Vuzix - Earnings Call - Q1 2020

Transcript

Speaker 0

Greetings, and welcome to Vuzix Corp. First Quarter twenty twenty Conference Call. At this time, all participants are in a listen only mode. A question and answer session will follow the formal presentation. As a reminder, this conference is being recorded.

I would now like to turn the conference over to your host, Ed MacGregor, Director of Investor Relations.

Speaker 1

Good morning, everyone, and welcome to the Vuzix First Quarter twenty twenty Financial Results and Business Update Conference Call. With us today are Vuzix CEO, Paul Travers and CFO, Grant Russell. Before I turn the call over to Paul, I would like to remind you that on this call, management's prepared remarks may contain forward looking statements, which are subject to risks and uncertainties, and management may make additional forward looking statements during the question and answer session. Therefore, the company claims the protection of the safe harbor for forward looking statements that are contained in the Private Securities Litigation Reform Act of 1995. Actual results could differ materially from those contemplated by any forward looking statements as a result of certain factors, including but not limited to, general economic and business conditions, competitive factors, changes in business strategy and development plans, the ability to attract and retain qualified personnel, as well as changes in legal and regulatory requirements.

In addition, any projections as to the company's future performance represent management's estimates as of today, 05/11/2020. Vuzix assumes no obligation to update these projections in the future as market conditions change. This morning, the company issued a press release announcing its financial results and filed its 10 Q with the SEC. So participants on this call who may not have already done so may wish to look at those documents as the company will provide a summary of the results discussed on today's call. Today's call may include non GAAP financial measures.

When required, reconciliations to the most directly comparable financial measures calculated and presented in accordance with GAAP can be found on the company's Form 10 Q filed at sec.gov, which is also available at www.vuzix.com. I'll now turn the call over to Vuzix CEO, Paul Travers, who will give an overview of the company's operating results and business outlook. Paul will then turn the call over to Grant Russell, Vuzix's CFO, to provide an overview of the company's first quarter financial results. Paul will then provide a few closing remarks, after which we'll move on to Q and A.

Speaker 2

Paul? Thank you, Ed. Hello, everyone, and welcome to the Vuzix Q1 twenty twenty conference call. Let me start by saying that all of us here feel deeply for those who have lost loved ones or whose health and well-being has been impacted by this viral outbreak and the disturbances it has created to all of our lives. We wish security and health for all of you as we collectively face this unprecedented challenge.

It has only been about eight weeks since our last conference call, but I think it has been the most world changing eight weeks we have all seen for a long time, if ever. For Vuzix, we feel this has put us out in front of one of the largest technological transformations to occur in the world since the onset of mobile communications. I'm talking about the remote worker revolution that has been spawned by the travel restrictions and social distancing practices being implemented across the world in response to this novel coronavirus. At Vuzix, this has driven us to refine and adapt our sales strategy. We've been able to empower and service our customers and partners through informational marketing, event webinars, demonstrating the solutions provided by our smart glasses and related applications, which is evidenced by the growing uptick in sales we are starting to experience.

We cannot be sure how long this current uptick will last or how large it will become, but at the onset, it does feel like a paradigm shift in the way many firms must do business. It's as though we are out in front of a rather huge wave and it's just starting to build. Before we get into some of the specific deals and aspects of the past quarter and because you can all review the financials and our recent press releases over the last eight weeks at your own convenience, I would like to share a little color with regards to what is going on right

Speaker 3

now at

Speaker 2

Vuzix. COVID-nineteen is on everyone's mind, and it has had a dramatic and immediate impact on the day to day operations of many domestic and foreign businesses, including Vuzix. Back in March, we instituted immediate actions in order to minimize face to face interactions between employees and to provide effective social distancing practices within the office and on the production floor. Vuzix employees who can work from home have been working from home and in person management, engineering and development and customer meetings in the office have been replaced by daily virtual Zoom meetings. Employees working at the office are following best practices, including social distancing, regularly sanitizing, keeping all doors open to avoid touching handles and, of course, wearing masks while inside the building.

Also, our HR, finance and legal teams are continually monitoring the latest legislation and guidance to ensure that we're operating within the constantly changing mandates and recommendations, protecting our employees and their families and understanding and applying for available support from the state and federal governments being offered to employers during these trying times. On the manufacturing front, we continue to have our production employees on-site assembling smart glasses. But when the pandemic hit, we split them into two shifts to minimize the number of employees at the office at a given time and to reduce density on our production floor. They have done a great job under stressful conditions, which has allowed us to continue to meet ongoing customer demand for both our M Series and Vuzix Blade products. In terms of component and product supply, the coronavirus impacted China at a difficult time with many local companies just coming back from Chinese New Year.

If we have not moved most of our M Series smart glasses production out of China last year, we could have been more negatively impacted. But I'm pleased to report that the impact to date for Vuzix has been generally limited, mostly just resulting in some delays. Business customers in Europe and The United States began going down during the first quarter and took several weeks to determine what aspect of our operations and manufacturing facilities will remain active and which divisions would be shuttered for a period of time. Business continuity plans are still being constantly tweaked as companies monitor the latest situational news related to the COVID-nineteen. Business continuity plans are still being constantly tweaked as companies monitor the latest situational news related to COVID-nineteen.

But one common trend that has emerged is that most firms have implemented strict travel restrictions for domestic and international travel between sites and locations as well as work from home programs to reduce in office exposure risk. Another consistent trend is that hospitals and other health organizations have implemented measures to limit interactions between patients and health professionals and are seeking new, innovative and safe ways to perform training, mentoring and patient care. While the coronavirus outbreak has slowed the progress of certain anticipated customer developments in our pipeline, both on the enterprise as well as on the engineering services and OEM side, it has at the same time led to an acceleration of new interest from others for smart glasses usage that broadly include remote support, business continuity, education and in particular telemedicine, which is rapidly becoming a critical tool in the frontline efforts in the fight against the coronavirus. Most importantly, since mid March and through April and early May, we have seen inbound interest converting directly into increases in our enterprise and medical sales in the second quarter. The month of April was one of our strongest thus far in terms of smart glasses sales, driven by broad demand from new customers, existing customers and Vuzix resellers.

We're experiencing increases in customer order flow, average order size and the number of customers placing reorders. We're also seeing this growth domestically in The U. S. As well as across the pond in Europe and in the Asia Pacific region led by Japan. In fact, I'm pleased to report that total revenue realized thus far in our second quarter, together with engineering sales we are contracted to receive, have already surpassed the first quarter figure we just reported for the three months ended 03/31/2020.

We're only about halfway through our second quarter, and we obviously have the rest of the year in front of us, but we like what we are seeing right now and have a lot of new and exciting opportunities in our pipeline that we look forward to closing and announcing as the year progresses. There are currently three specific segments within enterprise that are seeing an accelerated interest level and growth from customers since the COVID pandemic: field service, including remote support and training manufacturing, including work instructions, step confirmation and quality assurance and telemedicine, including procedure assistance and remote video and recording. Within field service and manufacturing, we have seen an acceleration in adoption driven by business continuity plans and the urgent need to deliver remote expertise without having to send engineering resources on-site. In particular, we have seen increases in order flows from multiple large pharmaceutical companies in need of remote expertise in their labs and manufacturing facilities and to support their equipment deployed in hospitals around the globe. Vuzix's business across health care, including telemedicine, training and technical support for medical equipment has also accelerated since the pandemic.

Our first quarter ten Q referenced several of our larger volume healthcare related customers, and we have a growing number of unannounced partners that are just starting their business relationship with Vuzix, all being driven by the COVID-nineteen pandemic. There are five recent examples I would like to share. One Minute, an exclusive reseller of Vuzix Smart Glasses, has seen tremendous interest in Europe as well S. For their health care and telemedicine solutions.

They placed volume orders for Vuzix M400s in January, March and April as they continue to grow their business. The University of Louisville School of Medicine, which is currently testing the M400 across six different facilities, has plans to deploy our glasses across their network and expand the program into educational training in addition to patient care. GemVision, a Vuzix reseller that has seen growth in health care and telemedicine demand, recently placed a replenishment order for M400s to support their efforts to meet COVID-nineteen remote health care needs in The Netherlands. In Thailand, Vuzix Blade Smart Glasses are now being used for COVID-nineteen patient care via our partner, Tele360 Ambulance Third Eye, at one of the country's main hospital sites used for quarantine COVID-nineteen patients. And last but not least, we just announced that Johns Hopkins Hospital, which is affiliated with Johns Hopkins Medicine, one of the leading health care systems in The U.

S, has become yet another customer that has quickly embraced the Vuzix M400 amidst a global pandemic, and their case to help with patient intubation and to host virtual patient rounds using our smart glasses. Of course, the time frames for some expected enterprise business developments are getting a bit stretched out versus our pre COVID expectations. For example, reductions in operating hours and the implementation of new shopping routes and rules for consumers have certainly disrupted the day to day operations and development plans of retailers across The U. S. That said, we remain in constant discussion with one of the larger U.

S.-based retailers, and we still believe this account represents a great multiyear revenue opportunity for Vuzix beginning later in 2020 as they start to deploy our smart glasses in different areas within their operations. We also previously mentioned that we have numerous enterprise accounts across various industries and use cases that each could represent more than $1,000,000 of pipeline revenue. We still feel confident that these opportunities have a reasonable likelihood of being deployed over the next twelve months, even in light of the current disruptions caused

Speaker 0

by

Speaker 2

COVID-nineteen. Vuzix M400 has clearly become the workhorse that many enterprise customers have been waiting for, and it has made the customer sales cycle for Vuzix Smart Glasses in enterprise a bit easier with a quicker commercial conversion timeline. The M400 was built to broadcast HD streaming video for field service workers with its 13 megapixel image stabilized camera. The OLED display delivers crisp, vivid color to the technicians. And with advanced voice control coming to the base OS, it will become a completely hands free device for many applications.

Our M400 Smart Glasses as a scalable platform continues to mature, further differentiating it versus other vendor solutions. During the first quarter, we added support for several popular video conferencing platforms such as Zoom and Skype for Business. More recently, we announced support for Cisco Webex, Teams, and Zoom for Healthcare. These popular applications each come with some specific advantages, which have made it very easy for large enterprise companies to get started with the Vuzix M400 and Blade Smart Glasses for video conferencing. With these applications, we generally lack advanced features such as camera control and voice control from the remote expert side as well as real time illustration and advanced document sharing.

This is actually a positive for Vuzix because we have typically found that one size does not fit all when it comes to hardware and software solutions. For customers that require advanced features, Vuzix has been successful in directly upselling solutions such as Vuzix Remote Assist and UVMax Frontline or working through our partner channels with established companies like Dynamic, Brochasia, Health Lightning, LeverStream, PTC, SiteCall, TeamViewer and others. In most cases, these upsells are helping to generate new revenue opportunities for Vuzix that can recur on an annual basis. As it relates to public safety and COVID pandemic, we are also working with a number of partners to deliver solutions that incorporate our smart glasses to assist with screening crowds of people with elevated temperatures. One such firm is Librestream, with whom we also partnered along with Verizon to support health care and first responders.

We recently announced a hands free thermal imaging solution with Librestream focused around our M400 Smart Glasses. This combined solution enables first responders, along with security and medical professionals to scan individuals within a crowd from a safe distance to rapidly measure human body temperatures for screening purposes by comparing those temperatures to a set reference point. The FDA recently published guidelines for using telethermographic systems for human temperature monitoring, and this solution follows these guidelines. Fever is a common symptom of COVID-nineteen, typically appearing two to fourteen days after exposure. Telepharmographic systems are able to determine surface skin temperature when used correctly.

The advantage of using these systems for initial temperature assessment for triage use is significant in high throughput areas such as airports, businesses, conference halls, sports venues, warehouses and factories, and also in settings where other temperature assessment products may be in short supply. As the world starts going back to work, we anticipate there will be a growing need for this solution to help with screening. We have also just announced a partnership with Pixie Medical, the world's first orthopedic navigation system using AR smart glasses. Pixie just received CE marking certification for Knee plus its unique patented technology that combines proprietary computer vision and deep learning algorithms, along with the use of our M400 glasses to precisely track instruments and implants during surgeries. HiXi is pursuing and expecting to receive FDA approval for knee plus later this year and plans to next develop a shoulder implant navigation system, which will display a hologram in the surgeon's glasses to precisely guide him through the skin during an operation.

With over 600,000 knee and shoulder operations performed every year in The U. S. Alone at a cost of well over $10,000 per surgery, This is a very exciting technological development to say the least, and we're proud to play such a key role in it. Competing solutions are bulky and expensive, and we believe this system can bring a new level of price performance to the operating theater. Given the accelerating customer interest levels we've been seeing and with the world being closed down for travel, we have been conducting a series of live webinars and product demos with numerous resellers and software partners, including One Minute, Bitnamic, Perseagia, HealthLightning, LibreStream, Ulimax, Zerenta as well as several topical ones using Zoom.

They have been a good way to share the value proposition of our smart glasses with partner software solutions virtually to both existing and target customers. The level of engagement and feedback has been tremendous thus far, and the video assets that we created have proved to be meaningful sales reference tools for our customers. Frankly speaking, these webinars appear to be even more productive and much less expensive than many of the conferences we used to attend. With most, if not all conferences being canceled for this year, this is becoming a new way of doing business. It's a perfect fit for our products what they are designed to deliver.

It's not unusual to get several 100 people attending a given webinar and the downloads afterwards have been significant. Recordings of our solution webinars can be accessed via the new webinars page on our website. I highly recommend everybody take a look. In addition to the webinars, we also released a series of downloadable white papers to help educate customers across specific market verticals, including telemedicine, remote support and field service, manufacturing and worker training and warehousing and logistics to provide further education on the usage, benefits and implementation of our smart glasses products. It's not unusual to get as many as 100 downloads a week to these white papers, and the numbers are growing with interest in how smart glasses can help with remote operations and business continuity, teams that are resonating with people with increasing frequency.

Product development and tooling for our new M4000 smart glasses continues, and we still expect to ship production units later in the third quarter. The M4000 is based mainly on our M400 design, which means you can take software from the M400 and just drop it on the M4000 and it will work. What's different here though is the m 4,000 is using a waveguide based display engine that's optically see through. The beautiful thing about that is you can do features with more advanced AR and the likes. All told, because these things are based on the same platform, it has been significantly reduced our cost to get this thing into production.

It's going to be exciting when we finally roll it out. With a product refresh being introduced later this quarter, we expect the Blade to gain additional traction across enterprise due to its built in stereo audio feature being added to the glasses as well as an improved autofocus camera replacing the current fixed focus versions. This introduction, along with a new Vuzix custom built lithium ion battery that one wears on their collar will deliver up to ten hours of streaming video to remote experts in the field on a single charge. The Blade continues to hold its own within the security business as we have a number of solutions and process, some of which we have discussed previously that are a great fit for its form factor and capabilities. The ability to use AI for facial database detection and deliver information hands free to a security guard or first responder based on that remains extremely valuable.

In March, we announced our second OEM project, this one with a new major U. S. Defense contractor to build a customized waveguide based optics engine. The first phase of this program is expected to generate initial nonrecurring engineering revenues for us over the next quarter with subsequent NRE phases expected thereafter before an accepted final product design leads to volume production order. In April, we received yet another follow on development order from a global Tier one aerospace partner.

This one is for the fourth stage of this program. We expect to see this move to a production opportunity for us later in this calendar year. Since our inception, Vuzix has invested heavily to develop our intellectual property focused on near eye displays. Our intellectual property portfolio now consists of over 157 patents and patents pending. Our leadership and in-depth knowledge of not only Near Eye displays, but designing, developing and manufacturing AR smart glasses from the ground up puts Vuzix in a unique position to rapidly deliver new optical components and systems as well as innovative waveguide based smart products for our customers, both direct end users and OEMs.

We also continue to make tremendous progress towards establishing Vuzix as a preeminent supplier of next generation optical solutions for use with micro LED displays. These new solutions should allow the creation of consumer focused smart glasses for Vuzix and other OEMs to help eventually build Kingsman styled smart glasses for the mass market. We're looking forward to unveiling more here with our new partners in the upcoming months as we believe what we are working on is well ahead of the competition. Notwithstanding a challenging business environment, we have made tremendous progress thus far this year in terms of meeting our operating goals for 2020. We're currently seeing growing overall sales demand and an increase in the average order size for our existing M Series smart glasses.

We're currently on track to commence shipments of our M4000 smart glasses in volume during the later part of this year. We have continued to improve our waveguide manufacturing yields and capacity, and with the introduction of our upgraded blade, we are preparing to further ramp production to support expected sales and the rollout of programs and security in the enterprise markets. We expanded the number of contracted engineering services, program engagements, and are actively pursuing additional new ones as well as OEM programs. We are making great strides to develop our next generation waveguide optics and creating very small but high performing display technologies around micro LEDs. Finally, Vuzix and much of its staff at a personal level have worked hard to trim the cost of operations and will continue to be prudent in our spending while focusing on revenue generating initiatives.

Leading or furthering each of these objectives will serve to increase Vuzix's net cash flow from operations. And while we are encouraged by all of these developments, we still have more work to do. Our ultimate goal is to own the smart glasses for enterprise industry, which would result in substantially increasing our top and bottom line and, by extension, our shareholder value. I'd now like to pass the call over to Grant so he can review some aspects of our first quarter financial results. Grant?

Speaker 3

Thanks, Paul. As Ed mentioned, the 10 Q we filed this morning with the SEC offers a detailed explanation of our quarterly financials. So I'm just going to provide you with a bit of color on some of the numbers. Our first quarter revenues rose 12% year over year to $1,500,000 largely due to increased engineering services revenues and secondly, due to strong sales of our M400 Smart Glasses, which drove a 35% increase in overall M Series glasses revenues. Sales revenues of Blade Smart Glasses decreased by nearly 300,000 or 55%, primarily driven by a 20% decrease in their average selling price and lower unit sales.

As Paul mentioned, the pandemic did slow the progress of certain customer developments in the period. So while we began the quarter with a somewhat higher sales expectations versus the one we achieved, we were generally pleased with our results of operations given global pandemic situation. There was an overall gross profit of $81,000 for the three months ended 03/30/2020, as compared to the gross profit of $40,000 for the same period in 2019. On a product cost of sales basis only, product direct costs were 54% of sales in the 2020 period compared to 52% in the prior year's period. The change primarily the result of lower selling prices for the M300XL in the 2020 versus the same period in 2019, and that was before the M400 was introduced.

Manufacturing overhead costs for the three months ended 03/31/2020, as a percentage of total product sales increased to 37% from 30 in the same period 2019, with the majority of this increase representing additional personnel year over year, also support the movement of M Series smart glasses production back from China to Rochester. Our operating expense control efforts continue to be fruitful as we realized an overall decrease of $600,000,000 or 15% during the 2020 as compared to the same period in 2019. R and D expense was $2,000,000 for the three months ended 03/31/2020, as compared to $2,500,000 for the comparable 2019 period, a reduction of approximately 20%. The decrease in R and D expense was primarily due to reduced external consulting fees related to Blade software development. Selling and marketing expense was $1,200,000 for the three months ended 03/31/2020, compared to $1,400,000 for the comparable 2019 period, a reduction of approximately 19%.

The decline was largely due to the decrease in advertising and trade show costs, salaries and stock based compensation as well as external consulting fees. General and administrative expense for the three months ended 03/31/2020, was $1,500,000 versus $1,900,000 in the prior year's period, a reduction of approximately 19%. The decline was largely due to decreases in legal fees and IT and security consulting fees. We expect continued comparable 2020 versus 2019 quarterly operating expense reductions going forward, especially with reduced traveling event costs augmenting our overall cost control efforts throughout the year. The net loss attributable to common shareholders after accrued preferred dividends for the three months ended 03/31/2020 was $5,900,000 or $0.18 per share versus a net loss of $6,800,000 or $0.25 per share for the same period in 2019.

During the May, we adopted a compensation adjustment plan that is expected to save the company an additional $1,200,000 of cash between mid May and year end. Virtually all employees receiving more than a base salary of $60,000 will be taking cash pay reductions ranging from 15% to 25%, while senior executives and board members will take a cash 50% compensation reduction. To help keep overall compensation at an appropriate level and also to incentivize and retain employees through the investment period, effective employees are receiving Vuzix restricted stock awards under the company's 2014 incentive plan at a rate of 150% of the net cash reductions. These shares will fully vest on 01/15/2021 and cannot be sold by the employee or officer until 07/15/2021. We consider this action to be preferable one versus a broad headcount adjustment as we feel we currently have a very solid team in place.

Speaking on behalf of our employees, I can say that we are all remain united in our belief of great success in our company's future and will continue to deliver world class and changing solutions for our customers and shareholders. Now for some balance sheet highlights. Our cash position as of 03/31/2020, was $6,100,000 and our net working capital position totaled $11,800,000 Cash used in operations, excluding changes in working capital, totaled $4,400,000 in the 2020 as compared to $5,300,000 in 2019, a decrease of 19%. In April, Vuzix properly filed for and received total proceeds of $1,560,000 under the Paycheck Protection Program administered by The U. S.

Small Business Administration. Cash used for investing activities during the 2020 was $200,000 as compared to $1,300,000 in the prior year's period as our investments in manufacturing new product tooling and other equipment purchases decreased substantially year over year. CapEx for the balance of 2020 is expected to remain well under 2019 levels in total. In addition to our compensation adjustment plan, we will remain, of course, focused on minimizing our cash burn through the numerous previously discussed measures, including selling our existing M300XL finished goods and blade component inventory, disposing of as many of our written down products and components as possible, increasing our efforts to further promote our engineering services programs, continuing to pursue licensing and strategic opportunities around our weight gain technologies with potential OEMs, decreasing trade show and related travel expenditures and delaying or curtailing discretionary nonessential capital expenditures not related to near term new products, reducing the rate of new product introductions and leveraging existing platforms as much as possible to reduce new product development and engineering costs as well as further reducing the rate of research and development spending on new technologies, particularly the use of external contractors. With that, I would like to turn the call back over to Paul.

Paul? Thanks, Grant. In summation, as you can see from the orders we

Speaker 2

have been receiving, the partnerships we have been striking, the use cases we have been creating and the overall breadth of customer interest we have been seeing, Vuzix is emerging to become a critical go to supplier of smart glasses during a period when the world is turning to them as needed solution. While many other suppliers in our space continue to struggle, some increasingly so, our solutions and market positions continue to get stronger and stronger. We're more excited than ever about what the future holds for our industry and more importantly, our place in it. And we intend to keep pushing the envelope in terms of our industry leading products and technology. We're a team here at Vuzix, and this has been a team effort to get us to where we currently are.

So I'd like to thank all of our employees that might be listening in for all of your time and effort, particularly during these most challenging times. Expected revenue growth in combination with the expense management measures discussed will reduce our cash burn as we grow and execute upon these opportunities. That being said, there is presently much uncertainty in both the financial markets and the global business environment as many companies continue to reduce scale or shut down operations and unemployment soars to record levels. Given this volatile and unpredictable scenario, we have decided to strengthen our balance sheet. As just announced, we have entered into a stock sale agreement whereby we will be selling 5,000,000 common shares of Vuzix at a price of $2.25 per share.

This sale, expected to close this Wednesday, May 13, is a common stock offering only with no warrants attached, and the stock will be distributed among existing or previous institutional shareholders of Vuzix. This is a derisking move that better positions Vuzix for greater growth and provides additional financial security in uncertain times. Our business is currently accelerating, and we want to be able to expand and deliver to it to meet expected customer demand. Management and the Board feels that this move will be supported by the vast majority of our stakeholders as well as by our employees and customers and will provide us the ability to grow, innovate and deliver world class solutions throughout 2020 and well into 2021. I'd like to now turn the call over to

Speaker 1

the operator for Q and A.

Speaker 0

At this time, we'll be conducting a question and answer session.

Speaker 3

At

Speaker 0

we'll be conducting a question and session. Our first question today comes from Brian Kinstlinger of Alliance Global Partners.

Speaker 4

I've seen a number of press releases discussing demand for the telemedicine industry for smart glasses, and you've talked about it a bit here. Can you quantify roughly how many smart glasses have been sold to tenants on telemedicine purchases in 2Q? Are we talking several 100? Are we talking you know, tens? Just give a bit of a magnitude of the demand you're seeing.

Speaker 2

It's many hundreds. And if you think about it, Brian, there's a new normal coming here. And even if you go back to work in hospitals, today hospitals don't want anybody in their facilities that might be carrying the virus. And so these big medical firms that make medical products that have their equipment sitting in the hospital, they all need maintenance. They all need support on a daily basis almost.

And it used to be the only way to do that was to send a person from that firm into the hospital. And what's happening now is literally they are they are sending a pair of glasses. The tech that already is qualified to be in the hospital is doing the remote support from some of these bigger companies. So the kinds of volumes we're talking about here, it's not like one or two for hospital kind of a thing. It could be a significant number ultimately in all of these hospitals going forward.

Hospitals are only one example. I mean, it's going to be the same thing in industry. People don't want to send their employees. In fact, you can't get an employee on a plane to China today and back and forth without fourteen days of quarantine in the land. So this is becoming a new thing.

And quite frankly, for smart glasses, we've been saying this for a long time, people were unhappy spending a ton of money putting people on airplanes and bearing out their staff when they could have simply just used smart glasses all along. This is forcing that change. And I think we're going to see a big move towards this direction in the future.

Speaker 4

And then I think Grant intimated as much eight weeks ago, you had thought revenue would build sequentially every quarter. And there were only three quarters left sorry, three weeks left in the quarter. So what was the biggest inhibitor to growth,

Speaker 5

sequential growth for those three weeks?

Speaker 2

You're talking about last quarter? Yes. So yes,

Speaker 4

I think that Grant said in his prepared remarks, and I think in the last conference call, you said you'd expect sequential growth first quarter compared to second quarter, and there were only three weeks left. So in those three weeks, what happened? Was there massive some large orders that

Speaker 2

got delayed that you thought would be difficult?

Speaker 1

I'm just

Speaker 4

trying to understand.

Speaker 2

So so the first quarter was about a million and a half in revenues. And then the second quarter, almost just all in April, it's about a million and a half in revenues also, maybe a little bit more. It's bigger than what the first quarter was. So we are seeing sequential growth here Q1 to Q2.

Speaker 3

And Brian, all kinds of businesses being deferred by companies that are just trying to figure out how they're going to adapt and what they're going to do next. Decision makers are getting together and initiatives being suspended. We've got not to name any automotive companies, but I mean, they haven't been building cars. So they're not interested in deploying smart glasses and parts of their operation, etcetera. I mean, it's yes, we had positive demand coming from hospitals, seniors' homes, etcetera, but majority of everybody else is frozen, trying to figure out what to do.

So that was a shock, and I don't think anybody fully contemplated it.

Speaker 4

Okay. And then can you speak to the supply chain? Last quarter, you said there was a few parts secured for the China having a significant impact. Has there anything changed from a supply

Speaker 3

Right chain now, no. I mean, you know, to be frank, I mean, there you know, we did say it slowed down some of our new product introductions. There was a period in the last couple of months when all new mold based distilled bases in China had to be allocated to building mass and PPE. So we had to wait for turns. That pushed out our new product introduction about three weeks.

It's not the end of the world, and it's on track, and we're getting samples now. But, I mean, there's been little glitches like this in the in the chain as well as it takes longer to clear products through customs going into Europe. You know, stuff has got to sit, you know, in quarantine, you know, materials. So everything's taking a little longer along the supply chain.

Speaker 4

Okay. Last question. In terms of liquidity, ahead of this morning's announcement on the raise, I'm curious how much cash you had as of today. I mean, by my math, where you ended and your burn went down significantly, I'm figuring 3,000,000 plus the federal loan, which is about four and change. Is that where you were?

Speaker 2

Maybe a little bit lower?

Speaker 3

We're about that. We don't we don't issue a monthly cash balances to anybody. We will fund that.

Speaker 0

Fair bet. The next question comes from Jim McIlree of Bradley Woods.

Speaker 5

It sounds like the increase in sales that you've seen in April has been concentrated with the M Series. Has there been an increase with the Blade as well?

Speaker 2

We don't break it down that way, Jim. Sorry. I think, you know, we just don't break it down that way when it comes

Speaker 3

M Series products is being stronger,

Speaker 5

for sure. There is

Speaker 3

a bigger the biggest portion of that. So that's why we're seeing the demands, you know, in related to telemedicine and in remote video conferencing. The Blade participates in that, but to a lesser extent.

Speaker 2

The Blade doesn't have auto focus camera, so it it has a bit of a a actually, a heel in comparison. And it will certainly have auto focus camera. That's what this new upgrade is all about. The Amp 400 has got a broadcast quality camera in it. It's amazing how good it is.

You can record four k video with it, and so when you're streaming HD, it's just it's just so easy to see and resolve issues because you can enter the text on the page to fine print, etcetera.

Speaker 5

And when you refresh the blade, you I think I think, Paul, you said it was this quarter. Is that is that with the same price, or is there

Speaker 2

a price change as well? We haven't fully finalized, Jim. I I think you're gonna see it start at least at a thousand.

Speaker 5

Okay.

Speaker 3

So that that would be a small increase. It would be back to where the plate originally started at 999.

Speaker 5

Right. Got it. Think in the press release and in your commentary, you talked about engineering services improving in Q2, and that's part of the bullishness you have on the quarter. Can you indicate what you think engineering services revenue would be this quarter, either a range or

Speaker 2

a percentage increase I or

Speaker 3

think we say in the Q, we got about a little over $600,000 in previously booked engineering services expected in Q2 We put in our last q. I mean, we're expecting the award of one and perhaps two new programs before quarter end. I mean, how much we we put on them by then, but, I mean, it's, what have we put in here? I think it was a little over 600 gram we said we had to complete. Just trying to find it in our

Speaker 5

I'll I'll I'll do it out. You don't need to Yeah.

Speaker 3

We do make a statement.

Speaker 5

That's good. Yeah. Okay. I'll I'll look for that. Thank you.

And then I'm just I'd

Speaker 0

like to understand a

Speaker 5

little bit better the price delta that you're contemplating, the M400 versus the M4 thousand as well as what different applications or end markets that you are intending to address with the 4,000 that you don't with the 400? I mean, I'm really trying to get at that the the the product transition or the you know, how those two products are gonna look together on the 4,000 that's introduced.

Speaker 2

So the M4000, which is the one with the optical see through will carry a it's about a $2,499 price point. We haven't finalized that out. I think that's what we're thinking right now. So it's a significant raise in price. Know, it'll do a lot of what the m 400 can do.

However, with the opposite c three display, sometimes it's not as handy to do remote support. In fact, it's not probably not as good because an included display is better there. But there's other applications where you're looking at stuff in the real world and you want the digital world to be overlaid on top of it and seeing it so that you're you're not having to think about picture in picture kinds of things. So if you think about looking into an occluded display or even at a laptop, right, you look over at the laptop and then you decide what you're gonna do based on what you're seeing there, then you go back to the real world and you gotta try to remember it. Even though your eyes are just moving a little ways, that's what happens on an m 400 today.

The m 4,000, you'll look out in the real world and the information will be floating out in front of you in the real world and so it makes it so that the odds of getting something wrong go down a fair bit. But it takes time to write software to do that kind of feature set, that AR kind of advanced feature sets. So, I would hate the M4000 and the M400, we think they're going to coexist very, very well together. There's going to be people that want to pay for that ability to get higher performance and more accuracy, and there'll be people that absolutely love the fact that what you're getting on an m 400 with this super bright beautiful display that's occluded that allows you to really read it well for remote support kinds of applications, they'll be more than happy with that. So, they'll coexist.

They'll be a reasonably large difference in price between the two and people will pick based on the needs we think.

Speaker 5

And it's going to be through the same distribution partners, the same software partners, or do you have to come up with a whole new set

Speaker 1

of partnerships in order to get

Speaker 5

the product out? Out of the

Speaker 2

age, many of the same software works. Right? So there'll be plenty of just slide it in and go with it. However, some of those advanced features I was talking about, some of our our partners want them and will enable them in the glasses, but it'll take them a little bit of time to get that software written for. But in the meantime, their current software will

Speaker 5

just work with it.

Speaker 2

It should be something they'll be able to upgrade to over time.

Speaker 5

Got it. Got it. And just finally,

Speaker 2

I'm I'm like to understand a little

Speaker 5

bit better about the improvement you've

Speaker 3

seen in

Speaker 5

demand since at least in some segments due to the COVID lockdown. I'm assuming that these are with customers who have already gone through the testing and evaluation, and now it's the lockdown that has pushed them off the decision point.

Speaker 4

It's a little bit So one, could you just say if

Speaker 5

that's my assumption there is true or not?

Speaker 2

And then secondly, is what

Speaker 1

about the

Speaker 5

new customers, the new testing? Is that all put on hold for now? Or is there is it you know, what's happening with with that portion of the of the selling and marketing process?

Speaker 2

There's a portion of our business that is on hold right now, and it's all the stuff that you might imagine is not so critical to deal with when your plants are shut down. As Grant said, in the car industry right now, since the plant floors aren't even operating, nobody cares so much about trying to increase efficiency there. The the there was a group of folks that these have been working with all along that have been wanting to do remote support. And in those cases, often, it just caused them to move into overdrive. In the medical space, there were very few people that were using our products in that space.

That that space moves like molasses. To make a change there, you normally have to go through sometimes years of testing, you know, but this virus has completely changed people's mindset on on how they need to operate. And so they're doing things expeditiously now. And so in that space, it's been been a like an avalanche of new business, and a lot of it's coming really fast. And when it comes to the medical supply side of it, larger companies that make medical equipment, they have to keep running in these hospitals.

They're trying to solve some big problems here. I mean, nobody wants to be in a hospital today because it's you know, ground zero for the virus. This equipment, everybody's, like, going back to work. Right? We're gonna go start doing operations again.

We're gonna, you know, you know, do do the stuff that's been put on hold, and the hospitals are running under extreme circumstances to try to make that work. They don't want anybody in the buildings. So they're all trying now to solve problems they've never had before. And it's happening very, very quickly in that side of it, Jim. So those are people, companies that we haven't worked with before that are finally they have no choice.

They have to figure out to make this stuff work and II VI stuff works well for it. So there's a part of our business that actually is on hold. Even some of the in store picking kinds of things and stuff, that's on hold because those employees that work in that side of the business, they're at home, stuck in so you can't deploy something in a store when the people who would normally be doing that can't even go to work yet. That stuff, the brakes came on. All this other stuff about trying to bring the world back to life, those are the things that are starting to kick into overdrive and new new customers coming out of the woodwork for Vuzix.

Speaker 5

Got it.

Speaker 2

Okay. Great. Next up. Yep. Thank you, Tim.

When the world shuts down around the world, it's extreme and amazing how the impact and what people try to do to be creative to get back to normalcy.

Speaker 3

Jim, one last thing. We have 695,000 remaining in the existing engineering services programs, which we the customer is in a rush and we're going to try to get done in this current quarter. Plus, we know we're going to get one more new job before the end of the quarter.

Speaker 5

That's great. All right. Thanks a lot, guys. Good luck with everything. The

Speaker 0

next question is from Jack Bedard of Maxim. Please proceed with your question. Hey, good morning, guys. Thanks for taking my questions. I'm wondering if you can

Speaker 5

I know there's been a

Speaker 0

lot of questions on kind of revenue ramp? I want to just follow-up on the engineering services revenue.

Speaker 4

I just checked

Speaker 0

the 10 Q as well. So the revenue from engineering services was a result of just two waveguide and display engine development projects, and that began in 1Q 'twenty. So one, is that correct? Is it just related to these two projects? And then

Speaker 2

Yes, how much that's correct.

Speaker 3

That's correct.

Speaker 0

Okay. And I think you said $695,000

Speaker 4

or

Speaker 0

so is remaining on these two contracts. So that would imply that the revenue produced from these contracts in Q1 is absolutely below what you expect for Q2, at least related to these two contracts?

Speaker 3

Absolutely. I mean they didn't really kick off till in March. So I mean there's we recognize revenue on a basis of completion. So we've got to ramp up and gear up. So that's all we booked is revenue in Q1.

Got it.

Speaker 0

Okay. That's helpful. And then I want to reference a specific customer example. It is described in the January presentation. Can you share additional color on volume blade shipments as it relates to Ride On?

I believe you're expected to expand that in Q1 twenty twenty to put another seasonal resell order. So given COVID-nineteen and everything, has that played out accordingly? And if not, where is that? Should you give me a status update in terms

Speaker 4

of where you expect revenues to come from that particular issue?

Speaker 2

That's sort of like the box madness basketball and all the other sports industry that we shut down. You can't go swimming pools today to swim either. So you can imagine what happens to anybody who makes swimming products. I mean, unfortunately, for Ride On, this has impacted them. We have sold them some, but we and honestly, we don't break out by account who we sold and how much we've sold to.

That said, they've had some challenges because of this.

Speaker 0

Okay. And that's understandable. And then I guess just lastly, last quarter you guys provided an update on waveguide manufacturing capabilities and production yields. They've definitely improved significantly, at least last quarter around I think

Speaker 2

exceeded 85% quite consistently.

Speaker 4

Can you

Speaker 0

maybe talk about where that's trended over the last few weeks? And then kind of what your outlook is for that production yield throughout the remainder of 2020?

Speaker 2

Now it's going great on the plant for waveguides. And in fact, one of the reasons why we're getting a lot of this OEM business is it's related to the fact that we manufacture our own waveguides. We can do them cost effectively and we do them here in The United States Of America. And that's a big plus, especially on these defense related activities. Our competitors that make these kinds of things are out of China for the most part, in fact, almost exclusively now.

And that's very problematic if you're a U. S. Defense supplier, as you might imagine, knowing the climate between us and China these days. So the plant's floor is going great. We've now got three replication pieces of gear on the plant floor, and our yields have never been better.

Speaker 0

Okay. Fantastic. And actually, if I can sneak one more question in here. As it relates to gross margins, product gross margin, I think it's negative here if my model is correct. Engineering gross margin was strong.

I mean, this is up a very, very small amount right now, of course. But maybe can you talk about like what your expectation is for gross margin, which came

Speaker 4

in around 5% this quarter?

Speaker 0

What do you mean to say for that? So how large can that ramp be? How quickly can it happen where gross margin is can get some lift here due to higher volume shipments maybe? And is that 84% or so engineering gross margin indicative of what you'd expect that even higher revenue scales from engineering services?

Speaker 1

That's it

Speaker 5

for me.

Speaker 3

I mean, the 84%, it's not going to be that high on a long term basis. It's just the way the work and the progress billing did. I mean, it does primarily internal work, and we didn't have external costs and contractors, which we can make a lot less money on. We need to reclass some of our engineering wages add it up the cost of sales. But, yes, product gross margins are less.

I mean, manufacturing overheads are you know, they're over 30% of our our sales, and it's all volume related. I mean, we built infrastructure. We have a nice 9,000 factory. You know, we we need the infrastructure, and it's all a matter of volume. So our long term goal is still to get north of the net 40% and not, you know, with any not with expected unusual, you know, big increases in engineering gross margin.

And we do try to do our best there, but I mean it's strictly volume. So until we can get our sales way up, then that fixed cost that's listed in our cost of goods payable. We got to amortize those fixed overheads.

Speaker 0

There are no additional questions at this time. I would like to turn the call back to Paul Travers for closing remarks.

Speaker 2

I would like to thank everyone for your interest and participation in today's call. We look forward to speaking with you again at our Annual Shareholders Meeting, June 22. This year, because of the virus, yet again, the world changes, we will be having a virtual meeting, and there are more details available on our website. So again, we'll talk with everybody then. Thank you, everybody.

Speaker 0

This concludes today's conference. You may disconnect your lines at this time. Thank you for your

Speaker 1

participation.