Vuzix Corporation

Greetings and welcome to the VUSIX 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. If anyone should require operator assistance during the call, please press star zero on your telephone keypad. 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's third quarter 2021 and September 30th 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, November 8, 2021. USICS 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 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 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. We'll 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 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. 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 nine months ended September 30th, 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 continue 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, in 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 onboarding 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. Lastly, we ended the third quarter with cash of roughly $129 million, which provides Vuzic's ample runway to grow our business drive ongoing product development, and expand strategic initiatives. As slide five illustrates, our quarterly and annual smart glasses sales growth has been steadily trending upward for Vuzix over the last five years. Year to date, our smart glasses sales have grown approximately 51%, almost equaling our total for 2020. And we expect our full year total for 2021 will show a solid year-over-year gain And as nice as these growth trends are, the total top-line revenues is modest just yet, as the expected AR smart glasses industry's growth phase has only just begun. We have clearly moved beyond the proof-of-concept stage with many senior management at several major corporations and dived on with their support, and we're now working through the logistical details for high-volume rollouts. Industry forecasts for the smart glasses industry indicate that it is expected to grow to millions of units on an annual basis over the next five years. Gradual enterprise adoption is underway today across a variety of market verticals, and we are confident that Vuzix is winning over the competition. There has been a lot of buzz about the metaverse over the past few weeks, following Facebook's, now Metaplatform's, broad statements about building it out along with Microsoft's announcements of their own metaverse initiatives. That said, the metaverse is not a new thing, at least as it relates to Vuzix's long-term vision, and as we expect, these announcements will bolster our position and direction. These new industry initiatives should represent a significant positive for both Vuzix and the AR smart glasses industry as a whole. It's worth keeping in mind that the metaverse is not just about virtual worlds that users congregate, socialize, or play games in. And it's basically been a cornerstone part of the AR, VR, and smart glasses industry all along, especially for enterprise. There's going to be an almost infinite number of enterprise use cases, and here are just a few. Imagine accessing IoT sensors and systems simply as a function of where you are looking live on the plant floor, or receiving changing work instructions on the fly through your AR smart glasses. or live remote guidance of a complex medical procedures in networked digital equipment. And in the world of logistics, support for picking and pallet stacking with advanced AI telling workers where to stack or what to pick, all communicated while being hands-free. The bottom line is that Vuzix AR smart glasses and the technology help bring the metaverse and the real world together for the user. And in doing so, create cost savings and in some cases bring new capabilities Not in some distant future with the coming metaverse, but now. Without a doubt, this is game-changing technology and clearly the future of computing. And Vuzix is out in front of this as a leader in the technology of connecting people to all of this metaverse information. We are seeing growth in all of our major geographic regions driven by customer success within healthcare in the broader enterprise market segments with continued demand from our major customers and partners. As we look to the remainder of 2021 and into 2022, we expect growth of smart glasses adoption to continue as the industry matures. Before COVID, logistics was one of the largest and most active verticals for music smart glasses. Activity in this vertical paused during the most challenging periods of this disease, but it is now heading back on track and accelerating as the need to gain supply chain efficiencies comes to the fore. We are seeing expanding engagements with many leading players in this market segment. Our customer success team is in close communication with these customers and our software partners. And in many cases, we have been onsite regularly to support the business groups. In multiple cases, we have moved beyond pilots and are in the functional rollout stages in select locations. These next steps should be network-wide and or global deployments. Over the last several weeks, we announced a few of the follow-on orders that we have received to support the needs of some of these larger customers. These customers are among the most innovative companies on the planet, and the overall feedback regarding Muzix smart glasses and the solutions running on them has been fantastic, well beyond the initial wow factor and focused on the operational benefits. In several cases, we are up against companies that have been solving the logistics problems for our customers for years with older alternative technologies. To replace these legacy solutions requires robust, Tested and proven solutions that bring better value while integrating into existing IT architecture in our smart glasses with vision picking brings just that. Our customers love the performance of our smart glasses products, especially the noise-canceling microphones required in the noisy environments the glasses are being used in. They love our crisp, high-contrast OLED display, critical for successful vision picking. They love the on-device scanning provided by our smart glasses HD camera, allowing a one-device solution for even barcode scanning. They love the lightweight and easy wear design of our solutions with their ergonomic wearability options. And most importantly for them, Vuzix smart glasses are a multitasking and programmable device that can remove their need to use multiple devices throughout their operations, which means an investment in one area can get leveraged across others. The volume potential associated with these opportunities represents many thousands of units, and we believe this is a market vertical that Vuzix can and will ultimately own. And for more than a few of these customers that are now beyond testing and proof of concepts with Vuzix, the planning stages for broad rollouts is underway. That said, at the moment, healthcare is our largest growth sector. According to ResearchNestor, the global healthcare augmented reality market is expected to reach $27 billion by the year 2030, representing a 19 times increase in size and a compounded annual growth rate of over 33% from 2020 through 2030. Vuzix has made considerable inroads into the healthcare market over the last 18 months and has quickly grabbed the attention of resource analysts and has been recognized as one of the preeminent players in this sector. Vuzix smart glasses routinely get called out in their reports as the latest state-of-the-art technology available. Again, healthcare continues to be one of our fastest-growing market verticals and accounted for a significant portion of our total revenue in Q3, as our key healthcare solution providers and direct customers continue to scale. The upcoming customer slides show some of the progress that is being made with a few of these key accounts. Within healthcare, patient care continues Medical training and education and surgery account for nearly 70% of the global healthcare market by application for smart glasses and are expected to grow by over 1,800% by 2030. Patient care is one segment that Vuzix has gained early traction to support better outcomes for patients and their healthcare providers. The advantage for providers is it allows patients to stay at home while home care nurses take their smart glasses with them to provide a communication link to the hospital to support regular checkups and therapy. Medical training and education is another segment Vuzix is gaining commercial traction in. We have discussed OHANA I in the past, a global surgical training nonprofit organization that is working with prestigious teaching universities such as Johns Hopkins, Stanford, Oregon Health and Science, and private practices to connect surgeons around the globe and to provide remote surgical training and education through Vuzix smart classes. Ohana One's goal is to have their program grow to 1,000 plus mentors slash mentee pairs using smart glasses. They are having great success. Their partners and supported doctors love the solution, and they are off to a strong start on hitting this goal. Surgery is a third segment that Vuzix is gaining commercial traction in and is one segment that is emerging as one of the exciting market verticals for the company as a whole. Over the last 18 months, Vuzix has gone from zero to having its products used in well over 1,000 operating rooms worldwide to support surgeons across a variety of specialties to provide better patient outcomes inside the operating room while lowering the cost of care at the same time. Medacta, a Switzerland-based international supplier of innovative orthopedic products and accompanying surgical techniques with annual sales of $400 million, is a Vuzix smart glasses-based augmented reality surgical platform provider that continues to make waves in the surgical community with their next AR solution for knee, shoulder, and spine surgeries. Medacta continues to place recurring orders for the Vuzix blade as they gain traction within the surgical community. As they expand through Europe, most recently they announced the successful completion of their first shoulder surgeries in France. Pixi Medical, based in France, is another Vuzix smart glasses-based augmented reality surgical platform provider that is also gaining commercial traction. During the quarter, the first medical report on the preliminary results of their AR surgical platform was published and confirmed the accuracy and effectiveness of their KneePlus solution. Pixie Medical is now primarily focused on commercial traction and marketing efforts within the surgical community. Pixie has hundreds of Vuzic smart glasses in the field and has completed a significant number of surgeries guided by Vuzic smart glasses in the operating room. In fact, Pixie's first knee plus total knee replacement surgery in the U.S. was recently performed by Brigham and Women's Hospital in Boston. which is a significant milestone as the USA is the largest market for total knee replacement and represents 50% of the total market at over 800,000 total knee replacement surgeries a year. Over the next 12 months, we expect demand from our AR surgical partners to increase significantly as they continue to support their current markets and for new market growth. Rods and Combs, provider of a fully virtual surgical collaboration platform, has placed hundreds of Vuzix smart glasses into operating theaters with leading medical device companies and hospitals across the EMEA, and is now expanding their commercial efforts beyond the EMEA into the United States, Latin America, and Asia Pacific. A recent example of a use case was the live streaming of a robotic esophageal surgery for an advanced medical training course. I recommend you go to LinkedIn to view their most recent video, Welcome to the World of Rods and Cones, to get a first-hand feel for how seamless their solution is. Medtronic, the world's largest medical device company, is another global user of USIC smart glasses and has hundreds of M400s already deployed and being used in operating theaters around the world. With over 100,000 employees, many of them service And medical technicians, Medtronic represents a significant deployment opportunity for Vucex. Similar to the growing demand from our AR surgical partners, we expect demand from Medtronic and Rods and Cones and others in the sector of healthcare to increase significantly over the next 12 months. In summary, the healthcare industry is embracing AR smart glasses, and they are becoming part of the operational framework, not in the future, but now. Most major organizations in healthcare have mandates to grow their ARXR initiatives from the operating room to the ICU. And as such, AR is now a permanent part of this industry. With all this momentum, we are confident we will see accelerating opportunities into the foreseeable future. As slide 13 illustrates, we currently generate the bulk of our revenues from the sale of smart glasses hardware. But as we have said on previous calls, We are focused on the long-term objective of creating a base of business that will be driven by three major indicated segments of smart glasses hardware, smart glasses SaaS software, and OEM supply of products and technologies to the broader market. Muzix has a concerted effort to augment our business model beyond a focus primarily on smart glasses hardware by also moving upstream closer to the ultimate customer with the complete solutions. In particular, the ability to generate meaningful SaaS-based revenue centered around our smart glasses with our software partners and ourselves will help provide us with a not only substantially larger revenue base, but one that is recurring and with much higher margins. Vuzix continues 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 based on micro LED displays and remain on track to deliver our first DVT or design validation test units before the end of this year. We have also been working on enhancing our core M-Series solutions with new features and line extensions, and we expect to introduce three new monocular smart glasses products in 2022. Vuzix also continues to focus on building out our internal infrastructure with key hires in support of our customers in their coming deployments. and in product development as we prepare for our next phase of top line revenue expansion. Our organization has grown over the last five years from 50 to over 100 employees. I'm very proud of the level of teamwork and employee satisfaction that exists within our organization and for Vuzix to be named one of Newsweek's top 100 most loved workplaces for 2021. We are amongst some of the most recognized brands in the world. Vuzix continues to make investments in our people, and we have a great team in place that is focused on winning an enterprise with smart glasses-based solutions and winning with our core technologies to grow our OEM customer base and supply to the broader augmented reality, excuse me, metaverse markets. In addition to the technology already under the hood at Vuzix, Vuzix maintains an active list of potential companies in our space, from SaaS-based solutions to the core technology itself that could significantly enhance portions of our business and generate high-margin accretive SaaS-based revenue and bring Vuzix even closer to the customer. We currently have multiple active irons in the fire, and we're progressing well in our due diligence and selection process. Finally, this will be an ongoing activity for Vuzix going into the future. On the internal solutions development front, our Vuzix custom solutions group formerly Integrated Solutions Business Unit, ISBU, is focused on the acceleration of enterprise-centric solutions in both new and underserved market verticals. The group will support current and future partners by assisting in developing and implementing innovative SaaS-based solutions around specific use cases in various industries. The core team is streamlined and focused with a strong background in building such solutions. The group has already been engaging with a number of organizations to drive requirements around solving problems and implementation into complex enterprise environments using Vuzix existing smart glass hardware with the enhancement of custom software. Vuzix produces some of the leading smart glasses in the industry, and our current and coming deployments are proving it. We also believe our core technologies, which include optics, displays, and systems, represent the keys to the kingdom for future AR smart glasses, the metaverse, and related software solutions across the entire space, and put Vuzix as a frontrunner. Take our waveguide technology alone, for example. Recent transactions in the waveguide space from a few competing waveguide technology companies reflect valuations in the $500 million range for companies that only produce waveguides. We not only have high-volume waveguide production in hand at Vuzix, we are pushing the envelope with some of the thinnest waveguides made to date at less than 0.5 millimeters. We're quickly moving to support high refractive index designs with high-volume manufacturing. And we also are producing some of the highest efficiency solutions available with capabilities providing very unique features for micro-LED displays that are just now starting to enter the market. In this area alone, we feel that Vuzix has built significant value proposition for waveguide and display projector solutions that will lead in the augmented reality space. This is just one arrow in Vuzix technology quiver. We have hundreds of patents and patents pending, and we are working on other critical areas that will ultimately be needed for the broad AR markets to flourish. Our patent and patent pending portfolio increased by another 23 in this last quarter alone, one of our largest jumps And we have a lot more on our drawing boards. As this industry achieves even larger scale, the control and ownership of these key technologies that we believe are essential to deploying smart glasses, optics, and displays at scale will significantly enhance shareholder value. As I stated last quarter, 2021 is a transformational year for Vuzix. And frankly, it has been for the entire AR industry at large. We are making solid progress against our key operating goals for 2021, and we look forward to 2022 unfolding. I'd like to now pass the call over to Grant for his financial review. Grant.