Andrew Haag - Managing Director, IRTH Communications Paul Travers - Chief Executive Officer Grant Russell - Chief Financial Officer.

Jay Srivatsa - Chardan Matt Robison - Wunderlich Securities Aaron Martin - AIGH Investment Partners Alpash Patel - Private Investor.

Greetings and welcome to the Vuzix Second Quarter 2015 Financial Results 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 Andrew Haag, Managing Director and Partner at IRTH Communications. Mr. Haag, you may now begin..

Good morning everyone. I would like to welcome all of you to Vuzix's second quarter 2015 financial results conference call. With us today are Vuzix's CEO, Paul Travers and the Company's CFO, Grant Russell. Grant and Paul, I would like to congratulate you all in your new facility and I can’t wait to get out there and see it.

Before I turn the call over to Paul, I would like to remind you that this call and management's prepared remarks contained in it have forward-looking statements which are subject to risks and uncertainties and management may have made additional forward-looking statements during the question-and-answer session of this call.

Therefore, the Company claims the protection on the Safe Harbor for forward-looking statements that is contained in the Private Securities Litigation Reform Act of 1995.

Actual results could differ materially from those contemplated by the forward-looking statements as a result of certain factors 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, and 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 August 14, 2015. Vuzix assumes no obligations to update these projections and in the future as market conditions may change.

Last night, the Company filed its 10-Q with the SEC and afterwards issued a press release announcing its financial results. Participants, in this call who may not have already done so may wish to look at those documents as the Company provides a summary of these 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 today's press release which also is available at www.vuzix.com.

I would like to now turn the call over to Vuzix's CEO and Founder, Paul Travers, who will give an overview of the Company's business activities and developments during the second quarter of 2015. Paul will then turn the call over Grant Russell, Vuzix's CFO, who will provide an overview of the Company’s key financial performance and operating metrics.

We will then turn the call over to Q&A.

Paul?.

Thank you, Andrew. Hello everyone and thank you for all joining our call today to discuss Vuzix’s second quarter results. We achieved a lot important milestones over the second quarter and there is a fair amount of stuff in here. So, I will try to be prompt to get my way through here, but let me start with some highlights.

Vuzix has to continued to grow our relationships in collaborations with companies like Intel, SAP, Lenovo, as well as many others, some of which I will highlight a bit later in this update.

Our M100 Smart Glasses initiatives have continued to move forward from test and trial programs to early program rollouts with the pace of integration and account uptake continues to grow that has been a little slower than expected from our larger customers.

We have found a direct correlation between customer size and integration duration which clearly the larger customer is taking more time to get through the process. That said, we’ve seen the used cases development in eight major vertical market categories with some amazing results.

These include categories like quality assurance, training and onboarding, field service, basic two-lay video communications and on Think Mobile Skype video calls kind of thing. Warehousing and logistics with examples like DHL and Rico showing improvement, efficiency improvements of as much as 25% to 30%.

And in the manufacturing space with the most recent example in Airbus cabin refurbishment with Airbus showing that the time spent per aircraft on marking operations is divided by six and air rates being reduced to zero. That’s an amazing improvement in performance.

They found that even newcomers after a short training session can now be entrusted with the activities. So that’s a big plus for them. And then finally in telemedicines with companies like Oculus, operating in post-acute care facilities that are not only reducing AR visits by 50% but saving lives in the process.

Finally, remote maintenance with companies like HP and their visual remote guidance application that is showing significant reductions in time and cost for field service repairs in the industrial trials and moving to full rollouts in early fall.

We also initiated pre-sales of the iWear video headphones with a product soft launch at E3and while there we met with many developers regarding this new product. We also – we have also – all but completed the ramp up for manufacturing needs for the iWear and are right on track for delivery early this fall and time to meet holiday orders.

We broke ground on a new facility as Andrew had mentioned that will house not only our corporate offices and product development team, it will also host a modern clean room facility for advanced optics tooling and nano-replication equipment for manufacturing of our waveguides and display engines.

This facility is a volume capacity facility which is capable of upwards of 5 million waveguides annually for various products Vuzix plans and our partners that we’ll be launching in 2016. The facility will be operational before the end of the year.

To say the least, we are pleased with the announcements here at Vuzix, this coupled with our new relationships and position in the market make management confident that we are in a good place to drive shareholder value. I’ll now go into a little more detail on some of these items as well as address a few other points.

M100 frames, we are excited about the launch of the M100 Wearable Smartglasses frame and prescription lenses announced in June with Eyeglass World.

Eyeglass World and their parent National Vision, not only provide prescriptions to consumers, but they provide prescriptions to the entire – excuse me – to the enterprise markets across most industries providing wider and easier access to the prescription solution for our smart glasses will make it easier for our enterprise customers to deploy our M100 products in the workplace.

Eyeglass World expects to introduce the Vuzix’s M100 smart glasses to all of its stores within 12 month, again though, this is not about consumer access but rather easy access to the prescription solution for our enterprise customers.

Eyeglass World is also putting together an onsite program that will go to even the smallest facility and fill the required prescriptions onsite. Rochester Optical, a local firm here on Eyeglass World are now also providing M100 safety frames with prescription options that meet the ANSI standard Z87.

This safety standard is excellent news for the company’s ongoing global sales efforts. Our devices are used throughout industry in having glasses that not only allow for prescription lenses, but also carried a Z87 rating strengthens the case for using the M100 in challenging enterprise environments M100 hardware and software and applications.

The M100 has also been going through a final update before we move to next-generation. Previously communicated as the M100 XL. This update which includes, improved camera, better noise canceling mikes, improved wearability options and more, has been released out of engineering and would be rolled into production this fall.

We are also in the process of moving the OS to Jelly Bean as requested by most of our partners in the process of improving features like advanced security, streaming video and video compression et cetera. With this Jelly Bean upgrade, it will be available to all of our M100 customers.

Of course, if you want the advanced hardware upgrades that we’re putting in this, you’ll have to buy the newer product. We recently made the Vuzix M100 smart glasses manager app available on iTunes and Google Play also enabling full M100 compatibility with both android and IOS platforms.

We feel this is a major advancement as the smart glasses manager provides users with access to more content and functionality for their Vuzix glasses via their smartphone and is available to Vuzix smart glass users for free adding support for Apple IOS platform and facilitating access to the app by making it downloadable from both Apple iTunes and Google Play is making it much easier for our customers to get up and running with the M100.

Along with this change to the smart glasses manager, the Vuzix app store is now completely managed and accessed through a website portal and applications are installed to the M100 using over their updates. This enables easy app installs via a simple click of the button. Again, I’d just like reiterate on the enterprise sales cycle, less time here.

It’s a bigger the company, clearly the longer the sales cycle. We are seeing smaller companies moving more quickly from pilot to volume rollouts, but regardless of the pace, the nature of our sales are moving from early adopters to pilots and volume rollouts. It’s a nice change to see. The M3 series.

These last two years have taught Vuzix a lot about the needs of enterprise as it relates to smart glasses and how they need to perform within their environments.

Soon after received the capital from Intel, Vuzix began working on the next-generation of monocular smart glasses, the M3 series and that will be introduced to the world as soon as we complete the development. I’d like to give you an early look at what these are.

Every product goes through cycles and if you look at things like the Apple, iPhone, every year, year-and-a-half they are coming out with the next-generation, and that’s what this is about. We have two products in development.

We have an M300 which is a non-see through version of smart glasses and the M3000 that will sport Vuzix advanced waveguide optics. These new smart glasses will also have Intel Inside Silicon. They will be ruggedized to allow them to be used indoors or out that will be work horses that can put in three shifts a day, seven days a week.

And the interesting point when we were talking with some of our bigger tier-1 partners, they got to shift of people that come in, they put the glasses on and it rolls right into the next shift and then the next shift and then the next shift.

So, literally, these things have to be designed, so the batteries flip out, hot swapping, all those kinds of things, so that it can be used around the clock. They will also have four times the resolution and four times the speed of the M100, while we plan less power to operate.

Finally, they will also include critical changes that are proving to be a barrier to some rollouts, like next-generation 5-gig Wi-Fi radios, KitKat/Lollipop OS upgrade and see-through optics capabilities in some cases.

As we have been designing these new smart glasses with direct input and support from our tier-1 partners, some of them anyway, we are confident that the M3 series will solve any remaining issues to these some of the bigger tier-1 partners may have to being rolled out programs in a much bigger fashion.

The M100 actually is working in case this year, but, to go with a bigger way, where you might sell tens or hundreds of thousands of them, you need to have some of the service addressed and that’s happening. The iWear. In June, we also showcased our iWear video headphones at E3, the Electronics Entertainment Expo in Los Angeles.

For those of you that are not familiar with E3, it’s the largest video game electronics, entertainment expo in the world. The Vuzix headphones iWear video headphones is a high tier of video headphones. The visual experience that the iWear enables is based on industry standards and it’s one of t he most compatible in the market.

The iWear is virtual reality-enabled. So, it can track head orientation and movements enabling a simulation experience of the virtual world inside the game.

A key feature of the iWear is that it supports standard HDM eye inputs that are compatible with the latest 2D and 3D moulds, allowing the users connect their mobile phones, tablets, console systems, PCs or 3D Blu-ray players in order to enhance and better enjoy the content. These things, plug into almost anything.

They don’t need special content to work. If you’ve got a movie, your favorite movie in 3D, you pop it in your Blu-ray deck, you scroll it from Netflix off of your phone and it just works on the glasses without being reformatted. It is important to note that the content being output does not need that reformatting to work, it just works.

That said, the 3D support in enabling tracking for VR custom content really makes the iWear shine and in the end, it’s all about content. As such, Vuzix is helping to drive this standard of the open source virtual reality platform.

We also have more than 60 developers to-date without planning to develop custom titles for the iWear helping to assure the most amazing user experiences available from a platform-agnostic product. E3 proved to be a great place to begin introducing our iWear both from a marketing and developer relations perspective.

iWear interest is solid and as an indicator since the soft launch of E3 to Vuzix Facebook page likes have gone from approximately 1800 or so to over 13,000 and that’s just in a very short period of time.

We are seeing a growing order book and we are kicking off marketing and sales efforts and to overdrive in September as the product becomes available.

On the production side, we are completing our production ramp up with final tuning adjustments and first engining those completed by the end of this month and volume production is expected to start within several weeks thereafter with shipments of Vuzix’s customer beginning in early October.

Let me move on now to some partners and collaborations that Vuzix has primarily around our smart glasses. HP, moving on to some of the partnerships been developing, in June, we announced that our M100 smart glasses were being used in a new HP solution called Visual Remote guidance.

This solution was announced and showcased at the Interop IT Expo in Las Vegas and that the HP Discovery 2015 in Las Vegas.

HP has leveraged Vuzix’s technology to create visual remote guidance or VRG which enables remote handsfree tech support between the challenged customer with an expert who can now problem solve with peak efficiency by a detailed audio and video guidance.

You put the glasses on, you make a call over the internet, the person is from HP tech support center picks up the call and he is an expert on the particular problem, maybe it’s fixing a printer, and literally it’s a two-way communication as you can even write on the screen to help somebody solve a problem in the field.

The VRG reduces both time and cost that resolve customer and technical support issues. Think about normally what would happen here, you’d have a person on the phone.

They wouldn’t be able to solve it, you get on an airplane, the spend thousands of dollars on flights and maybe three or four days later, the facility is back up and operational whereas this way that can typically solve those problems within an hour or so.

Visual remote guidance can be used for live collaboration between customers and remote service engineers via HP’s My Room enabling real-time voice and video content sharing. We are very impressed by the HP solution and are happy they chose our M100 smart glasses to help deliver to their clients.

They will be introducing and rolling VRG out in mid-September. It is important to note that VRG is a service from HP and will not only be used to support HP products, it will be available as general service for any third-party that needs remote service for their organization.

If you are in the aircraft industry, if you make nuclear facilities whatever, you can use this service from HP as if it was an internal service for your company. Lenovo, as everybody knows, it’s a great partner for Vuzix. They have been shipping our M100 smart glasses now for just about six or seven months.

So in a comparison they are quite a bit behind Vuzix where we are at, but they are getting there. Their focus is been on enterprise customers. They are making progress, but as is the case for this market, it takes time.

At this point, we have not received follow-on orders for the M100 and we are currently in discussions with them about our next-generation smart glasses, both for enterprise and consumer. We are also discussing broadening the geographic regions of the relationship.

They are interested also in our iWear product today and then frankly, we are looking forward to the continuation of the relationship and how we can develop further alongside the largest computer manufacturer in the world.

SAP continues to support Vuzix’s M100 smart glasses and as you all know, they have two applications currently available with four companies doing working pilots around them and two that are going live in September finally. That said, their internal sales have yet to engage with these new offerings which has been frustrating for Vuzix. We love SAP.

I am not trying to throw them under the bus there, it’s just the nature of these big companies. As we get many SAP customers coming to us, looking to employ the M100 it’s frustrating that they are not going quicker, but it’s, I guess the nature of the beast.

We expect they will be efficient in announcing these two new production rollouts in mid-fall and they’ve started a more progressive sales activity including marketing collaterals and sales tools before the end of this year. So they are selling, they are being successful in places they have customers that really like the products.

They are just not being aggressive about it yet. Now a knock on where that’s coming. There is a lot of other activity clearly besides these two companies going on around Vuzix’s products and our smart glasses.

I said in the past, that M100 sales have been moving from early adopter and test programs to real rollouts, our partners like Oculus, Ubimax, Pristine, APX Labs and many others are all in those same kinds of transitions as value-added resellers, they are selling solutions to a large section of the users that for the most part fit in those eight verticals I described earlier.

These efforts are beginning to move initially ones and twos now to tens and twenties and we expect hundreds of units in some cases and then in a few in the thousands. So, it’s happening even with the smaller guys and actually especially with the smaller guys. Intel. Now onto a topic that I am sure many of you are interested in hearing more about.

As you all may well know, last January, we announced a $25 million investment into Vuzix from Intel Corporation at $5 share price. In conjunction with the investment, the two companies agreed to collaborate on developments in the wearable tech market.

Although there is no formal collaboration agreement as yet, Intel and Vuzix have been working together on a purchase order basis on projects for them and as you can tell by our new M3 smart glasses, that are in development it has been a two-way relationship. I truly wish I could say more about how Vuzix is working with Intel.

But I can’t other than to say that we are and it is a significant effort around our advanced optics. Intellectual property, I’d like to touch briefly on our IP position as wearable tech and more specifically the smart glasses market – excuse me – continues to develop, we expect more and more value placed on relevant IP.

Vuzix has been in this space for sometime and through that we have developed license and purchased a good amount of relevant IP in the form of patents and trade secrets from the gesture control augmented reality applications we acquired to in-house improvements on our proprietary waveguide technology, these are just a few elements of our long-term approach staying ahead of the curves in this dynamic sector.

In total, we hold 41 patents and we have 12 additional patents pending as well as numerous IP license and trade secrets in the video eyewear field. I’d like to offer here also there is a handful of other patents that are in process right now that are not in the pending status but they are being written.

From a team members’ perspective, we continue to build out our teams to support the opportunities we are seeing and to create future growth. We’ve added a number of – more specifically in our engineering side of the house, we have optics PhDs that we brought onboard and alike strengthening the engineering team.

We are also bringing on accounting and sales and increasing our marketing groups and I wanted to introduce to you folks, a couple of new adds to the company, Brad Craig and Lance Anderson as new lead members of the sales and marketing teams of Vuzix. Let me start with Brad, as I think a lot of people are already a bit familiar with Lance.

Brad joined the team earlier, excuse me, earlier this week. We announced that we named Brad Craig to head up our developer relations activities.

The position will directly support the commercial launch of Vuzix iWear Virtual Reality compatible iWear headphones which are on schedule for an early fall release and we expect Brad to be heavily involved in Vuzix’s augmented reality fashion glasses, smart glasses, augmented reality is going to provide some of the most amazing gaming experiences as it allows the virtual and the real world to collide, making it much more practical than just putting your head in a device that you have to sit in your living room with because you can’t interact with the real world.

Brad has over 25 years of hands-on experience in developing and enabling the supporting content ecosystems and his solid contacts within the gaming space and throughout the tech industry. He has been a key contributor of companies such as Compaq, and Advanced Micro Devices, ATI, Future Publishing, Ingram Micro, Electronic Arts, to name just a few.

He has industry contacts and enjoys great respect within the developer community. From a personal perspective, it’s amazing to walk around at a gaming tradeshow with Brad. Almost everyone knows the guy and he can almost – open almost any door.

Moving onto Lance, many of you probably already know Lance, but for those that don’t, as the Vice President of Sales for Vuzix, Lance is responsible for enterprise sales marketing and business development, focused on expanding the global enterprise market for the Vuzix line of AR smart glasses, Lance has spent over 15 years in the supply chain and logistics space.

With extensive sales and management experience in complex technical software environments for Fortune-500 clients worldwide.

You know that the sales sort of path that Vuzix is on for our smart glasses has changed, when we first came out with the smart glasses, it was more of an interesting Gizmo of its part of this new wearable world space and that we are – all of these internet of things and wearable tech conferences that Vuzix visited.

Many companies were trying to figure out whether or not it made sense for them to even use these kinds of devices and our previous people that we had involved in our sales effort were really good at doing those kinds of things. But the sales plan and approach is different today.

Companies are deploying these things in real situations and Lance is good at addressing those kinds of markets. He has been involved in the logistics space for quite sometime.

He knows what it is like and what he need to do to solve the problems associated with the real rollouts and the sales focus at Vuzix for our smart glasses is changing from that earlier isn’t it interesting to go see these new kinds of gizmos to actually putting placements in real businesses.

Lance focus in this first quarter of Vuzix putting in place the mechanics and strategy and personnel required to drive forward Vuzix proactive enterprise sales and marketing strategy.

This sales strategy includes leveraging of Vuzix’s data and analytics to drive a targeted marketing campaign capitalizing and – excuse me – capitalizing on and growing the funnel of pilot production programs already in process at Vuzix. You can see this is in about or let’s go to this interesting put it on trade show.

This is about focus on the customer and programs that we are – the Vuzix partner program has been launched to connect new end-user interest with the mature applications of our best partners. If you go to our website today, you’ll see this new selection that we’ve added called solutions.

It’s just getting – there is a bunch of stuff up there with more coming, but those solutions are real world solutions and in many cases, they are sponsored by or coming from our value-added reseller partners.

So, as we have new customers that come to Vuzix that want to know, well, jeez I want to put this in my warehouse, that solution section help connects those new customers to the guys who can help them do the installations and make that happen. It has a goal of significantly reducing the sales cycle time by doing that.

And finally by establishing a used case vertical sales focus, the team is leveraging real world key performance indicators such as labor savings, accuracy gains and other quantifiable results to engage mainstream enterprise organizations to follow their leading edge peers or competitors into Vuzix’s mark asset base workflows.

It’s interesting, we don’t talk about it. It’s is an interesting gizmo. We now talk about, these are the steps you need to do to implement and put them in your processes to experience and gain some of the value assets you can get from the glasses.

So it’s a nice change for Vuzix frankly and it’s a sign of maturity for our smart glasses in these vertical markets. The new facility. Now, as many of you have been following our Facebook page, I bet you know that we’ve recently broke ground on a new facility here in Rochester.

As I mentioned earlier, this will house our corporate offices, R&D, as well as production for all of the waveguides to be used in the various products that are to be based on this technology.

We do not intend to enable third-parties with the ability to produce these optics as they are key to producing fashion smart glasses and the next-generation products from Vuzix that cause the gate and ultimately will enable the massive consumer market opportunity.

This stuff is unique and it’s not like Vuzix is thinking, well, let’s go to China to get the cheapest player here. This is going to be built, designed in the way it’s going to be produced at our facility here in Rochester, New York.

So at the new facility, our R&D team will be able to work side-by-side with manufacturing to develop the waveguides that will enable the future smart glasses. Interesting to know, we have some amazing waveguides now.

We have display engines that are being put together for them right now that are based upon some of the smallest display engines ever built. One of the display systems that we are using is based on a TI solution and we’ve been told that it is the smallest display engine they’ve seen any other company build.

You couple that with the optics that we are producing now at Vuzix’s facilities, and that’s where the M3000 is coming from and our binocular glasses that we’ve talked about, we will be, they are getting put together for this fall and they will be showcased at the Consumer Electronics Show coming up and it’s coming out of this next-generation facility that we are building.

When completed by the end of the year, the new facility will be approximately five times the size of our existing facility. The move will enable us to operate more efficiently and add new equipment to improve the accuracy in the waveguide manufacturing.

This will also speed up new development processes to support the substantial interest we are seeing from existing relationships and potential new partners. Finally, it is interesting to note that in June, when the Russell indices were reconstituted, our common shares were included in the Russell Micropath Growth Index.

It’s kind of was a growth, thanks for me, I like to think that Vuzix is part of the pulse of the financial system and we are part of the measuring tool. It was kind of nice to see. We hope to see that this addition continues to add to our visibility with institutional and as well as individual investors.

I hope I’ve been able to give you a sense of the momentum Vuzix has been building, we believe based on our advancements and standing in the market, that the company is now significantly more attractive on many fronts from the investment side and as potential business development partners than it was even just a few months ago.

I’d like to conclude by again thanking you all for your support. Now I would like to turn the call over to our CFO, Grant Russell to review our financial results.

Grant?.

Thanks, Paul. Good morning everybody. Before diving into the section of the call, I would like to point out that I will be rounding many of the discussed numbers to thousands and occasionally to millions even though we do currently report in dollars.

Okay, total revenues for the second quarter ending June 30, 2015 were $420,000, down from $723,000 in the same period in 2014. The decline in revenue was primarily due to the planned phase out of the company’s Wrap products and the absence to revenues from Engineering Services.

The Wrap video iWear products have been sold for video viewing, augmented reality, and virtual reality applications. All of these Wrap 1200 product models were effectively phased out early this year and we had very limited quantity left for sale in our second quarter as compared to the 2014 period.

As a result, sales of video iWear AR and VR products decreased by over 74% compared to the comparable period in 2014 and represented just 16% of our total revenues for the second quarter. As the new iWear video headphones are not yet in production, we did not have replacement models available for the discontinued Wraps.

Monocular smart glasses represented 84% of total product revenues for Q2, 2015 as compared to 60% in the 2014 period.

Sales of the M100 smart glasses were flat for the quarter as compared to the prior year showed some important trends in terms of a seen more repeat orders from existing customers rather than primarily first-time single-unit purchasers.

We recorded no sales from engineering services for the three months ended June 30, 2015 as compared to $113, 000 or 16% of total sales in the same period in 2014.

We had no open orders for any further military-related engineering development services and are focusing our own – focusing on our own products and technology development activities as well as non-military customers. Our gross margin percentage for the second quarter of 2015 decreased to just 8% as compared to 36% for the second quarter of 2014.

The large decrease was driven largely by the make up of several cost components within our cost of goods sold and are effectively fixed at our current operating levels. As a result, our overall gross margin percentages decreased significantly faster than the percentage drop in our revenues.

These fixed cost included $72,000 for the amortization of previously capitalized software development costs and $44,000 in minimum software royalties related to a new software bundle on the M100 smart glasses versus nil for both these amounts in the comparable 2014 period.

Additionally, there was a $32,000 increase in manufacturing overheads, again being negatively leveraged by our reduced revenue base for the quarter as compared to 2014.

Jumping into a non-GAAP comparative analysis, gross margins after excluding fixed amortization cost and minimum royalties and cost of goods for the Q2, 2015 period, but including overheads, actually increased by 3.6% as a percentage of product sales over the 2014 period.

Clearly, we need a large increase in our sales revenues to achieve net gross margin levels, closer to the 40% goal we are striving to achieve after all fixed cost of good sold related costs. Overall, research and development cost for the 2015 period were up by $437,000 as compared to 2014.

The change reflects our increased development activities on a new products, particularly the iWear video headphones. Additionally, the R&D department salary and staff compensation costs increased as a result of new hires.

It should be noted that the overall increase in R&D activities for 2015 versus 2014 was actually not as great as it appears on the first look. This was due to the fact that in the prior year’s 2014 period, we capitalized M100 software cost totaling $202,000. And all the software development cost were expensed in the 2015 period.

General and administrative expense for the three months ended June 30, 2015, as compared to 2014 increased by $491,000, the largest of these comparable period increase was a result of higher investor relations activities compared to the prior year totaling $325,000, of which $249,000 was for non-cash expenses related to stock and warrants awarded to consultants; a $45,000 increase in professional and consulting fees; and a $143,000 increase in salary and compensation costs 56% of which was the result of compensation paid to our external Board of Directors who are starting in 2015 are now finally receiving cash director fees and share awards and finally, we had a $10,000 increase in stock exchange listing fees as a result of moving to a more senior exchange namely NASDAQ from the OTC.

Other income and expense for the 2015 period was a net other expense of $258,000 as compared to other income of $1,164,000 in the 2014 period. The change was primarily attributable to a $1,270,000 negative change in the derivative liabilities, mark-to-market revaluations for the 2015 versus 2014 period, when we reported a gain of $1,249,000.

These quarterly mark-to-market valuations create losses when the company's stock price rises and profits when the stock price decreases between the end-of-quarter measurement dates. Fortunately, as I will discuss later, their impact should be relatively immaterial moving forward.

Overall, the company reported a net loss of $2,402,000 for the three months ended June 30, 2015, versus net income of $239,000 for the same period in 2014 when we reported about $1,249 million gain in our mark-to-market derivative liability.

Moving to our balance sheet, as at June 30, we had cash and short-term marketable securities of just over $20 million. We had a positive working capital position of $21 million versus a negative working capital position of $1.4 million as of December 31, 2014.

During the first half of 2015, the company has paid down and brought current its accounts payable with its vendors and is now investing in inventory and components for the launch of its iWear Video Headphones this fall.

I would just like to quickly mention that our inventory levels which include inventory component deposits with vendors will be higher at the end of our third quarter due to the new products releases and related inventory build outs.

The close of the $25 million Series A preferred share financing with Intel, not only greatly improved the company faster vision but it also positively impacted our shareholder – stockholders equity and derivative liabilities with only 45,100 warrants outstanding as of June 30 that contained full ratchet pricing and the dilution adjustment, the derivative liability now stands at only 169,000 as compared to over 13 million at the end of December.

The impact moving forward to these mark-to-market adjustments will be immaterial now compared to the past. Staffing-wise, new personnel resources will be added this fall as Paul discussed as we move into our new facility, which we are leasing where we haven’t purchased.

So I wanted everybody know we are breaking ground that’s with an existing new building that just had dirt for the – on the floor and it’s now got started.

And while – and finally, while we are not be able to achieve the overall 2015 revenue growth, we have anticipated earlier in the year, we are still expecting to see a strong – a return to strong revenue growth in the fall of this year.

We intend to remain fiscally prudent with respect to our capital position and we’ll be using our stronger balance sheet to advance the Vuzix strategy going forward with exciting new products and business relationships. With that, I’d like to turn the call back over to Paul..

Thank you, Grant. Nice job. We are well positioned – I’d like to offer some closing thoughts here. We are well positioned in a space that is in its early stages and many see as multi-billion dollar market.

We see this not only in various industry reports and analyst projections, but also in the corporate transactions that are occurring in the form of investments and bios. I am sure you’ve all seen them. We are highly confident that Vuzix is well positioned here.

We are well capitalized for success and we look forward to updating you on our continued progress in our next call. We’d like to now open the call for questions..

[Operator Instructions] Our first question is from the line of Jay Srivatsa with Chardan. Please go ahead with your question..

Thanks for taking my question. Paul, in Q2, it looks like the M100 sales was roughly flat.

First is, the question was, was there any delays in the orders? And two, how do you see the second half outlook for the M100?.

Good question, Jay and yes, it was relatively flat. However, if you look at the characterization of the sales, it was for the most part, made up of repeat orders and programs that are going live. That said, the larger accounts that we are working with are just taking longer to get this done than we had anticipated.

I think in some cases, then even partners we are working with had anticipated. We had a pretty – what I thought was, pretty good visibility into the second quarter, but it’s just a length of time that has taken some of these guys to come on board. That said, we anticipate still the M100 to do reasonably well through the fall of this year.

As Grant had mentioned, revenues for the second half are still going to be strong, they won’t be as strong as we originally think that they are going to be strong..

Okay.

And then on the M3, you are working with Intel on, it looks like there has been lot of progress made, what’s your sense in terms of timeline for a commercial launch and when does the M3 really start to become material for you?.

It will be in the first half of next year..

Okay. And then, go ahead..

Just to clarify, the M3 is the Vuzix’s product and we have an Intel CPU inside. It’s not a direct product collaboration officially. I just want to….

Right, let me also offer that, it’s a series, there is actually two products in the mix. There is a non-see-through product which is much like the M100 today and there is a waveguide based version of it and clearly the plans here are going to be the waveguide based is going to be more expensive..

Right, right.

And then in terms of your progress towards additional capacity, what are some of the unit increases you are positioning yourselves to and do you feel that there is enough orders and demands in the books to justify that?.

Okay, so, I am not entirely sure the question here, you are talking about current product or are you talking about where we are heading with the waveguide side of the business, Jay?.

The question has, it’s on aggregate, as you look at increasing your capacity, the question is, do you feel like you have enough demand in the books or if you have enough visibility as you expand the business?.

The expansion of the manufacturing of our current products is, I believe more than justified. We’ll have no problems selling the products that we are building today and the inventories that we are building out for those.

The expansion of the waveguide, the facilities that we are building here in Rochester are about next-generation products and Jay, we as does much of the industry, we anticipate significant demand for these products especially once they start to have that look and feel of an style sunglass or fashion glasses.

So part of this expansion is based upon the future needs of a industry that’s coming where we believe this is going to be in a big way based upon not just Vuzix’s input, this is from our – some of our partners and third-parties and the other portion versus are our current ongoing business..

Okay. There has been some rumors about Google coming back with its next version of Google Glass 2.

What are your thoughts on that? And how do you see that playing out and if – do you expect any impact to your business relative to that – help us understand how you see the competitive space now?.

So, we’ve heard also rumors about glass coming with an next-generation of a Glass 2. The rumors that we tend to be hearing is a cautious move. We think it’s a great move on their part, we love to see them in the business because it just raises, yet again everybody’s interest in the category.

We think Vuzix, number one, we started the industrial space, we are ahead of anybody in this space today and understanding what the customers’ needs. Not only that, we have a footprint in the industrial space that is stable and growing today. Our customers like the fact that we are there for them.

No company likes to invest several million dollars or millions even in a test program and these early trials and writing all this software, only to find out that it may or may not be there as a solution in the end. And, Vuzix is committed to this space and many of our customers see that and because of that, they like working with us.

We have strong partners at the same time and so, some of these bigger tier ones, I think feel pretty comfortable with Vuzix.

So, it does have some impact today, I will say because, some of our partners are coming to us and discussing the fact that, that are potentially coming with some wagon or such not, but this will – today it is not yet impacted Vuzix and where we are going except in a positive fashion, the rumors..

Okay.

Last questions for Grant, on the margin side, do you expect margins to get back to the previous levels given some of the manufacturing overheads and some of the software stuff that hit the margin line in Q2?.

That will improve. Clearly, we’ve got the ongoing software amortization. I mean, that being spread over three years. The minimum royalties, to be honest, it looks like we stopped the inclusion of that product in the next year. So, I mean, that would pull that up, but a lot of it’s volume-related.

I don’t think we are going to get to the – a net 40% overall gross margin yet for – at least till after the year from now or so. But it will improve, I mean, that be single-digits is something we never want to see again..

I would add to that, it’s only get better if the volumes grows, Jay and we anticipate the volume to grow significantly over the next year and a half..

Thank you. Good luck..

Thank you, Jay..

The next question is from the line of Matt Robison with Wunderlich Securities. Please go ahead with your question..

Hey, thanks for taking the question.

I was hoping you could comment on the mix of the inventory increase and what we should expect for the current quarter? And how that relates to what you are talking about for the fall?.

Okay, at the end of June, on our balance sheet, we had just a little under $1.1 million of inventory and then we had another $850,000 in related component deposits, prepayments with our – some of our vendors. I would – that could potentially increase by as much a further $1 million.

So we’d be getting close to $3 million with the – at the end of September. The iWear is just going to be getting ready to shipped. We made commitments for the components and will be the M100 B that will be coming under production. So, some of these vendors, particularly Asian ones, they require deposits of up to 50% down.

So – and their lead times can be two to four months. So, we’ve had to make these deposits. So that will be about the extent of it then after that, it will decrease and then we’ll have a more steady supply chain..

Okay, so, this – in terms of mix, that’s pretty much, it’s largely M100 as opposed to iWear at this point?.

At the end of September it’s probably going to be – it will be 60% iWear, 40% M100.

Of that, that’s made up $3 million bucks at this time?.

Okay, understood.

So you are basically building inventory now to this demand you expect to see in the fall? And how this relates to – how does it relate to backlog?.

First part of your question, some of the – because of the lead times, and because some of the Asian manufacturers that we have to prepay their orders. So if they need to order something, all they way down the supply chain, if you want to order something that takes three months to get.

They effectively want 50% down with order and then the balance of 50%. So we are – and some of those monies that gone out there literally deposits and the components are still in the process of either flowing in or have flowed into our – some of our contract manufacturers.

So, it’s not all parts that are just currently, sort of sitting around and as far as the backlog, I mean, we currently tend to build to our internal forecast and because of the nature of products, particularly consumer products, you can have necessarily an outstanding order on a brand new product, get them like four or five months ahead of the actual order dates.

So we are building that based on forecast, which, as a nutshell is effectively on spec. We are confident we are going to be on a move with them but we do not have matching orders for all that product at this stage..

Are you giving backlog for the iWear, the M100?.

It’s growing, yes..

Okay, thanks, Paul. That’s it for me..

Our next question is from the line of Aaron Martin with AIGH. Please go ahead with your question..

Hi, good morning, guys. I appreciate a lot of the detail you put in the prepared remarks.

I want to dig in a little more on the M100 pipeline, you specifically said, you had two pilots with SAP that are converting and then you talked about other – I know, the larger guys are taking longer, but on the smaller guys that you are getting conversions, I just want to clarify that in addition to the two you had with SAP, you have in conversions on the other smaller guys with direct sales..

That’s correct, Aaron. But, you have guys like XOI that have actually three or four programs that are with larger targeted on their side, that are going live. And companies like Oculus in their upright are buying, in modest, but growing volumes and we know the customer base that you are selling to.

So, we have pretty good insight as to where they are going..

How do you find a larger or some smaller customer action when you think about these things?.

Well, I mean, if it’s a value-added reseller, even though, they might be selling to a tier-1 in some cases. We, in our mind, we put them in the smaller category, yet, if we are selling direct to a larger player, then it’s a – to us, we view them a s tier in many cases it’s tier-1..

But in terms of what’s – number of units, when you are classifying small or larger customers, what those – small opportunities versus the large opportunity?.

I would say, the smaller programs are between 500 and 1000 and guys that are going to be – the bigger guys are 1000 to – in some cases it could be 20,000 or 30,000 pieces..

Okay, so almost smaller ones that you are saying are getting reorders, so those reorders are on the order of tens of them that kind of eventually over time become 500 to 1000 to that one customer?.

In some cases, they’ve turned into between 50 and 100 to the one customer 100..

Yes, some of those indicators, 500 to 1000 is coming shortly. So you we have them six month annual 12 month forecast. Some of them are turning up those kind of numbers. But, great if we – to get the business..

Now I guess, to move on to the internal relationship which you did give us a lot of details on. You said now you are working with the amount of purchase order basis.

Did you have any revenues from them in Q2 on a purchase order basis?.

Yes, we do..

And how should we think about that in terms of going forward? What the – you are not considering that engineering services to what you are doing with them, you are classifying that as product revenues?.

We are basically delivering products to them, yes..

Okay..

And now it’s, I mean, hope Paul could comment, I mean there is a good size program going on that started this summer which is pretty substantial, I mean, the scale of all this will clearly get disclosed under 10-K at the end of the year when we are required to report revenues with related parties, but at this stage, I mean, Paul, do you have anything more to say?.

It’s reasonably healthy six-figure kinds of numbers, I guess to quantify it..

So, I mean, obviously, should we look at that as an indication of us getting closer to the launch of a commercial product if your work with them is getting, now that purchase orders are going up?.

I really can’t – I really can’t comment on that, Aaron, sorry..

Okay.

In terms of the technology side on the waveguide, what are the grading factors, in terms of getting the commercial product out with Intel? Is it more waveguide upgrades, is it integration work with Intel Technology? What is the grading factor?.

Those are all really good questions, Aaron, but….

Maybe – let’s just take on the waveguide.

Are there – in terms of – let’s set away from Intel, in terms of obviously you are going to - increasing it but in terms of the current waveguide technology that will be in your facility, so it’s operational another year, is the technology today good enough to get up to where we need to be for even the consumer device?.

Here is an example, the M3000 is using the waveguides and that we’ll be shipping with them. The waveguides are operational today, Aaron, we have some of the smallest display engines in the world ever built to drive them and they are being designed into devices at Vuzix as we speak..

Okay, I would go back..

We can always introduce today, although our volume manufacturing capabilities are – they need this new facility completed to really get to that point, in the high volume is coming..

Okay, but in terms of – if there is an issue of scaling to a larger scale or it’s an issue of modifying the technology?.

No, the technology works..

Okay, going back to the pipeline, some of your smaller trials, are you effectively giving away the M100 to some of the smaller trials – we are not showing that or showing at the revenue or all the trials, be trials?.

It’s very rare that we give one away every now and then happens, but, I will say, sometimes we offer a discount, kind of the same to get people in the game, but, it’s rare to give them away..

Okay, thank you very much. Congratulations on the progress..

Yes, thank you Aaron..

Our next question is from the line of [Indiscernible] Please go ahead with your question..

Hello Paul. Hello, Grant. I’d like to congratulate you guys for making much progress with the past six months. I have three questions. The first question is regarding the M300 or M100 line.

I was wondering, if some of the customers are holding out or M300s instead of massively adopting M100?.

So, some of the bigger customers that we are dealing with have facilities that requires certain radio stands to operate with et cetera. They also have facilities that were run on the 2.4 bands on the M100 stay and those biggest players like, I would really like to rollout with this single solution that solves the problem across all my facilities.

So we do get pushback on the customers, but it’s primarily related to the ability of the M100 currently not being able to match some of the facilities that they have. I think, you’ll get some pushback in that..

Okay, thanks. And the second question is regarding the M3000.

Is there like AR2000, the monocular device or is it the larger? What kind of price points are you looking at?.

\Those were….

I am sorry..

Yes, I was wondering what kind of price points are you looking at the M3 series - M3000 and M300?.

So, we haven’t gone public with pricing just on it and honestly, there is a lot of strategy that’s going into that aspect of it. I will say that the 3000 is clearly going to be more expensive than the 300 for various reasons. I mean, it got capabilities that you can do that you can’t with a non-see through system, one.

Number two, they are very similar products from the perspective of – it got a 2.3 or 2.8 gigahertz processors in them.

They have the same processor engines that are running the same OS, et cetera, but one of them clearly is designed with our waveguide at the same time the results – and they are smart, unlike the M3000, it was not a smart, but it should plug it into something else, I am sorry, the M2000, thank you.

The M2000 required, some brain at some place, like a computer or something to plug into it. These guys are small little gizmos they clip on, they are ruggedized and they are full up smart.

Did I answer everything there? Ph, by the way, just a point to make here, the reason why we are going with the 3 series instead of the 2 series like an M200 which you would think would be the logical next step is because of the confusion we think that that with our modeling numbers, that the M2000 would create in.

So we just made the jump and said look, this is the M3 series of products. M300 and M3000. The M means monocular and that 1000 versus the 100 is non-see through versus waveguide base..

Thank you..

Our next question is from the line of Alpash Patel, a Private Investor. Please go ahead with your question..

Yes, hi, thank you for taking my call, Paul. I wanted to ask you. I saw an interview back in June that you did with ROC growth, and you showed a video of the waveguide’s potential.

How realistic is it or when do you think realistically that all that will be in real life?.

In the enterprise space, the M3000 will be able to do a fair amount of the things that you see in that video. Not everything, I would suggest, but a fair amount.

We have things demo systems here in Rochester where you can literally reach out and touch a three-dimensional object that you are looking at through the waveguide, spin it, grab it, move it around and play with it, but getting all of that in a consumer product, the binocular version we come out with next year will do a lot of it not everything though.

There is some of the sensor technology, positioning technology that you need things like Intel’s Real Sense technology built into the glasses to do some of the things that are in there and some of the point cloud kinds of stuff that people are working on. 2016, you’ll see some amazing things, and in 2017 it will even get more amazing..

Okay.

And as far as the waveguides go, are you mainly focusing those for the enterprise or the consumers?.

It’s kind of a mix bag. They are starting on the enterprise side for Vuzix’s but some of our partners are focused on consumer. We will also have our own consumer offerings in the 2016 timeframe now..

Okay.

And how are the pre-orders coming for the iWear 720?.

It’s growing. We did the soft launch at E3. There is an unending amount of interest in them. We don’t have the units yet that we can be out on the road with.

And I believe that once that’s there in September, we have a – for significant marketing efforts that we are kicking in, and the demands that – it’s already got pretty good demand, but what we’ll see to sell the products that we are building through this, it won’t be a problem at all for us..

But do you see….

We are not really publishing right now specifics in this regard from competitive perspectives..

But do you see that product competing directly with Oculus and the numbers that Oculus has projected to sell, do you think Vuzix will be very close to that?.

I don’t see this as actually a direct competitive offering to the Oculus product. The Oculus product, you can – it’s a great product, but you use it in your house, you plug it into an IBM PC that’s very expensive, it’s reformatted content, so everything that gets built for that content perspective has to be customized.

And the iWear 720 is not the case. It’s – you can plug and play with almost anything. So it’s really – it’s also not quite the virtual reality experience. Although it’s amazing gaming experience. There are times where it will take your stomach out even if you are like flying around and that sort of stuff doing so.

So it’s a great products, but it’s really different classification of a product. The demand, I don’t know yet, what to expect from this in the next-generation of it..

Okay, and as far as iWear 720 goes, you are launching globally and do you think China lifting the ban on the gaming consoles, will that help?.

I don’t have a good feel for the impact that might have with this device in China. We are launching globally though. It’s interesting to know that they have done that and I would suggest that on Playstation 3 and the Playstations and it’s a great product to use.

But, I am not sure that I have enough insight to know whether or not the lifting on that ban is going to make a significant impact on our sales in China..

Okay and some of the PRs that you said will be coming in the summer and the fall.

Do you still expect more PRs coming for Vuzix?.

Yes..

Okay and do you know when roughly?.

Sorry, they are going to be scattered from now until the December timeframe, right up tot the end of the year that will be. There is all kinds of stuff coming. Vuzix has a lot of hands in the fire..

And each time there is an order or something Vuzix has to report that, right?.

If it’s a material number/contract, then we would typically report that and some of the customers clearly want confidentiality until he has to market, but we would – if there is something material, we would do our best to be – disclose it..

Thank you. Our next question is coming from the line of [Indiscernible] with Oppenheimer. Please go ahead with your question..

Hi, congratulations. It looks like you’ve made a lot of progress..

Thank you..

Yes, you are welcome. Let’s see. I think, last conference call, you would say that there were about 40 large, very large companies who had tested the glasses last year.

So, I wanted to ask, have roughly what percentage of them have given you reorders and do you expect to see more reorders over the next six months or so?.

Yes, I mean, a significant number of them are giving us reorders now..

I mean, just a ballpark, here you are talking about like 10 in the area of 10, in the area of 20, 30, what kind of numbers you are talking about?.

Hold on, just a minute. I don’t have the whole sales database in front of me. I mean, the names of the companies that I mentioned in the conference call, every single one of those guys at this point are in the reorder conditions with Vuzix.

The companies – I told this is in the APX Labs, in the Ubimax, they are more aggressive in their reorders with Vuzix’s, because in most cases they are selling to a lot of other companies around our solutions. So the value-added reseller partners.

Some of the bigger companies, like the SAPs of the world, they are just really getting started, they are reordering too though. Some of the trials you guys have heard about from the larger shipping companies and alikes are in reorders with Vuzix’s. It’s a reasonable number of trial programs are actually following on with more and more.

They are not doing as fast as Vuzix would like, especially the bigger guys, that’s what we mentioned. But, it’s the bulk of them..

Thank you..

The next question comes from the line of Jay Srivatsa with Chardan. Please go ahead with your question..

Yes, thanks for taking my follow-up. Just a couple of questions related to operating expenses. It looks like there was a pretty decent jump in the quarter.

What do you see your further expense structure to look like going forward, Grant?.

Well, maybe excluding, what we continue to have them higher. I mean, it will – this quarter, it shouldn’t be anything too dramatic. I mean, we have hired some additional R&D people and we are going through all of the final tune ups and testing on the iWear.

So, you’ll see a further increase in R&D, but, in G&A in the fall, let me add some financial reporting people. I would think you are going to see increases for the balance of the year in the 20% to 25% range over the – what we’ve incurred in the last – just in the last fiscal quarter..

What is that due to your breakeven revenue run rate? What type of revenue run rate do you need to get to?.

Well, it’s certainly more than the $10 million to $12 million. We had a year from now. We have modestly calculated, but I mean, I would realistically or probably looking at revenues north of $15 million..

Okay, and then, given the burn, are you comfortable with your cash position that you have currently to achieve breakeven or is that something that needs to be looked at some point?.

Definitely, I mean, with over $20 million bucks in cash and marketable securities, I mean, even if we had a weak quarter revenue-wise, like we just did, I mean, we got well over three years of runway left and as revenues will increase and we are very positive they will that that runway will get extended even further..

Okay, and last question, what was the share count in the quarter?.

There is - just a little over 16 million shares outstanding as of today..

Thank you. Good luck..

Thanks..

Thank you. The next question is from the line of Alpash Patel. Private Investor. Please go ahead with your question..

Hey Paul, I am back again. I wanted to ask you about the Intel. I know they bought in at $5 a share.

So, Grant, do you guys – did you guys feel that would have been – get support for the share price?.

Yes, we would have thought that might have being some level of floor, but clearly, there is some holes in the floor. So, it’s – I mean, they made – I think a long-term strategic investment. So, I mean, and at the time, it puts a large position. We typically, these investments like that go in at a premium..

I would offer that I think Intel got a hell of a deal. I realize where the stock is trading at now, but if they try to buy that much stock today, our stock would not trade at this price. I also believe Vuzix, if you look at the marketplace, this is personal, but we are undervalued.

It happens to be that we are a public company and the winds blow the way they do as a public company. I don’t believe our current stock price has much to do with what the real value of Vuzix is..

You are exactly right. A few are coming with an IPO right now, I believe you’d be valued and value gets right now, at least $1 billion..

I mean, look at the comps, right. I mean..

Okay, and finally, has there anyone else other than Intel approached Vuzix recently for a potential buyout?.

I got a few closing remarks. We’ll comment to that last question..

Thank you guys..

Thank you. I will now turn the floor back to Mr. Andrew Haag for closing remarks..

Hi, everybody, sorry about that. I’d like to thank all Vuzix’s shareholders for their participation on today’s call and their support for the company. And this concludes the Vuzix’s 2015 second quarter conference call and Paul, and Grant, I just want to congratulate you and the team there on all the accomplishments. Thanks everyone..

Thanks everybody..

Thank you. You may now disconnect your lines at this time. Thank you for your participation..