Vuzix Corporation

Greetings and welcome to the VUZIX second quarter ending June 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. If anyone should require operator assistance during the call, please press star zero on your telephone keypad. 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 VUSIC's second quarter 2021 ending June 30th financial results and business update conference call. With us today are VUSIC 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 sessions. 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 9th, 2021. EUSIX 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 at 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 calls. 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 on 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 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, We'll provide an overview of the company's second quarter financial results. We will then move on to 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 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 in the broader enterprise market segments. As we look to the back half of 2021, we expect growth of smart glasses adoption 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. 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 underway. 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 begin coming online again. Additionally, our OEM program engagements are progressing, and we expect to see follow-on NRE programs and product supply agreements with the shipment of initial production units this year. During the second quarter, we continue to see strengthening in our core smart glasses business from some of our largest repeat customers, which continue to be a driving force of our base business on a quarterly basis. Our largest 2% of customers have accounted for approximately 45% of our enterprise smart glasses revenue over the last 18 months, with customers like Medtronic, KDDI, USAA, Clorox, Johnson & Johnson, and Becton Dickinson along with some large and as yet unnamed U.S. general merchandisers leading the way. Before COVID, logistics was one of the largest and most active market verticals for Vuzic smart glasses. Our customer success team has now been back on site and in regular communications with several notable name brand customers involved in the retail stores, distribution centers, third party logistics, warehousing, and inventory management. Most of these accounts and some new ones are driving forward again and are focused on scaling up to gain the efficiencies that deploying smart glasses will afford. According to marketwatch.com, augmented reality and virtual reality in the global healthcare market alone is expected to reach $6 billion in value by the year 2025. This continues to be one of our fastest growing market verticals and accounted for approximately 25% of our total revenue in Q2. In terms of comparison, our second quarter healthcare-related smart glasses sales increased 240% year over year as the use of Vuzix-supported surgical solutions continues to steadily expand, and we expect further growth to continue into the foreseeable future. Medacta, based in Switzerland, is a Vuzix smart glasses-based augmented reality surgical platform provider that has spent considerable time over the last year working with regulatory agencies. In June 2021, Medactor received European CE marking for knee, shoulder, and spine surgeries using its NextAR solution and has received FDA clearance for shoulder as well as knee surgery in the United States. In July, surgeons in both the U.S. and Europe completed the first total shoulder replacement surgeries using NextAR augmented reality surgical application, which is based on the Vuzex Blade smart glasses. Medecta has now turned its focus to expanding its commercial sales and gaining traction within the surgical community. Medtronic, the world's largest medical device company and a global user of USIC smart glasses, continue to order at a robust pace in the second quarter to support their medical techs and surgeons in the field. Medtronic now has hundreds of M400s deployed in operating theaters around the world. a global surgical training nonprofit organization also continues to expand their uses of our smart glasses. Through July 2021, a total of over 900 surgical calls have been placed over the use of smart glasses, which were used to connect more than 100 surgeons across five specialty areas, including neurosurgeons, general and colorectal surgeons, adult and pediatric orthopedic surgeons, and plastic and reconstructive surgeons. Ohana's goal is to have their program grow to 1,000 mentor-mentee pairs using smart glasses, and they are already deployed to some level in over three dozen countries. Pixi Medical, based in France, is another music smart glasses-based augmented reality surgical platform provider that is also gaining commercial traction. PICC-C received their FDA clearance in April 21 after spending considerable time over the last year supporting regulatory agencies to expand on their European CE marking received in May of 2020. PICC-C Medical has now also turned its primary focus towards commercial sales and continued market expansion within the surgical community. Over the last six months, PICC-C Medical has expanded to 10 countries, added 20 distributors and has completed many hundreds of surgeries using Vuzix Smart Glasses. Rods and Cones, a provider of a fully virtual surgical collaboration platform, placed a $1.2 million order for Vuzix M400 Smart Glasses in Q2 with monthly shipments scheduled to occur over the balance of the year. These monthly shipments remain on track and will support the firm's customer expansion plans both across Europe and the United States. Beyond these medical-focused software firms, we are engaged with other leading device companies in this space. Again, smart glasses usage in telemedicine, particularly within the operating room alone, represents a significant market opportunity for Vuzix over the next several years, and we intend to be a dominant solution supplier into this space. As slide eight illustrates, we currently generate the bulk of our revenues from the sale of smart glasses hardware. but maintain the longer-term objective of creating a base of business that will be driven by three indicated buckets of smart glasses hardware, smart glasses SaaS software, and OEM supply to the broader markets. As the market for enterprise smart glasses continues to gain momentum, Vuzix is spending considerable time and effort to transform our business model beyond a focus on smart glasses hardware by moving upstream closer to the customer with a complete solution. In particular, the ability to generate meaningful SaaS-based revenue centered around our smart glasses over the long haul with our software partners and ourselves will provide us with not only a substantially larger revenue base, but one that is recurring and with much higher margins. We have adopted a three-prong approach that will drive the changes required across the company to make this happen. Vuzix will continue to invest in our core business, including smart glasses, software, and customer service to help accelerate smart glasses sales and industry adoption. We are continuing the development of our next generation smart glasses and are on track to deliver our first EVT units before the end of this year. We have also been working on enhancing our core M-Series solutions with new line extensions and models currently being aggressively worked on. We are also increasing our engagement and service levels with our major enterprise customers and partners to complete the final steps in support of large-scale enterprise-wide rollouts. Building out our internal infrastructure through key hires has been another primary focus for us this year. Most notably, we brought Pete Jamison on board as our general manager earlier this year. Pete is a proven hands-on executive with a track record of building and scaling multi-billion dollar B2B and consumer growth businesses. and has done a standout job thus far supporting our efforts to bring our capabilities to the next level. We have also made key additions to our engineering, software, and sales team that will expand our abilities to produce, support, and sell our solutions. We are pursuing both organic and inorganic opportunities for enterprise business solutions to expand our participation in the overall value chain with our end customers. On the organic front, we recently announced the creation of an integrated solutions business unit. Vuzix ISBU will be focused on the acceleration of enterprise-centric solutions, the development of new tools to support our current and future partners, and building SaaS-based solutions for business opportunities in various new and underserved market verticals. This new business unit will be led by Pano Spiliotis. Pano has wide experience in the electro-optical field with areas of expertise in software development, sales and marketing, strategic planning, and development of strategic partnership alliances with large organizations. The Do Business Unit has specific revenue and EBITDA achievement targets in place for significant portions of management equity compensation to incentivize success, and we expect the ISBU will drive significant value for our customers, partners, and shareholders over time. Regarding inorganic opportunities, there are numerous SAS-based solutions that exist across multiple market verticals where Vuzix is focusing. We believe that the fundamental problems being solved within healthcare today and ROIs being delivered by smart glasses to aid general and specialty surgeries, both financially and for better outcomes for the patient, could ultimately represent significant revenue on an annual basis. as it rapidly becomes one of the standard tools for providing patient care over the next three to five years. We also believe so strongly in the future of smart glasses and healthcare that we have a focus on SAS-based growth in this market and are well into due diligence in this space. This business could deliver significant, accretive, high-margin revenue streams for Vuzix and bring Vuzix even closer to the customer, not only as a hardware supplier, but also as a solutions provider in the medical space. And finally, we're advancing our core technologies to enable our own products, grow our OEM business, and supply to the broader markets. Our core technologies, which includes optics, displays, and systems, represents the keys to the kingdom for future AR smart glasses and related solutions across the entire space. As this industry achieves even larger scale, the control and ownership of these key technologies will significantly enhance our company's values. Vuzix continues to steadily develop some of this cornerstone technology internally, and I'm pleased to report that our most recent patent and patent pending numbers reach a record 210, well above last summer's total of 166. Last, and perhaps most importantly, we have begun the due diligence phase in evaluating a potential investment in an eventual ownership of a disruptive nano-electro-optical technology. We believe that this new technology has the potential to work seamlessly with our wave guide tech and ultimately could unlock significant additional long-term shareholder value. We are making solid progress on our key operating goals for 2021. As it relates to growing sales and the deployment order size of our M series and blade smart glasses, we continue to see follow on orders from our customer base and expect year over year revenue growth over the remainder of 2021. As for increasing SAS-based revenue through acquisitions and internally developed software, we've hit the ground running with our recently announced integrated solutions business unit, as previously mentioned, and we are completing due diligence on a potential acquisition that would deliver high margin SAS-based revenue streams initially focused in the medical space. On the development of our core smart glasses products, the new versions are on track for production release as early as the fourth quarter of 2021. Our next generation micro LED-based smart glasses are on track for planned introductions to key customers before the end of the year. Our OEM program engagements are progressing, and we expect to share follow-on NRE programs and product supply agreements with the shipment of initial production units this year. During 2021, we have already increased our IP portfolio from 184 to 210 patents, which is up from 166 a year ago and 90 three years ago. Over the remainder of this year, we will continue to add to our IP portfolio with a focus on our next-generation smart glasses, micro-LED-based display engine technology, and waveguide optics. I'd like to now pass the call over to Grant for his financial review. Grant?