer GE used the concept in their FastWorks program, lean manufacturing leaders like Toyota, Ford, John Deere, Parker Hannifin, they use it every day as part of a process called Kaizen. In short, this is what the Vuzix's team had been focused on for decades and the end result is a solution that is the most robust for the vast…

Thank you, Paul. Over the first half of 2017 we successfully transitioned our manufacturing to China. We continue to work looking closely with our VIP partners to improve the design software and performance of our M300 enterprise smart glasses. We also have a continuous improvement program in place and are putting out consistent software updates to improve the M300 experience. The bottom line, the M300 is moving to a full production/sales program at Vuzix. As a result, we're starting an active marketing and sales campaign and that includes some national TV advertising. We intend to have a series of stock that will grow to include some of our larger partners, solutions, and actions. These stocks will be a call to action, making the point that if you’re not moving forward already, you’re behind. From an OEM perspective, our project with Toshiba to develop Toshiba smart glasses powered by Vuzix is progressing well as we have finished the query for the device in the second quarter and a large portion of the software is now in hand. We have also built out the production line in China and are preparing to run the lines for the first time in this quarter. We’re in the final stages of negotiations with Toshiba on the supply agreement that remain on track to view the involvement production for Toshiba in the fourth quarter of this year. We’re very optimistic about the project roadmap here with Toshiba and the opportunity to generate a significant piece of business for the company. Our relationship and engagement with our Tier 1 consumer electronic partners continue also. We’re supporting the needs of our Tier 1 OEM customers as they build to consumers smart glass prototypes featuring Vuzix Waveguides and display engine [indiscernible] and are looking forward to the next steps…

Thanks Paul. We would now like to open up the call for questions. [Operator Instructions] Our first question comes from the line of Brian Kinstlinger of Maxim Group. Please go ahead with your question.

Great thanks. I'm just curious with the average selling price, the smart glasses, where I thought you mentioned discounted pricing, so maybe given that demand has exceeded supply currently, if we should expect discounted pricing is going to continue and if I heard that correctly?

I mean our average selling price of the M300 is around $1,100. I mean, we - our biggest. That’s our average base. I mean, I don't - as far as how that my equate the end of sales and reported revenues and the other, I mean we still had a period where we were fulfilling preorders of M300 migration shipments. And there is different amounts of revenue recognition on that because there was a portioned recognized on our original M100 sales, so that momentarily or temporarily deflated some of the average numbers, it might have been recognized on a revenue standpoint. So, is that - hope you followed me there?

Yes. And then can you talk about where capacity is today with your announcements and then will you hope or expect to end the year with capacity?

About a 1000 units a month right now and we will be stepping that up north onward to 2000 before the year is over.

But that said capacity could be 50 times that, given adequate lead times to get components. Our manufacturing partner in tools could runway with way larger volumes. So, it’s a reasonable target for Q2 to be 2,500 given you’ve got excess demand, but you also have to ship the product in time for the quarter?

Like I said, you will see us in the third quarter in the 1000 plus kind of numbers.

I meant 3Q, sorry.

Yes, you will see us in the fourth quarter in the 2,000 to 2,500 timing volumes.

Okay. And then with the comment on DHL, can you kind of talk about what that means in terms of maybe pieces over the next 12 months, obviously that you’ve got a huge warehouse in logistics staff, so maybe talk about what that might mean for you?

So, let me, this is Paul Boris. So let me put it in perspective. I mean these companies have thousands, I mean GE has got estimated 120,000 people that touch, you know lay hands on product either picking or assembling or repairing. They really don't project those types of things. They roll these technologies out as quickly as they can consume them. Anybody who puts a firm stake in the ground with those is purely speculating because it’s really dependent on a lot of things that the company is driving. So regardless, if they see value and they have reported specific value, they reported in their own communication channels that’s part of the industry furrow, you will see that accelerate for sure.

Great. And then finally, can you highlight what the one-time cost were for decommissioning the California manufacturing or any other one-time cost that you had?

It was around $460,000 for the quarter.

Great, thanks so much.

Thank you, Brian.

Thank you. [Operator Instructions] Our next question comes from line of Rob Stone with Cowen & Company. Please go ahead with your questions.

Hi guys, I have a few. I wanted to follow-up first on the topic of gross margin, I know you would essentially mark the video headphones down to cost, could you say, how much that has contributed to sales in the quarter and obviously that would have had a zero gross margin or so, if that assumption is correct, and related to that how much inventory is left related to that product?

The Video Eyewear sales in Q2 were 5% of total revenues or $70,000. As far as inventory goes there is, probably got about another 100,000 [indiscernible]. And I got to say that the eyewear is the kind of product that from now to the end of the year is where it will meet most of this interest in the market. It’s a consumer oriented device, gets holiday, that sort of stuff.

So is that inventory still at the level of components and subassemblies though I’m trying to translate that to what might be left in potential units of that product?

About 80% is finished goods and the balance is work in process.

Okay.

Our last few thousand pieces and they are on their - is shortly going to be on their way from China.

Okay. So that’s a product I assume you don't expect to carry beyond the end of this year then?

There probably won’t be much left by the end of the year, if there is, I can’t say we would just kill it, but we were just going to sell it out and end it. That’s correct.

Okay. Alright. And then putting the big impact of one-time cost and the sequential increase in volume and starting to get the benefits of moving to China, I know you are not at this stage of giving precise guidance, but does all that math suggest that you should see a positive gross margin in the third quarter?

We would expect though. Certainly improved margins and ultimately we have our fixed components that are in cost of goods. So, if there were cost overruns and achiever project which we don't think they are, I mean we're recognizing around a percentage completion basis, but we’re continually updating our forecast on our cost in the project. So, we're not expecting, but I'm just telling you some of the potential risk. So, it should hopefully be positive.

On the subject of operating expenses, which declined sequentially and also year-over-year and you noted that some of that was reallocation of cost into cost for the Toshiba project, I assume that as you get finished with that development work and Gary just started manufacturing, we should see OpEx move back-up as the folks working on Toshiba go back to other projects, but what sort of a level of OpEx are you expecting in the second half, especially with respect to increased marketing and TV ads?

Well in the R&D side it was $180,000 of wages [indiscernible] for Q2. So, we are not anticipating or making any headcount changes when they are no longer working directly on the [indiscernible] as that would certainly pull back in. And another quarter where there is a rate classes, so from Q4, when the projects both began we will be back to the regular expenses as part of R&D. Sales and marketing costs, I mean there is, we are honestly are in the summer periods, it’s not a part of the prior quarter for any gig portions there is not a lot of trade shows, there is fewer trade shows in the second half of the year then traditionally is in the first year. So, I mean we have some promotions and smaller things we are participating in, but I wouldn't expect there to be a major uptick in the quarterly average when it comes to sales and marketing expense, at this pace.

Even with TV ads or…?

That is an awareness program with an 800 number to try to tell our story and say we’re there in effect of Google Glass to get all the television coverage. I mean, we [indiscernible] I believe a little less than $100,000 with this expense and we’re going to revaluate it. I don't think it’s going to become a monthly expenditure of $100,000 at one time on television ads for the M300.

Okay.

That is correct. It will judiciously be used when we have, like I said there is going to be some partners spots that we anticipate coming up in the future, so it is a selective spend.

I mean we are getting callbacks regarding 800 numbers. We have got people to follow-up with. So, like any other marketing investments you try to look at your ROI and at this stage go on experiment that we’re seeing some encouraging signs.

Great. A couple of product roadmap questions for Paul. One is, so Blade is you gave the schedule for EVT and DVT and your work is done on the waveguides for M3000 as well, I think you said, could you provide us a schedule update for M3000?

It’s going to be sometime in the latter part of the first half of next year.

So latter part of first half 2018?

Yes.

Okay. And then finally you had notable waveguide revenue in the quarter with your CE OEM partners, are you still expecting to go into production with those partners in the fourth quarter or will you see another quarter of sort of low-level volume as they do their development work just thinking about the slope of the ramp there for waveguide component?

I think that, well waveguide component for Vuzix is going to go up significantly as we go into the end of this quarter and into next year of course, but waveguide revenues from these guys is still going to be not significant until I would suggest in midway through 2018.

Okay. That's all I have. Thanks.

Thank you. We’ve reached the end of our question-and-answer session. I would like to turn the floor back to management for closing comments.

I would like to thank everybody for joining the conference call. We're looking forward to a fantastic 2017 and thank you guys for being shareholders and looking forward to a great fall. Thanks everybody.

Thank you. This concludes today's teleconference. You may disconnect your lines at this time. I thank you for your participation.