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

Rob Stone - Cowen & Company Kris Tuttle - SoundView Tech Fund Amit Dayal - Rodman & Renshaw Aaron Martin - AIGH Investment Partners Matt Margolis - Wall Street Forensics John Heerdink - Vista Partners.

Greetings and welcome to the Vuzix Second Quarter 2016 Financial Results conference. 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. I will now turn the call over to Mr. Andrew Haag, Managing Partner at IRTH Communications. Mr. Haag, you may begin..

Thank you, Operator. Good morning everyone. I would like to welcome all of you to Vuzix’s second quarter 2016 financial results conference call. With us today are Vuzix’s CEO, Paul Travers and the company’s 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 contained in the Private Securities Litigation Reform Act of 1995.

Actual results may differ materially from these contemplated by any forward-looking statements as a result of certain factors not limited to general economic and business conditions, competitive factors, change in the business strategy or development plans, the ability to attract and retain qualified personnel, as well as changes in the legal and regulatory requirements.

In addition, any projection as to the company’s future performance represents management’s estimates as of today, August 15, 2016. Vuzix assumes no obligation to update these projections in the future as market conditions may change.

This morning, the company filed its quarterly results on Form 10-Q with the SEC and issued a press release announcing these financial results. Participants in this call who may not have already done so may wish to look at these documents as the company will provide a summary of the results 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 at the quarterly filings at SEC.gov, which is also available at www.vuzix.com.

I would like to now turn the call over to Paul Travers, who will give a brief overview of some of the company’s business activities and developments during the second quarter. Paul will then turn the call over to Grant Russell, Vuzix’s CFO, who will provide an overview of the company’s second quarter financial and operational results.

Paul will then talk in more detail about some of the more recent milestones and developments, as well as give more information on Vuzix’s programs and technologies. The company will then move the call into the Q&A portion for an update.

Paul?.

Thank you, Andrew. Hello everyone and thank you for joining our call today to discuss the company’s second quarter 2016 financial results and outlook for the remainder of 2016.

As those who have followed our company for a while know, Vuzix has been working hard to bring a series of next generation wearable display products to market utilizing augmented reality and virtual reality technologies. We have made significant progress during the past few months and want to update you on these.

At the end of Q2, Vuzix began to ship the first of its highly anticipated M300 smart glasses to developers and key partners in our VIP - Vuzix’s Industrial Partner program.

The M300 represents the first major upgrade to our smart glasses and the first major product developed since we received the $24 million investments from Intel at the beginning of last year and began that relationship.

As many of you know, the M100 enterprise smart glasses, one of the leading enterprise smart glasses in the world, was developed at a time when Vuzix was smaller and not as well capitalized, and when the smart glasses market was really in its infancy. Regardless, it became one of the best selling smart glasses in enterprise.

These early efforts gave us a valuable feedback from partners and customers and helped create a high level of pent-up demand for a new solution that would solve the many problems that current smart glasses have. We believe the M300 does just that.

As a result, we expect that over the coming quarters the M300 should far outpace the M100 in sales, both in units and in speed of its sales ramp. Based on preproduction orders and our discussion with existing M100 customers, we expect initial demand to be robust.

I’ll share more on this, as well as on our new VIP program, later in the call, but first I’d like to turn the call over to Grant to review the financial results for the second quarter.

Grant?.

higher salary, commissions and benefit costs related to new staff additions totaling $131,000; increased trade field costs to $45,000 due to larger exhibit booth sizes; and increased PR and website costs, including revisions that we made to our European website, so it matched the improvements we made to our dot-com site, and finally a $23,000 increase in travel costs to support our products and upcoming product launches.

G&A expenses increased by $150,000 or 15% for the three months ended June 2016 as compared to 2015, primarily due to an $85,000 increase in professional fees resulting from the retention of SOX consultants to help us strengthen and improve our financial reporting controls, a slight increase of $31,000 in increased IR and shareholder communication costs, and a $29,000 increase in salaries, benefits, and stock comp and increased rent and occupancy costs due to our larger corporate R&D offices of $19,000.

Total other expenses were $274,000 for the three months ended June 2016 as compared to an expense of $258,000 in 2015.

This net change was primarily the result of an increased loss of $76,000 on a derivative liability valuation mark to market for the 2016 period versus a 2015 quarterly loss, and that change was offset by a reduction in senior term debt discount amortization and debt issuance expense of $64,000 for the 2016 period versus 2015.

Overall, the company reported a net loss after accrued preferred dividends available to common shareholder of $4,503,000 or $0.28 per share versus a net loss of $2,779,000 or $0.17 per share for the same period in 2015.

Regarding some balance sheet highlights, at the end of June 30, 2016, we had cash and short-term marketable securities totaling $4.6 million.

This was a decrease of $3.6 million for the quarter as compared to March 31, 2016, and of course it reflects both our continued operating losses but also our further investment in new product R&D and tooling and plants. This amount is just under the $3.7 million cash decrease we reported in Q1 of 2016.

Important to note, the $4.6 million figure for cash balances at June 30 does not reflect the equity offering we completed in early July after quarter ended. We raised a net of approximately $6 million after offering expenses, so our pro forma cash and cash equivalents is actually $10.6 million at the commencement of Q3.

We believe our existing cash and cash equivalents and cash flow from operations will, if management’s operating plan is met, be sufficient to meet our working capital and capital expenditure needs for the foreseeable future, even with expected continued operating losses for the next two quarters.

Inventories, including vendor prepayments for components, were up slightly to $3.9 million at June 30 as compared to $3.7 million at 12/31/2015.

This increase represents a procurement of component inventories for the M300 product line net of smaller than planned decreases in the iWear and some of the M100 inventories, but we do expect that number to march down significantly before the calendar end of 2016. With that, I’d like to turn it back over to Paul..

“Demand for the combination of eyesight in the M300 is already high, both from companies new to wearable innovation as well as existing customers.

Commonwealth Care Roanoke, who is an end customer, were excited about the arrival of the M300 with its new sleeker design and improved capabilities, so much so that we’ve already placed preorders to be first in line to receive it.” This is just a sampling of the some of the folks in our VIP program and some from their customers what they’ve seen so far of the M300, and as you can tell from some of these responses, the M300 is not a completely new device.

It if were, you don’t drop software on it and within 24 hours have it all running. It is the migration from the M100, the culmination of two and a half years of M100 trials and learnings.

This sets up the M300 for immediate positive impact and production rollouts, as proven by the early access EVT - engineering validation test units demand and the size of the potential commercial pipeline while it also ushers in new market and use cases to foster an expansion of the market for enterprise monocular smart glasses.

The M300’s new ergonomics and features will also create new use cases and applications that the M100 could not support. For example, the rotation of the M300 to be ergonomically positioned with the camera down yet display rotated up enables new surgical and desktop/benchtop enterprise use cases that have significant ROIs.

We’ve also been developing partnerships to improve voice recognition navigation and control of the new M300 smart glasses.

One example is our recently announced partnership with Sensory to deliver Sensory’s truly hands-free voice recognition on the M300 to improve the efficiency of workflows in warehouses in the field, in telemedicine, and for many other use cases.

The voice trigger command and control operations with Sensory utilize embedded speaker ID and speaker verification technology based upon deep learning technology to enable hands-free voice navigation of the user interface.

It is also highly accurate, even in high noise conditions, allowing the user to speak an unlimited and programmable list of commands, such as to go menu, turn on camera, take a picture, confirm pick, and many others. Enterprise users will be able to create company-specific libraries of commands to complete core tasks.

Within the field of telemedicine, the Sensory truly hands-free enabled M300 can allow physicians to dictate and create medical records electronically while conducting examinations.

The speech detects function will enable insurance companies, for example, to create records in the field while an investigator is reviewing a damaged property or vehicle while taking pictures or a video with the M300.

The advancements in the Wi-Fi and Bluetooth capabilities of the M300 allow warehouse use cases to expand beyond simple picking by allowing 5 gigahertz connectivity, more powerful barcode scanning and auto focus and positional awareness.

With these features, the M300 can now serve as a platform for most, if not all the various tasks within a warehouse, including receiving, put away, sorting and packing. That is one of the reasons that DHL, one of the world’s leading logistics companies, selected Vuzix to expand its program implementing smart glasses in DHL Logistics.

Further, the addition of Bluetooth Beacon support enables geofencing in pharma manufacturing, or the addition of voice modulation as a user identification allows for use cases in the most secure settings. We’ve been selling M300 migration packages and taking deposits. As Grant noted, all M300 related revenues are deferred revenues until units ship.

We have also primarily been marketing the M300 directly to our installed base of M100 customers and will be accelerating our expanded outreach efforts in the back half of the year.

As smart glasses and wearable technology in general build acceptance in enterprise, we have been having discussions with partners and customers regarding implementations in the thousands and tens of thousands unit range.

We’re in a race to pull the trigger on final production of the M300, and in a best case scenario we expect to start rolling out production devices in late September. Worst case, this could slide to mid-October. The fact is DBT, which are units we’re expecting to get within the next couple of weeks, effectively represent production units.

The only difference is where they’re being manufactured, so in theory in September, we could be manufacturing out of the DBT units and using them as finished products. Finally, there has been some questions around FCC and the M300. To be clear on this, the M300 EBT unit has been in test labs and it passes on all accounts.

We will need to do final tests with the DBT unit, which again are effectively production units. For the USA and Europe, it takes about two to three weeks to complete. We are right on track here, as planned. Moving on to the Vuzix award-winning iWear video headphones, we’re excited about the response we are seeing from partners and customers.

This is the ultimate mobile entertainment system compatible with any device supporting HDMI output, such as mobile phones, tablet devices, gaming consoles, PCs, etc.

It provides an experience equivalent to watching 125-inch home television screen from a distance of about 10 feet and allows the wearer to play games, interact with apps, watch 2D, 3D, 360-degree VR movies, and even fly drones.

With an integrated battery, the iWear video headphones is completely portable, so you just can enjoy it at home or on the go. Earlier this month, we sponsored our first drone racing event at New York City’s Governor Island with our HD camera and radio supply partner, Amimon.

As most of you know, the drone industry is growing rapidly and our iWear is ideally positioned to be the headset of choice for HD FPV, that represents HD - high definition first person view drone use.

Flying a remote control drone through a labyrinth-like racecourse at speeds in excess of 80 miles an hour is all done with a video feed coming off the drone. The feed allows the racers to see the course as if they were actually sitting in a cockpit of the drone.

If there is any delay in the video feed, the pilot could easily fly the drone into an object before actually seeing the object, obviously making it miss gates, have to go back, lose time on the course. This is where the iWear is a perfect solution.

The iWear were designed to be a low latency device for VR gaming and with less than one millisecond video delay, it is 30 times faster than any other HMV used for drone piloting out there.

The iWear are also much more comfortable to wear and have a clear HD image right to the corners of the virtual display with a much larger field of view, which enables the racer to easily see the entire field of view without having to constantly adjust the headset, as they do with competitors.

Finally, the drone industry is experiencing a shift from low reliability analog with standard definition systems, meaning low quality video with lots of drop-outs during the race.

At the Governor’s Island race, in fact it took upwards to 20 minutes to half an hour to finally get these old-style analog radios to settle down enough so that the eight racers could fly without their frequencies running into each other. It’s really a big problem, and it’s hampering the sport.

They are shifting from those standard definition, low reliability radio systems to high reliability all-digital systems, like the Amimon ProSight, in combination with Vuzix iWear. They are calling it HD FPV.

For this reason, we believe the older analog FPV solutions are on their way out in favor of this new standard, which is 100% compatible with Vuzix iWear today, and so far we have gotten great feedback from pilots that are using the iWear with comments like, “The clearest and biggest field of view I’ve ever seen in an FPV goggle, breathtaking flying experience especially when flown with the Connex HD FPV system,” and “The Vuzix iWear is a game changer in drone racing.

Combined with the Amimon Connex ProSight camera and transmitter, the iWear erases the latency and IPV issues with many [indiscernible] goggle experiences.

With five to seven millisecond system latency and crystal-clear vision, the iWear will make pilots faster, races quicker, and a more immersive experience for online viewers.” To give you a sense of just how quickly the popularity of this sport is growing, there are now more than 100,000 registered drone racers compared to only about 10,000 just a few short months ago.

Of course, there is more to drones than just racing. Drones are being used in many diverse areas like boosting crop yields, verifying insurance claims, inspecting power lines, and assisting in future Hollywood blockbusters, in a business that’s due to boom by more than 6,000% by the end of the decade.

The global market for commercial applications of drone technology currently estimated at about $2 billion is expected to balloon to as much as $127 billion by 2020, according to the consulting group, PriceWaterhouseCoopers.

Finally in the drone space, we have numerous events coming up that we’ll be sharing, and in fact even Oppenheimer as asked us to join their Oppenheimer Drone Day event September 19, 2016 at the Storm King Art Center in New Windsor, New York. Our gaming support activity for the iWear also continued to move forward.

For instance, last month the Open Gaming Alliance - OGA, a non-profit business trade association focused on the games industry, named us as their latest corporate member. We’re in good company with other OGA corporate members, including Intel, Unity, Lenovo, Ubisoft, Dell, Alienware and many other leading companies.

Vuzix will be active in the OGA VR - virtual reality and augmented reality special interest groups in recognition of our pioneering role in VR and AR. Currently, the iWear have support for over 100 titles, including [indiscernible].

In the coming weeks, we expect to be announcing an ever-increasing list of new titles being released from leading game developers, significantly increasing that number. Production has been a challenge for Vuzix with the iWear, but we have gotten that in hand and are now reliably building product out of our Rochester facility.

Because this involves a significant rework of product [indiscernible] in China, it is a slow process and has been expensive, not just in the rework required but also in the shipping as most of the product has seen expedited shipping.

We’re now bringing up our partners facility in China with all the required changes, and by the end of this month they should be running full tilt. We have folks at the plant even now and in the last week of August, we will have a full team there qualifying the first new volume production runs out of their facility.

Despite these production challenges, we continue to experience strong customer interest in Vuzix iWear and expect to finally implement our broader planned marketing and sales activities around the iWear. We’re expanding our sales and distribution channels with the recent appointment of North American distributors and resellers.

Europe and Japan have recently commenced receiving iWear units, and they are also signing up expanded distribution channels in anticipation of the seasonally strong fall selling season for consumer oriented goods like our iWear video headphones.

Our products are not only instrumental in improving productivity in the workplace, increasing pilot control at the racecourse and enhancing the consumer entertainment experience. They are also vastly improving quality of life for many.

For example, we just recently partnered with Cyber Timez to improve the lives of people in the low vision and blind community with Vuzix smart glasses and Cyber Timez application, Cyber Eyez.

This application has the ability to enable low vision and blind users to magnify anything in their environment up to 15 times, and can also re-text in over 100 languages without a connection to the internet.

In addition to Cyber Eyez, several other vision-adding applications that are preinstalled in the M100 include email, calendar and apps that are all helping the low vision and blind community. On the R&D front, as many of you know, interest in AR and VR is intense and continues to grow, as illustrated by the strong success of Pokemon Go.

Although not developed for a pair of AR glasses, Pokemon Go shows the great potential this technology has. Many of the major news outlets, including the New York Times and Wall Street Journal and others, have commented on t his growing interest.

Vuzix has been relatively quiet about how our R&D efforts will impact the delivery of AR through our Waveguide-based smart glasses; however as we’re getting very close with finished products that would deliver on these kinds of experiences and with the excitement of the Pokemon Go phenomenon, it seemed like a great time to start to share a little, so we recently demonstrated our AR capabilities with a short video filmed in our Rochester corporate headquarters.

I would encourage you all to go watch it on YouTube by searching for Pokemon Go-character views-Vuzix Waveguide. It’s an amazing video and it really shows the potential of our Waveguides and the system we’ll be putting them in. Vuzix believes that AR and VR are going to merge into a single solution in the end.

People will not be putting their heads in a bucket in a closed immersive VR system, but rather they’ll wear fashionable smart glasses with see-through optics that will merge the digital world and the real world.

Still able to provide a VR experience but also see-through, this capability and the sexy form factor has the potential to replace the smartphone and become the world’s next preferred computing platform.

One of the keys to making this happen is to be able to create glasses that don’t make you look like a nerd, and at the same time deliver large screen see-through experiences. This is exactly what our Waveguides can do, and if you take a look at that video, you’ll see.

We literally put a Pikachu character in one of our offices here sitting in a chair, and it looks like you could reach out and touch it. Research and development continues on our Waveguide efforts, with focus moving from research and more to production and commercialization.

Our ion beam etch equipment used in the manufacturing of Waveguide tools was finally relocated from our old plant just last week and is being installed in our new clean room and undergoing a full upgrade, which should be completed by the end of August.

Our first automated robotic Waveguide manufacturing station is now being built, and by the late fall this should enable cost-effective volume production of Waveguides. We can produce now. We have equipment on the plant floor that manufactures Waveguides, but this is a high volume production machine.

These machines can be replicated as production demands increase and supporting millions of units on an annual basis, we’ll be able to do with this machine and on our current plant floor.

On the Waveguide product development front, the M300 design has being completed and turned over for production tooling to our third party contract manufacturing teams. Our new Cobra 2 display/Waveguide engine tooling will be completed by mid-October, and it represents one of the smallest DLP engines ever made to date.

We also have the B3000 series of binocular Waveguide products well into the design phase with released electronics and with industrial designs in hand. These are going to be very exciting products for Vuzix that should co-exist with our current products.

That said, we are not actively marketing these products at this juncture; however, shortly we will be releasing further videos through the Waveguide series, like the stuff we have on YouTube today, and several new corporate videos coming out on our upcoming M3000 and B3000 products.

We’re confident that the introduction and shipping of our new products will begin to have a significant impact in the latter half of 2016. Customer interest is significant with early orders starting to grow as we get closer to launch. Key customers know that production will take time to ramp and supply will be limited at first.

Customers are already vying for access to first volume production. Once the M300 is in the field, this should accelerate. This is starting to drive the order pipeline.

For the iWear, we are finally able to open the channel with many of the drone FPV sites starting to carry the iWear, and planned efforts on distribution channel activities are finally being executed on. By Q4, we expect to have all of these products in full production and this should have a significant contribution on revenues.

Finally, as most of you know, we have been collaborating with select global partners to integrate our technology into some of their wearable solutions. As per the announcements we made in June, we continue these efforts with another partner.

There are engineering fees associated with this new project and ultimately a contemplated production program around Vuzix’s Waveguide optics sometime in 2017. I cannot say much more than this at this time, other than we’re very excited about the opportunity.

With everything that we have going on at Vuzix, we’re confident that as we execute on our strategy over the coming quarters, we will reduce our cash burn significantly as we march toward breakeven, followed shortly thereafter by profitability and positive cash flow.

We look forward to updating you on our continued progress in our next conference call. We’d like to now open up the call to questions. Thank you..

[Operator instructions] Our first question is coming from Rob Stone of Cowen & Company. Please proceed with your question..

Hi guys. Thanks for taking my questions. I wanted to just spend another minute on the iWear production transition.

So it sounds like by late August, you’re going to be ramping up the new production process, so how should we think about the cut-over in terms of getting through the slower, costlier rework process, and air freight shipping to a more normalized business model for iWear?.

Well, we’ve been expensing some of the one-time costs as we go along, and that was a big component in Q2 revenue, so the freight costs we’ve been choosing to expense just to be on the conservative side and not have the burden going forward.

But the real cost savings should take place in Q4, because as Paul mentioned, at the end of August, first of September, the first sea freight shipments from China are going to come, and when they arrive - and that takes like 21 days - that is when we expect to start seeing the cost improvements and the quality--increased flow of quality components and products, and that’s going to be the last week of September, but really into Q4..

Okay, so there’s not really a freight cost overhang on the existing inventory. And then you mentioned that --.

No, we chose to write it off, primarily a good chunk of what had already come in..

If I can add, we do have product here in Rochester that’s still going through that rework process, so this is stuff that’s happening in parallel. We’re still manufacturing at Vuzix here at Rochester, New York, and as that’s happening, we’re bringing up the Chinese facilities. That said, we’re no longer shipping product expedited from China to the U.S.

That stuff is here, it’s baked in..

Yes, we put the kibosh on--I think the last shipments came in mid-July from China that were shipped by air of iWear, and everything is now going to be coming in by sea. .

Okay..

We have a big enough cushion stateside that we can handle that transition, and that’s effectively--you know, it allows us to change over about the middle to the end of September..

Good. So you mentioned that excluding the fixed overhead and the extraordinary freight costs that the product margin is around 39%.

How should we think about the margin model pre-spreading of overhead for M300?.

The M300 should be in the high 50s for at least the first six to 12 months. It should be pretty good. The iWear is a lower margin, and we’ve said all the way along that’s going to be about 20 points of margin on average, we expect.

But the blend is still to achieve hopefully around 40-plus on a product-only basis, and the M3000 will have another--should be in the low 60s before fixed overheads..

Right. You mentioned that operating expenses were up quite a bit year-over-year. They were up sequentially, roughly $250,000.

How should we think about the run rate of expenses in the second half, Grant? Are you reaching a level that you need to be, or will there be quarter-on-quarter increases to come?.

There shouldn’t be a whole lot of material increases in the sales and marketing costs, at least for the balance of the year. I mean, the timing of some trade shows kind of causes some spikes.

G&A should be sort of consistent, the way it was in Q2; but that said, we’re probably going to face $100,000 per quarter increases related to--you know, we’re making some staff additions to complete our improved segregation of duties as part of our move to SOX compliance.

As well, we have another quarter where we’re working with the engineers, but I think sales and marketing should be consistent in the similar range to where it was. R&D, I wouldn’t expect too much in the way of a big increase in Q3, Q4. We’re pretty well where we need to go.

We’re expensing anything that isn’t tooling-related, like the M300, and then this quarter and next all those costs swing from the M300 to the M3000, so we’re expecting that to be relatively flat. It won’t be an increase of more than 10% at the most on those..

Okay. My final question for Paul is you mentioned that there’s a lot of pent-up demand now for M300 and the other products coming behind it, especially with the already established partner relationships.

How should we think about your capacity, your ability to support increased volume and what sort of cycle time is it between, let’s say you get a big order and your ability to respond to that with product?.

So, on the M300 side, it’s a significantly easier thing to produce than the iWear, one. The partner that’s doing that with us is--not that our Asian partner on the iWear side doesn’t do high volume also, but these guys are really good at doing that.

The only issue is lead time on parts, and we tend to buy some of that in advance, the longer lead items. That said, if we had to hit the ground with nothing in the hopper, it can take 12 to 14 weeks, kind of a thing, to produce from a cupboard that’s bare..

But you’ve got a pretty considerable inventory of components and parts on hand right now.

Right, long leads to the tune of 10,000 iWear or so--I’m sorry, M300s. .

Yes, that’s our first current planned production build, so we’re keeping the pipeline primed for that. That doesn’t mean we can ship all 10,000 in one month, but we have the ability to act pretty quickly within that range..

Great. Thanks guys. I’ll jump back in the queue. .

Thank you. Our next question is coming from Kris Tuttle of SoundView Tech Fund. Please proceed with your question..

Hi. I just wanted to know if you look out a year to 2017, what’s your--I’m interested in knowing what do you think the breakdown is between your VR product set that’s related to drones and all that, and your enterprise business? Is it 50/50, 75/25? A little bit of help there would be great..

It’s going to be more like two-thirds, one-third. That said, we have--.

Two-thirds being the enterprise smart glass products..

Thank you, okay.

We believe on the VR side of things, there’s going to be--I think for some time now, the idea of people putting their head in these bigger sort of devices is going to be around, okay? But when people can wear a pair of fashion glasses, it begins to change completely what the consumer side can and will do in everyday use, and you will start to see in 2017 a shift at Vuzix into products that can support that sort of technology.

So you could even see fashion glasses flying drones, kind of things. But of the current mix of products that we have, Grant is correct..

Okay, thank you. That’s very helpful..

Thank you. Our next question is coming from Amit Dayal of Rodman & Renshaw. Please proceed with your question..

Thank you. Congrats on all the progress, guys.

Just in regards to iWear, what kind of numbers from a production perspective, as in minimums, do we have to commit to these manufacturers in China?.

We’re in a position, Amit, we’ve committed to something like 10,000 pieces..

Ten thousand per year, or per quarter? Can you give us any color on that?.

Well you can--some of these guys--in fact, this particular partner, they’ll build 1,000 at a time, if we want to. It’s just a function of what happens to the price. It was a good mix for us, we thought, to make that level of going in with the level of interest we’re seeing in the marketplace and the time it takes to prime the pump.

It was logical for us to make that sort of a first kick at the can..

All right, understood. .

We haven’t made any decisions on follow-on builds at this stage, though..

Understood, okay. In regards to the iWear again, it looks like you seem to be prioritizing the drone market for this.

Is this sort of the killer application for this product for you guys? Would you rather see larger market share over here versus, you know, diluting the effort for other applications?.

We have actually activities going on in personal entertainment in the gaming space and in the drone space. As it happens, there is a shift happening in the drone space right now, and it’s a real opportune time for Vuzix because there’s not a lot of competitors that can deliver what we have in the drone space.

You need 16x9 aspect ratio, you need zero latency.

We have this wonderful field of view and this beautiful crisp image, and it works perfect here, so we are--you know, have a bit of a focus going on in that part of the space because it’s so opportune, but you’ll see, Amit, over the next week or two some other activities that are, I think, equally impressive in the entertainment side..

Understood, thank you. Maybe one last question from me. In regards to your comment in the previous quarterly call, you had said you’re prioritizing around 50 top customers for these M300s.

Have you shipped to all of them yet?.

We’ve shipped to a large number of them, not all of them but a large number of them..

Understood. Thank you, that’s all I have. I’ll follow up later as well, thank you..

Amit, we have way more than 50 that want product, actually. If you can imagine, this is a brand-new gizmo. It’s getting pretty high marks from our partners so far, so there’s guys are lining up. It’s just--you know, they’re EBTs, they’re expensive.

There’s a lot of effort that goes into doing this sport, and it’s well worth that but we’re also right around the corner from DBT and production, so we have purposely chose to focus on what we’re doing at this point..

All right, makes sense. Thank you for that..

Thank you. Our next question is coming from Aaron Martin of AIGH Investment Partners. Please proceed with your question. .

Hi, good morning guys. I guess this is for Grant.

In terms of the deferred revenue on migration shipments, can you quantify in terms of the effect on the gross margin, the fact that you’re not recognizing a full--the full revenue coming in there from those units, but you’re recognizing the full cost?.

Well okay, the migration costs--.

I mean, what kind of percentage of the revenue coming in are we able to recognize in that kind of transaction?.

Recognizing 40%, and effectively they're getting an M100 for that, and that equates--because the migration package sells for $1,500, we’re recognizing $600 on the sale of the M100, which normally sells for $1,000. But of course, we’re recognizing the full cost on that, so that has dragged down our average margin on some of the M100s..

Got it.

Now in terms of the cost of sales, are you able to break down between product versus engineering services?.

Yes, our system does that, but we don’t currently report that level of detail. .

Okay. This question is for Paul.

When you mentioned Pokemon Go, and obviously it’s created a lot of excitement and people realizing the potential here, can you help us quantify, call it the effect it’s had on Vuzix from a perspective of your discussions with other parties and stuff like that? Just any sort of way we can understand how that’s had an effect on Vuzix?.

I can--yes, I’ll do my best on that one, Aaron. When the Pokemon Go thing happened, the whole world kind of lit up as everybody saw, I’m sure, and if you didn’t, it’s because you were probably on vacation and didn’t have a phone.

The same thing is true in the corporate world, although I will say there’s always been this level of from the larger players, we need to ultimately be in this wearable display space.

When events like that happen, our phone rings a bit more and there’s more knocking on the door and there’s more people visiting, and that’s been part of the results of that. It really shows the potential of where this stuff can go. I mean, the revenue generation off of the content is massive.

You saw it - I mean, they had more users than Twitter overnight, so that wakes people up..

Has that changed your discussions with third parties? Has it changed the amount of discussions you’re having? How does that really in real life make a difference for you?.

It kind of pushes some people to accelerate their activities. It’s hard to get into lots of discussion around that, Aaron. I mean, we’ve already had a lot of people and have a lot of people on our front door. You’ve seen in the second quarter, we made an announcement with a global partner, and I can only say that that continues.

It seems more feverish now than it was. I don’t know if I can attribute all of that to Pokemon Go, but it certainly is a stimulus..

Okay, thank you, Paul..

Thank you. Our next question is coming from Matt Margolis from Wall Street Forensics. Please proceed with your question..

Hi Paul, Grant. Thanks for taking my question. So you guys recognized some of the engineering revenue in Q2, the 140.

Can you kind of outline what this will look like over the remaining part of the year?.

Yes, there will be similar engineering services amounts in Q3 and Q4 if the current program continues, which we expect it to..

And was the initial payment based on a specific milestone, or is it kind of generic?.

There’s milestones along the way, and some of it is general [indiscernible] on their implementation..

Okay.

Can you break down the inventory again? I think it’s $3.4 million between, I guess, the M100, M300 and the iWear?.

The iWear would be the biggest component. It’s probably 60%, M300 would be, like--M100 would be another 25%, and the balance would be the start of procurement of materials on the M300..

Okay. In your 10-Q filing, it mentions ramp-up in the M300 in October.

Is that when we should look at--should we expect any kind of contribution in Q3, or is most of this going to be the EBT units at this point?.

We are--as I mentioned in the conference call script, we are pushing so that a portion of the DBTs that we’re building could be moved in as a function of production.

We’re not sure if we’re going to be able to do that or not, Matt, but we would love to be able--I mean, there’s people screaming at us that need product to get some of their programs going, and we don’t want to delay for them. But we’re just not sure if we’re going to be able to pull that off or not.

It’s within a two or three-week window here, plus or minus that we’re kind of pushing through, so we don’t know yet. It’s almost impossible to miss the October time frame. We’re hoping to pull some into September. .

And to quantify that, you know, there might be half a million dollars at most in play of revenue..

From a pull forward perspective, or just in general for Q3?.

From a pull-forward perspective. .

So my last question, just on the VIP program, right now you’ve done a lot of the software partners that will be--that are out there kind of selling your products, a couple end users.

Is it kind of the remaining part of the program, are these really going to be the end users, those type of companies that we’re looking at for the remaining part of the VIP program?.

A lot of it has to do with folks that have the potential to be the first guys to be rolling out in volume.

When they move to the DBT devices, they are--as I said, they’re practically production ready, Matt, so it will start to shift into other folks that get them, but they may not necessarily be VIPs in the sense that they’re not necessarily developers, they could be end customers too..

Okay, that’s all I have. Thank you. .

Thank you, Matt..

Thank you. Our next question is coming from John Heerdink with Vista Partners. Please proceed with your question..

Hi gentlemen, congratulations again on moving Vuzix forward and to the many different and wide applications. Quick question around you signed an agreement with a global consumer electronics and mobile firm to develop Vuzix and see-through optic technologies.

Could you speak a little bit about that, and then secondarily, to be efficient, can you speak to the healthcare applications and maybe what we might see coming out of that sector?.

I’m sorry, John, the first question again? I didn’t--.

Cooperation partner. .

Yes, you have the global consumer electronics and mobile firm that you signed this development and supply agreement.

Could you speak to that and the see-through optics?.

Yes. I mean, the folks--those folks see the value of see-through systems and wearable display technologies, and they see that Vuzix can deliver on the optics that they need, and this partnership revolves around that. Like I said, it’s really hard to get into a lot more.

We’re developing with them something, and sometime in 2017 the intentions would be that it would be a product introduced by them into the mass markets. Again, it’s hard to say more than that. From the healthcare perspective, you guys saw that on the M100, we’ve got this low vision assist product.

We have folks like AMA that are working in the medical space for remote telemedicine kinds of applications.

We have folks in big pharma that are doing drug manufacturing with our iWear and all of the quality systems that are associated with that to make sure the drugs get built right, the systems get cleaned and put back together appropriately before they build their next batch, etc.

So we have people that are looking at using them in the operating theaters, and we have folks that are writing applications around a patient-doctor visit, where you’re just recording what happens and doing the script of the doctor, recommending X,Y and Z, and it does the speech-to-text conversion so it’s all documented on the fly.

So there’s multiple areas in the medical space.

Did that help, John?.

Absolutely. I think it’s such a significant market that sometimes doesn’t get as highlighted as the others, I think that healthcare area could have a real impact on Vuzix going forward, so..

I tell you, John, if you think about it, one of our competitors here, Google, their system is designed so that the eyepiece and the camera are bolted together and they’re pointed up like a unicorn, so it’s a horn that looks up.

If you’re a doctor and you’re going to record an operation and you want to train others in how to do that operation, in order to use competitive products like Glass, you almost have to break your neck to look down at the patient where you’re doing the work. Again, the M300, we took this into account.

You can literally just lower the thing down, look down through the eyepiece, the camera now points where the eyepiece is pointed, and it’s right down at the work surface, so it’s designed to do this job. The other piece is the video performance, it’s amazing how well this looks.

The M100, it’s based on older stuff, and when you’re streaming video with it, if you’ve got the right software, and there are folks who can do this really well with an M100, it’s okay. But with this thing, man, it looks like you’re seeing HD streaming off of it - it’s beautiful.

So we designed it specifically with that market in mind, one of a bunch of them..

Thank you..

Thank you. Unfortunately, we are out of time for questions. I will now turn the call over to Mr. Haag for any additional or closing comments..

Thanks Operator. I’d like to thank Paul, Grant, all of Vuzix’s shareholders, as well as the institutions and analysts that participated on today’s call. This concludes Vuzix’s second quarter 2016 conference call. Thank you all..

Thanks everybody..

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