Greetings and welcome to the Vuzix’s Second Quarter 2019 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 call is being recorded. Now, I would like to turn the call over to Ed McGregor, Director of Investor Relations at Vuzix. Mr. McGregor, you may begin.

Good morning everyone and welcome to Vuzix’s second quarter 2019 financial results and business update conference call. With us today are Vuzix CEO, Paul Travers; and CFO, Grant Russell. Before I turn the call over to Paul, I would like to remind you that on this call management’s prepared remarks may contain forward-looking statements, which are subject to risks and uncertainties, and management may make additional forward-looking statements during the question-and-answer session. Therefore, the company claims the protection of the safe harbor for forward-looking statements that are contained in the Private Securities Litigation Reform Act of 1995. Actual results could differ materially from those contemplated by any forward-looking statements as a result of certain factors, including but not limited to, general economic and business conditions, competitive factors, changes in business strategy or development plans, the ability to attract and retain 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, 2019. Vuzix assumes no obligation to update these projections in the future as market conditions change. Prior to the market open this morning, the company issued a press release announcing its financial results and filed its 10-Q with the SEC. So all 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 non-GAAP financial measures. When required, reconciliations to the most directly comparable financial measure calculated and presented in accordance with GAAP, can be found in the company’s Form 10-Q quarterly filings at sec.gov, which is also available at www.vuzix.com. I will now turn the call over to Vuzix’s CEO, Paul Travers, who will give an overview of the company’s second quarter 2019 financial results and business outlook. Paul will then turn the call over to Grant Russell, our CFO, who will provide an overview of the company’s second quarter operating results. Paul?

Thank you, Ed. Hello, everyone, and welcome to the Vuzix Q2 2019 conference call. A lot has happened in the second quarter of Vuzix. We have made great progress with our ATEX-certified partnership with Eaton and are now expanding the effort to include our entire line of Vuzix Smart Glasses. We also entered into a long-term MicroLED supply agreement with Plessey Semiconductors. The future of AR will require glasses that people will want to wear. And this agreement forms the basis for next generation displays that we expect will significantly shrink the form factor and power required to drive them. These MicroLEDs are being tailor made to work with Vuzix waveguide. We made progress on the OEM side of our business with follow-on engineering services orders from an avionics partner and inbound requests for further OEM relationships around Vuzix waveguides and wearable technology from market leading companies continues to build. Vuzix Blade in the security and first responder markets made its debut in the first half of 2019 with the announcement of multiple new programs that we expect to generate significant revenue streams, a timely intro when you look at the news headlines at the USS scene of late. We also have been significantly expanding the Vuzix Blade’s capability both with core upgrades to the software and hardware and third party applications. These new applications and upgrades open new markets and sales opportunities. For example, the new blade application supporting DJI drones, the leading drone manufacturer in the world with an estimated over 74% of the drone market and the new blade safety glasses that can now be used for many applications in enterprise space requiring safety eyewear. I’m also happy to report that the company raised an additional $20 million in gross proceeds to support our expected growth over…

Thank you, Paul. Before I begin, I would like to encourage interested listeners to review our 10-Q that we filed today with the SEC for a more detailed explanation on some of the quarterly year-over-year variances, as I will be highlighting just a few. For the three months ended June 30, 2019, Vuzix reported $2.2 million in total revenues as compared to $2.6 million for the same period in 2018. The overall reduction in sales in smart glasses is driven by a combination of factors, including the timing of what was the company’s largest single smart glasses shipment to date at the end of June 2018, along with price reductions implemented during Q2 on the current M300 and M300XL products. Additionally, we observed some customer order deferrals in advance of the new and more powerful M400 Smart Glasses arriving later this summer. New shipments to OEM partner, Dynabook, formerly Toshiba, did not fully offset the impact of those factors. Vuzix Blade Smart Glasses sales continued to accelerate in the second quarter of 2019, and represented 46% of Vuzix branded product sales for the quarter. Engineering services revenue for the second quarter of 2019 was $0.4 million versus nil in the last year’s second quarter. Looking out on the balance of 2019, we expect our revenue for Q3 will be similar to this last second quarter, but should accelerate nicely in the fourth quarter of 2019 with our new products and indicated customer demand. Our overall gross profit from sales in the second quarter of 2019 was $0.2 million versus a gross profit of $0.7 million in the 2018 period. On a product cost of sales basis only, our product direct costs were 76% of sales in the 2019 period as compared to 48% in the prior year’s period. The increase…

At this time, we’ll be conducting a question-and-answer session. [Operator Instructions] Our first question comes from the line of Nehal Chokshi with Maxim Group. Please proceed with your question.

Yes. So Blade increased pretty significantly as a percent of revenue, which is great. And you pointed out that the product cost, as a percent of product revenue, did tick up Q-o-Q. And you did talk about how that was a result of the price drop. So is that safe to say that the waveguide- based GM is hopefully above the prism-based GM?

Not at this stage. I mean, the impact of margin was the sales of our OEM Smart Glasses to Dynabook. I mean, the margins there are about half what we normally make selling a smart glass. The decreases in the pricing implemented on the M300 and M300XL was done for competitive reasons as well as the commercial introduction of the M400. So that reduced our margin. We went from $1,500 retail price to $1,000 retail price, and clearly, no change in our cost. So that pretty – that reduced our margins going forward. The Blade, at the end of the quarter, actually we did also implemented price reduction on that. We went from $1,000 down to $699. That had a minimal impact on the Q1 gross profit – I mean, Q2 gross profit. But during summer, you’ll start seeing some of the impact. But our margins on the Blades are still over 40%.

Let me add a little bit to that. The Blade, here next week, we also have a version that is really focused on the enterprise markets because it’s got Z87.1 ANSI certification for safety glasses, and that is a $1,.000 price point. So we’re not determined yet whether or not we will be permanently keeping that $699 price point. It was part of a special program that we did for a dads and grads kind of a thing. But it’s working fairly well, quite frankly. So odds are it’ll stay.

For the long-term, we do feel our waveguide-based products will be able to earn a superior margin than the prism-based products going forward.

Great, okay. And then thanks for the color on the expectations as far as how revenue plays out for the remainder of the calendar year. Previously, you did talk about that towards the end of calendar year, you thought you did get towards breakeven. Does that guidance still include that possibility? And where would you put the probability of that possibility happening if it does?

Well, it’s clearly not impossible, but I’d say the probability of that has decreased a little. So I mean, probably the loss for Q4 will clearly be much less than Q1, Q2, Q3. But just looking at the timing of some of the new products and other factors, I don’t think we’re going to achieve that in Q4.

It will be close to that.

Okay, great. Thank you.

Our next question comes from the line of Christian Schwab with Craig-Hallum. Please proceed with your question.

Great, thanks for taking my questions. Can you tell us what – on the revenue ramp in Q4, which products or customers, if you could elaborate on, that you anticipate driving them? And then secondly, as we look to 2020, we did talk about a host of many customers and applications for the products. Can you give us any type of expectation for what you would anticipate revenue in 2020 looking like?

So, this fourth quarter, our M-Series products going to be a good contribution. There will be, I believe, an uptick in the OEM business that we’re doing and clearly Blade – I mean, so you’re going to see it through all three sort of business sectors that we have.

The M400 should be a big contributor there because we start to see some good pent-up demand for that.

Okay. Okay. So getting roughly to breakeven, are we anticipating revenues to ramp up closer to 6 million? Or right now, we just feel better about – better than Q3 guidance?

I think, we can confidently say better than Q3 guidance. I mean, it should be a multiple of that. But really can’t confirm that we’ll achieve $6 million at this stage.

Okay, okay. And then just a follow-up on the outlook for 2020. As you look to 2020, is there one product or one or two customer that you’re the most excited about that we should be monitoring the most closely?

Well, there are – our guys have this pipeline of – frankly, Christian, it’s over $100 million. And there are whales [indiscernible] in there, and there are guys that are modest. I mean, it’s across the board. I think there’ll be a lot of exciting customers that will start getting rolling and there’s a few guys that are going to go in a big way. So it’s a bit of everything. I will say, it’s amazing to me the size of the business that we’ve identified from accounts that – there are reasonably high percentages that these things are going to start rolling into real business. The M400 is going to be a big impact in that regard. But the M300 has also gone through 1.5 years of qualifications and there’s many companies that really like it and are planning on rolling with it also. So M300 and M400 would be well in 2020together.

Awesome. Thank you. No other questions.

Thank you, Christian.

Our next question comes from the line of Jim McIlree with Chardan Capital. Please proceed with your question.

Yes. Thanks. Good morning. Paul, when you talked about the retailer and the deployment the retailer is going to make, were you referring to the M300 or the XL or the M400? What is it that, that retailer is deploying?

I am sorry. Can you just one second, Jim? Bear with me. Okay?

Sure. Yes.

It’s – that particular client is qualified the XL, the M300XL.

Okay, great. Thanks. And I’m a little bit confused by the transition from the 300 to the 400 in the Q, and then in your commentary, you talked about delays in the 300 as customers wait for the 400. But also in the call, you talked about big deployments of the 300. I’m just – I’m puzzled as to what’s going on here? Is – was the Q2 delays just a function of specific customers, but other customers aren’t waiting for the400. It just seems a little bit contradictory what I heard.

It’s sort of it. There’s a lot of factors that are going into the dynamics around M300 and M400 with users and/or customers. First of all, going into the spring of the year, we knew that our friends from Google were going to preannounce this next-generation pair of glasses that they have. And we thought it was important that we, in a partnership with our friends at Qualcomm, make this announcement, and we did partially because of that. We’ve also got a bunch of customers, not all of them, but a bunch of them coming to us as they’re going through their rollout efforts, and their IT departments are saying, well, we need OS level blank on android. And unfortunately, the M300, it’s a low cost, as we said. It’s been qualified. It’s – there’s a lot of guys that don’t even want to talk about anything else. They’re very happy with the M300XL. It’s taking them this long to get there and they’re okay with it. But there are other guys that are saying, if I can’t get OS 8.0 or 8.1 model or better, we’re not going to deploy. So that – we were facing that issue also. We also have another competitor that had rolled their product up because they put their on a different platforms. Unfortunately, Intel item, it just doesn’t have the support any longer to get this OS upgrade. So we had competitive reasons. We had customers coming to us that said they really needed this OS change. We needed to show the world and our customers that this next-generation product was coming. So they kind of sit on top of each other. That said, we fully expect M300XLs to be very successful in the marketplace still. People love the things. And there’s going to be a price differentiation going forward, the XL versus the M400.

Okay. I think I see what you’re getting at. And as far as inventory goes, the – as long as the M300 is as successful as you think it’s going to be, then there’s not a worry that you have stranded inventory. But on that issue as well, how much of the inventory is the video ware? How much is still remaining on that?

The Blade 30%.

I’m sorry, Grant. What was your answer?

30%. Little over...

Grant’s assuming, you mean the Blade, right?

Yes. No, I thought you still had some of the old consumer video wares in there.

The eyewear is gone. Zero.

That’s all done. Okay, great.

All right.

All right. That’s great. Thank you. That’s helpful

Anything to happen with the M300.

Right. Right. And then in the Q, you talked about volume manufacturing and sale of the M100 Smart Swim. Did you address that in the – in your opening remarks and I just missed it or...

We did not address it. I will say that we’ve got our first units in. They look fantastic. And through the rest of this year, the goal is to get it all finished, qualified and roll out.

Okay. All right. Great. Thanks a lot.

Yes, thank you Jim.

Our next question comes from the line of Brian Kinstlinger with Alliance Global Partners. Please proceed with your question.

Great, thanks. The Smart Glasses revenue in the quarter, looking at the Q, is $836,000 and was the lowest in six quarters. So – and history has told us that ramping up new smart glasses products, the Vuzix is taking some time for that ramp or the adoption. So what gives you confidence that 4Q is at ramp? And are there actually orders in hand already?

We have multiple accounts right now, Brian that are in the million-plus kinds of numbers that we know that they’re rolling.

There’s also, in this case, compatibility near 90 – right at 90% between M300, 300XL and the new M400. The M400 just gives you everything the earlier models do plus a whole bunch more. So in the initial pilots and testing with our software partners, they’re finding 100% compatibility to a little bit of tweaking. And of course, there’s our software partners that want to take advantage of some of the new capabilities. So we anticipate the adoption rates to go much better than in the past. And in most cases, you can drop it in and people won’t really notice other than it’s got a nice gorgeous OLED display in it now.

And it’s performed so much better. I mean, the streaming video, as an example, was just – it’s outstanding with the M400.

All the accessories are compatible, batteries, everything. So it’s...

Look, I don’t doubt the technology is stronger. I just questioned whether in the fourth quarter you’re shipping $1 million orders to customers as opposed to a handful that they try and maybe two quarters out is when they start to buy in more bulk. I guess, that’s what I was telling here.

We’re expecting bulk orders through the following year time.

And the large retailer, you mentioned, following up to Jim’s question. I think, if I’m not mistaken, you said there was one particular large retailer that are looking at thousands of pieces. First, is that a brick-and-mortar store or is that online? And then in terms of timing, is that a fourth quarter event or is that more 2020?

We’re expecting – we know that here in the third quarter even there will be some that start to deploy. And it’s a brick-and-mortar that’s doing it. And it’s not – they’re not doing it to sell to customers. They’re using these as a tool in store.

Okay. And then I missed the number. I think you actually provided the numbers for Dynabook, and I didn’t get through it in the Q. Can you just provide what that number, in terms of orders, were in the second quarter?

We shipped them a couple thousand pieces.

Thousand pieces. Okay. And what were total pieces?

I’m sorry Brian, 2,000.

2,000. And what were the total smart glass pieces you shipped in the quarter?

We don’t break it out that way for all kinds of reasons.

Okay. And then finally on the engineering side. I think you’ve got a lot more visibility typically on that. Is there expected projects? Can you – is the second half of the year, are those quarters looking more like 2Q as well? Is there a ramp? Is there kind of a pullback there?

Looking at the pipeline of stuff that we quoted, it’s going – it should ramp maybe a fair bit.

Right. Okay. Would suggest that third quarter product sales will be slightly lower than the second quarter if we’re looking at a similar quarter?

Yes probably right. We’re just being cautious here on our third quarter revenue numbers. We will see where it really goes. We’re comfortable with the more modest numbers, but it could be bigger.

In the tier, Brian, and I know you probably had no time to read it yet this morning, we did say there’s remaining existing performance obligations of $315,000 for Q3, Q4 of this year. But the – we’re expecting some other programs that might come in on top of that. So you’ll see at least $315,000 between now and the end of the year.

Okay, great. Thank you.

I’d now like to turn the call over to management for final remarks.

Yes. Thank you, operator. We did get some questions submitted prior to the call, and I’d like to take a few. Some of them have already been answered in a dialogue on this call. But here’s one, Paul. You have great technology, so why not create other products for people to be able to enjoy other than glasses.

That’s a good question. Vuzix does have amazing technology, and it can be employed in a lot of different ways. And in fact, we are working with third-party partners where our technology is being put in their products, and it’s not glasses related. We haven’t been able to share that to the folks just yet, but we will be sharing more about that going down the road. And we’ll say, we have a tight focus on smart glasses. We know this is going to be a very big marketplace. So we’re focused on being successful there.

Okay. Another question. We’d really like some hard info on production capabilities. How many Vuzix Blades are being produced monthly?

Currently, we’re at a run rate of 250 a week. And if you look at the CapEx spend in the second quarter, you’ll see there was a chunk of dollars spent on equipment upgrades, and that’s going on the plant floor. That equipment is being qualified right now and should show up on the plant floor here within the next couple, three weeks. And it’s all related to Blade manufacturing and improving the number of units on a monthly basis.

One more question. There have been multiple patent applications released including one from Disney and another from Samsung that use illustration, 95% accurate to that of the Vuzix Blade Smart Glasses, which are produced by Vuzix. Is Vuzix aware of these patents? And is the company involved with any of these potential devices?

Vuzix can’t comment on the business relationship side of what may or may not be happening within some of those companies. And I have to say that this is a [indiscernible] of companies that are applying for patents in the augmented reality space, and they often reference Vuzix because we’re one of the leaders, our technology shows where the future is going and so it’s good to wrap other technology around what we’re doing. Now that doesn’t always thrill Vuzix because, frankly, some of that is intellectual property that Vuzix is already owners of. And so in some cases, this is straight because it’s cooperative and in other cases, it’s actually inappropriate and Vuzix is dealing with that on a case-by-case basis.

Thank you, everybody. I really appreciate the participation on today’s call. I would like to reiterate that Vuzix has a clear roadmap to success in multiple areas in the AR markets. We have the infrastructure in place at the company, the technology behind us and the needed capital to deliver. So we’re really excited about the next 1.5 years at Vuzix. This should be a very exciting ride. We look forward to speaking to you again in November, when we report our third quarter 2019 results. Thanks again.

This concludes today’s conference. You may disconnect you lines at this time. Thank you for your participation, and have a wonderful day.