Vuzix - Earnings Call - Q2 2020

Transcript

Speaker 0

Greetings and welcome to the Vuzix Second Quarter twenty twenty Financial Results and Business Update Conference Call. At this time, all participants are in a listen only mode. A brief question and answer session will follow the formal presentation. As a reminder, this conference is being recorded. Now I would like to turn the call over to Ed McGregor, Director of Investor Relations at Vuzix.

Mr. McGregor, you may begin.

Speaker 1

Thank you, operator, and good afternoon, everyone. Welcome to the Vuzix second 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 or development plans, the ability to attract and retain qualified personnel, as well as changes in legal and regulatory requirements. In addition, any projections as to the company's future performance represent management's estimates as of today, 08/10/2020. Vuzix assumes no obligation to update these projections in the future as market conditions change. This afternoon, the company issued a press release announcing its financial results and filed its 10 Q with the SEC. So participants on this call who may not 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, reconciliation to the most directly comparable financial measure calculated and presented in accordance with GAAP can be found in the company's Form 10 Q filed at the sec.gov, which is also available at www.vuzix.com. I will 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, who will provide an overview of the company's second quarter financial results. We'll then move on to the Q and A session, after which Paul will provide some closing remarks.

Paul?

Speaker 2

Thank you, Ed. Hello, everyone, and welcome to the Vuzix Q2 twenty twenty conference call. Q2 sales and gross profits were the highest we've achieved as an enterprise product supplier. We're pleased to see our products being used across our client base to assist customers in solving the complex issues associated with today's business environment. Our sequential revenue growth in Q2 for product sales was nearly double, 98% to be exact as compared to Q1 driven by a record $2,300,000 worth of Vuzix Smart Glasses revenues in the quarter representing a quarterly year over year increase of a 183 compared to Q2 of twenty nineteen.

Our second quarter Smart Glasses sales were driven by new customer acquisitions and follow on purchase orders from existing customers. COVID nineteen has changed the way business is getting done by most organizations. And as a result, we are seeing our business growth become part of the new normal. Our third quarter is off to a strong start with revenues continuing to show further growth. As a result, we believe we're in a position to deliver continued growth in this quarter and over the remainder of 2020.

We're now six months into the COVID pandemic and the business activities to support enterprise customers and business continuity continues to accelerate, precipitating for many a shift in terms of urgency and interest to deploy smart glasses. The global pandemic is currently showing no signs of letting up, and all indications are that we have entered a new normal for business to operate regionally and globally. This has and continues to accelerate adoption for most of our key business verticals, most notably field service, telehealth, and health care. There are also similar needs for customers operating in manufacturing, warehousing and logistics, and retail, both online and in store pickup, all of which were negatively impacted by coronavirus, but are now trying to come back online in spite of COVID. Companies of all sizes are significantly restricting or even eliminating most travel altogether, and conferences and trade shows around the world have all gone virtual.

The International Air Transport Association is forecasting that air travel may not return to pre COVID nineteen traffic levels until 2024 at the earliest. The IATA commented further in their recent report that video conferences have made significant impacts as a substitute for in person meetings and have greatly reduced the need for corporate travel. As a matter of fact, Vuzix is using our own technology in this regard as well. As you can imagine, Vuzix needs to qualify vendors and supply sources from around the world. And as an example, just over the last few months, we have been bringing online a relatively expensive piece of new manufacturing equipment being custom built for us that is coming from China.

And instead of flying someone halfway around the world and letting them sit in quarantine for fourteen days, we sent the supplier a pair of Vuzix m 400 smart glasses. On our first call using the m 400, we were able to test out the equipment and go through QA remotely without having to send a person. It begs the question for us and probably every other firm out there. Why send a person when you can send a pair of Vuzix smart glasses? It's safer, cheaper, faster, and in almost every way, a better way of doing business.

We have been saying this for some time now. The pandemic is forcing the point. Internally, Vuzix continues to operate under directives put in place in March to minimize COVID risk, including avoiding face to face interaction between employees when at all possible, practicing social distancing, and requiring face coverings within the office and on the production floor and conducting regular COVID screening. Vuzix employees who can work from home have continued to work from home, and in person meetings at the office have been almost entirely replaced with virtual Zoom meetings. On the manufacturing front, our on-site production employees are as distant as possible while assembling smart glasses on our production floor, and other protections have been adopted to further limit COVID risks such as enhanced facilities and equipment cleaning and staggered clock in and clock out for shift workers.

The Vuzix m 400 has clearly become the workhorse for a steadily growing list of enterprise customers. The m 400 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 technician. And with advanced voice control now in the base OS, it has become a completely hands free device for many applications. Our m 400 smart glasses as a scalable platform continues to mature, further differentiating it versus other vendor solutions.

During the first half of twenty twenty, we added support for several popular video conferencing platforms such as Zoom, Zoom for Healthcare, Skype for Business, and Cisco Webex Teams. Most recently, we have added incremental improvements and features to these applications based on feedback received from the field to increase the ease of use and provide additional functionality such as one click joining of meetings, zoom in, zoom out camera capabilities, and hands free usage. I can't emphasize enough how these popular conferencing applications make it very easy for large enterprise companies to get started with the Vuzix m 400 and Blade Smart Glasses for video conferencing. For our customers that require advanced features not offered by these software applications, Vuzix continues to be successful in directly upselling solutions such as Vuzix Remote Assist and UVMax Frontline or working through our partner reseller channels. In most cases, these upsells are generating new software revenue opportunities for Vuzix that can recur on an annual basis.

In July, we formalized a collaborative partnership with ProGlove, a leading supplier of small wearable barcode scanners to offer a combined product solution that addresses the growing need for greater efficiency and safety in industries spanning retail, transportation, logistics, manufacturing. We expect this partnership has the potential to increase the customer reach for both firms in the warehouse and logistics markets going forward with firms like BMW and others already starting to use our combined solution. The three specific verticals within enterprise that continue to accelerate since the COVID nineteen pandemic began in February remain field service, manufacturing, and health care. Within each, we continue to see an acceleration in adoption driven by business continuity plans and the urgent need to deliver remote expertise without having to send engineering personnel on-site. One of the hottest areas is health care, which includes remote patient care, telemedicine, training and education, medical equipment servicing, and surgery assistance, all driven by the top notch performance of our m 400 smart glasses coupled with a variety of software applications being sold by Vuzix and our partner channels.

A number of our key accounts that each could ultimately represent more than a million dollars of pipeline revenue within the next several quarters are now coming online, which is resulting in recurring monthly sales as these accounts begin to scale. One prime example is a global medical device manufacturer that came to Vuzix in March with initial units going to one site in Europe, but rapidly expanded to more than a dozen locations with deployments of hardware and software across The US as well as Europe and Asia. And we are not just seeing revenue growth coming from one or two of our largest accounts. Instead, it's across many customers that are expanding their use of smart glasses, which helps accelerate Vuzix customer footprint and our revenue growth. As a result, we continue to see an increase in customer order flow, average order size, and the number of customers placing reorders.

We are seeing these trends occur domestically as well as in Europe and the Asia Pacific region. The latter led by Japan with revenues rising significantly over the previous year. As reported a few weeks back, we now have regulatory approvals, and the m 400 has started shipping into China. As China is a manufacturing center of the world, we expect to see considerable sales growth in the region as companies around the world address business continuity issues while not easily being able to visit the country. Everywhere we look around the world, we see our glasses being put into service.

Other new use cases and technological developments that we have announced recently include use for auditing in meat plants, knee replacement surgery, and gastrointestinal surgery. I wanna spend some time to provide an update on our relationship with Verizon. The story around the Verizon five g network and the connected workforce with Vuzix smart glasses across a variety of market verticals is gaining momentum internally at Verizon with key business sponsors, executives, and the Verizon b to b sales team. The ongoing effort inside Verizon to scale up their sales efforts is beginning to bear fruit, and we expect a broader coordinated effort and marketing push from Verizon integrating Vuzix solutions around their five g and mobile edge compute platform. Organizations like Verizon often take time to get this ship moving, but it's finally rolling now.

We're working with Verizon to address key market verticals, including retail, most notably big box retailers, distribution centers, and logistics, all of which can leverage Verizon's five g network alongside Vuzix smart glasses for order picking and AR vision to drive efficiencies and cost savings. Another major focus is on health care, telemedicine, and first responders. Last month, Verizon announced in a press release that Vuzix was selected as the AR smart glasses solution provider for the Verizon EMS bundle. The EMS bundle will be co developed by Verizon and Vuzix alongside some other exciting companies to put together a world class turnkey solution centered around five g by bringing situational awareness technology to public safety and first responders. It's one thing for Vuzix to enter this market alone, but with the technical support, ecosystem, financial muscle, and five g network of Verizon in place, it should help bring this turnkey solution to the market very quickly.

Verizon's EMS solution will be market and sold nationwide by Verizon to public safety organizations across The United States. Verizon is planning to launch its EMS solution nationwide by early twenty twenty one. Verizon is well positioned to become a significant smart glasses distributor for Vuzix over the next twelve months, and we hope to share other exciting partnership developments involving Verizon over the remainder of the year as they materialize. The Vuzix m 4,000 is a very exciting sister product for the m 400. Built on the same XR one silicon, we expect this offering to be very complementary to the m 400 and provide a one two punch with an enterprise.

The optically see through m 4,000 will give our customers not one, but two enterprise workhorse products to choose from. Product development and tooling for our new optically see through m 4,000 smart glasses is complete. Preproduction units of the m 4,000 have been shipped out to select partners over the last several weeks, and we expect to ship production units during the current quarter. The Vuzix Blade upgraded version, which will include a new built in stereo audio feature as well as an improved autofocus camera, will start shipping in volume this fall. We have also shipped early production units to select enterprise customers, and their feedback thus far has been excellent.

We expect this new blade to gain additional traction across not only enterprise space, but for prosumers as well due to these added features. Our OEM business portfolio continues to expand and move towards volume production programs. We now have four programs, two of which we have discussed before and two more nondefense programs that are yet to be announced. The multiyear revenue potential associated with volume production for these programs for Vuzix in this space could be significant and, of course, grows with each additional agreement signed. During the second quarter, we delivered a customized waveguide based optics engine to a major US defense contractor for a project we first announced back in March.

This customer was pleased with the initial product delivered, and we expect to see additional NREs in subsequent phases of the program before an accepted final product design leads to potential volume production orders. In early July, we delivered a customized waveguide based head mounted display system to the global tier one partner we first announced back in 2018. We now have completed four phases of this product development program, receiving cumulative NREs of 1,300,000.0 from this partner to date. Importantly, this waveguide based head mounted display system has been qualified not only for commercial aviation use, but for defense as well. As a result, we are now negotiating a supply agreement with this customer for volume production of this customized head mounted display waveguide and HD display engine product for both aviation and defense usage with deliveries potentially commencing as early as this fall.

Beyond these efforts, we have a growing list of other projects that continue to progress towards signed OEM programs. Of course, we look forward to announcing further details on all of these opportunities when we can. Vuzix remains diligent regarding the development of our intellectual property focused on the smart glasses product solutions and technology. Our intellectual property portfolio continues to grow and now consists of over a 166 patents and patents pending, up from 90 patents and patents pending just three years ago. As a US based company, our leadership and in-depth knowledge of not only near eye displays, but designing, developing, and manufacturing AR smart glasses, head mounted displays generally, and optical systems 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, including global defense companies.

As the graphic on slide 10 illustrates, we have broad expertise and capabilities regarding the manufacturer of optical waveguides. We can make them in volume, in various shapes, sizes, and structures. And we are one of the few, if not the only company making them here in The USA, a critical factor for many of the OEM customers we have. We also continue to make progress towards establishing Vuzix as the preeminent supplier of next generation optical solutions for use with and around micro LED displays and other advanced display engine technology. Vuzix will be sharing more about these exciting developments in due course, but let me say that these new solutions should facilitate some of the most advanced enterprise and consumer focused smart glasses for Vuzix and our OEM partners to help build stylish smart glasses for use across the board.

The smart glasses pictured on slide 10 are already in the prototype stage. And unlike others preparing to enter this space in 2022 or '23, we expect to see products like these reaching the market in the much nearer term. I'd like to now pass the call over to Grant so he can review some aspects of our second quarter financial results. Grant?

Speaker 3

Thank you, Paul. As Ed mentioned, the 10 Q we filed this afternoon 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. For the three months ended 06/30/2020, total revenues increased $800,000 to $3,000,000 versus the same comparable period in 2019. The increase was driven by higher sales of our non OEM smart glass products, which rose 183 year over year.

Sales of OEM products were nil for the three months ended 06/30/2020, as compared to just under $1,000,000 in the 2019 period. We do not currently contemplate further orders of that OEM smart glasses model. Engineering services revenues for the quarter was $700,000 versus $400,000 in the prior year's period. There was an overall gross profit of $800,000 for the three months ended 06/30/2020, as compared to a gross profit of $200,000 for the same period in 2019, driven by improved product gross margins and stronger gross margins earned on our engineering services program. Product gross margin before overheads and other items was 50% of the for the three months ended 06/30/2020, as compared to 24% in the prior year period, with the improvement primarily the result of higher margins earned on the M400 versus the M300 series in the prior year's period when the M400 was not yet available for sale.

Manufacturing overhead costs for the three months ended 06/30/2020, as a percentage of total product sales decreased to 16% from 20% in the same period in 2019, with the majority of the decrease being attributable to higher levels of sales versus the previous year's comparable quarter. In addition to its normal reserve for obsolescence provisions, the company wrote down to net realizable value all of its unique component parts related to our original blade in the amount of $300,000 for which several items went end of life. Our manufacturing efforts have had to shift to the production of our newer blade upgraded version, which should ship by the fall of this year. For the three months ended 06/30/2020, we reported gross profit from our product sales of $200,000 or 9% of product sales as compared to a gross loss of $100,000 in the same period in 2019. Research and development expense was $1,800,000 for the three months ended 06/30/2020, compared to $2,000,000 for the comparable 2019 period, a reduction of approximately 10%.

The decrease in R and D expense was primarily due to a reduction in overall new product research and development costs as well as reduced external consulting fees related to Blade software development. Selling and marketing expense were down 3% to $800,000 for the three months ended June 30 as compared to the 2019 period as lower travel costs and staff reductions implemented in Europe 2019 were offset by higher commissions paid to TDG pursuant to our amended noncompete agreement as a result of increased revenues from our defense based customer engineering services programs. Dental and administrative expense for the three months ended 06/30/2020 was $1,800,000 nearly unchanged from the prior year's period as lower travel expenses and legal fees were offset by increased stock based compensation and IR and shareholder related expenses. Even with the recent increase in total sales, our expense control efforts continue to show reductions with total operating expenses, excluding depreciation and amortization, declining 4.8% to $4,400,000 for the three months ended 06/30/2020, versus the corresponding 2019 period. We expect continued comparative 2020 versus 2019 quarterly operating expense reductions going forward, especially with reduced travel and trade show costs contributing to our overall cost control efforts.

The net loss attributable to common stockholders before accrued preferred dividends for the three months ended 06/30/2020, was 4,200,000 as compared to $5,100,000 for the same period in 2019. The net loss after accrued dividends for Q2 twenty twenty was $0.13 per share versus a net loss of $0.20 per share for the same period in 2019. Now for some balance sheet highlights. Our cash position as of 06/30/2020, was $13,200,000 and our net working capital totaled $20,100,000 Cash used in operations, excluding changes in our working capital, totaled $2,900,000 for the 2020 as compared to $4,000,000 in the 2019 comparable quarter, a decrease of 29%. Cash used for investing activities during the quarter was $400,000 as compared to $900,000 in the prior year's period as a required 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. The company has a $1,600,000 debt obligation as of June 30 under a Paycheck Protection Program loan that it received in April 2020. The company intends to apply for forgiveness of the amounts received under this loan once rules are finalized and further guidance is issued. With the amount eligible forgiveness expected to equal the sum of payroll costs, covered rent obligations and covered utility payments incurred by the company during the twenty four week period beginning on 04/21/2020, calculated in accordance with the rules and other terms of the CARES Act. With that, I would like to turn the call back over to Paul.

Paul?

Speaker 2

Thanks, Grant. Our third quarter is off to a strong start in terms of smart glasses revenue through the August and is currently outpacing our second quarter sales rate. This bolsters our belief that we are in a position to deliver continued growth in the third quarter and over the remainder of the 2020 year. 2020 is proving to be a transitional year for Vuzix and it is encouraging to see that the growth in our business to date is broad based and not dependent on any single project or customer. We're also seeing growth across multiple market sectors.

And with the world changing as a result of the pandemic, we see that growth continuing into foreseeable future. Again, why send the person when you can send a pair of glasses? They're faster, cheaper, safer, and more. What Vuzix delivers in relation to COVID is going to be part of the new normal. And when people finally get back to work at scale, adoption of smart glasses and many other use cases as we have discussed in the past should expand our business even further.

Augmented reality and smart glasses in general are the computing platform of the future, and Vuzix is positioned well to be a winner in

Speaker 4

the space. With that said, I'd like

Speaker 2

to now turn the call back over to the operator for q and a.

Speaker 0

Thank you. We will now be conducting a question and answer session. If you would like to ask a question, please press star one on your telephone keypad. A confirmation tone will indicate your line is in the question queue. You may press star two if you'd like to move your question from the queue.

Our first question comes from the line of Christian Schwab with Craig Hallum Capital Group. Please proceed with your question.

Speaker 5

Great. Thank you. Congratulations on a very strong quarter. I was just looking for the growth commentary. Is that a common, regarding year over year growth in, you know, '19 to '20?

Or is that a comment, regarding sequential growth from the just finished June?

Speaker 2

Yes. The answer is yes to both of those, Christian.

Speaker 5

Okay. Perfect. Thank you. It it when the the avionics opportunity that we've already been qualified in, can can you give us any potential range of outcomes, you know, over the course of the next few years, you know, between zero and obviously something else? So we could kinda gauge the the opportunity there and and what would be a fair ASP if you're willing to share, plus or minus that we should be thinking about?

Speaker 2

Oh, jeez. This is really difficult without let me say this. If you follow the defense space in when it comes to smart glasses and things like the HoloLens being employed, etcetera, there's a lot of big defense suppliers that aren't part of that HoloLens effort, and they are already delivering wearable technology today. And if you take a look at what our friends were doing over that side of the house, it's a significant piece of potential business here. I mean, there's a lot of defense guys out there and gals that need to have access to equipment like this.

And it's going to be in programs, we believe, at least what we're being told, upgrades to stuff that's in the field and brand new programs. You'll see these things in a lot of different places. They have to be qualified to defense level performance. And so it's not as inexpensive as purchasing a enterprise level solution just because it has to meet all these other sort of specifications. So, you know, you look at even a finished product that uses these subcomponents are probably gonna be more expensive than that.

Hard to give you a hard number on that. Again, I but it's it's, you know, it's it's greater than 1,500 to $2,000 kind of numbers. And the volume could be significant. And, you know, we've mentioned a couple of players in this regard. You know, the technology of the future is all wearable and see through optics is a critical part of it.

And the cool thing is Vuzix manufactures these things in The United States. And if you pay attention at all to world politics, you know that that could be a very important edge.

Speaker 5

Great. Thank you. I'll just ask one more quick question to get back in the queue. Either and we have a vast expansion of of opportunities that that we kinda talked through. So I won't let you regurgitate that.

But what I was thinking about is a couple of the other opportunities that kind of, you know, stood out, I thought, which was, you know, the Verizon opportunity on a couple fronts, as well as, you know, marching through NRE engineering, with with a with a US defense contractor. Would would you expect or be disappointed if there wasn't some sort of potential material volume, from both of these customers in 02/2021?

Speaker 2

Oh, we definitely should see significant contributions to revenues, not just there, Christian. Think about knee surgeries. There's over 600,000 knee surgeries done a year in North America. I mean, there's there's a lot of places where the technology Vuzix makes should have nice contributions to the to the revenue side of things. And in the Verizon side, we have high expectations.

And then some of our OEM programs, have high expectations. And 2021 will not be a bad year for them. Knock on wood.

Speaker 5

Great. No other questions. Thank you.

Speaker 2

Thanks, Christian.

Speaker 0

Thank you. Our next question comes from the line of Jim McGillery with Bradley, Woods and Company. Please proceed with your question.

Speaker 4

Thank you. Good afternoon. Paul, you mentioned in your commentary two nondefense engineering programs. And to the extent that you can elaborate on that, are those for see through optics as well? And we haven't seen the we haven't seen the engineering part of that yet.

Correct?

Speaker 3

That's correct.

Speaker 4

And if we haven't, when when is it a reasonable time to think that they would that that when's a reasonable time to think that you could start working on those projects?

Speaker 2

Well, we're we're in development on them now, so I would anticipate you'll see some contribution to the to the pile here from an engineering nonrecurring engineering OEM perspective even in this quarter, q three, on on some of them, Jim. And and there there are smart glasses and optically see through related programs, optically see through optics systems. I wish I could share more. I I'm hopeful that

Speaker 4

No.

Speaker 2

I understand. Even shortly here, we'll have a bit more color we can put on those for everybody.

Speaker 4

Okay. You also mentioned in your comment

Speaker 2

I was just gonna say some of it is related to next generation display systems that I think people will find pretty cool.

Speaker 4

In your commentary, you also mentioned increases in sales to international customers. I was hoping you could give us some indication about how much of sales was deployed in, let's let's just go broadly, Asia, Europe, North America. Not necessarily where the sale was made. It might be made to a North American customer who deploys it internationally, but that the end deployment. Do you have an indication about how that would divide up in those three geographies?

Speaker 2

Grant, do you want to try to take that one? I think I could pick it up here.

Speaker 3

Sure. I mean U. S. Is still the prime market. Europe, number two.

And then but Asia, particularly Japan, really grew in the last couple of quarters. So it's a bigger percentage. So I mean, it's Asia, Japan has been 10%, 12%. And I think it's probably in a recent crested, the 20% level. So there it's coming on.

So so international sales are rapidly gonna become the probably greater than domestic, excluding the engineering services programs in 2020. Okay.

Speaker 4

Grant, while I have you, it looked like cost of sales on the variable side is is getting close to where you want it to be, or there's still a lot of is there still substantial room for improvement as a percent of sales?

Speaker 3

Well, we think there's still some room for improvement. Obviously, the the higher the volume, the more we can spread some of our close to more fixed overhead costs. I mean, we still had a fairly large reserve for obsolescence regarding blade as we transition to the next generation of it. So those are always pull downs. And, you know, hopefully we don't like to have to take those provisions.

But, you know, it's we were kind of forced to the way everything worked out. But I think we're getting there and our goal is still ultimately to try to get to a gross profit number of 40% or greater with provided we got the total revenues up top to amortize those costs.

Speaker 4

Understood. Okay. And then just finally on the on the blade, I'm assuming that your security customer is still I don't I don't know how to characterize it. So this might be, unfair, but let's call it behind schedule. Is that what's happening, or is there something else going on that we should

Speaker 2

be aware of? From the perspective of COVID, unfortunately, for those guys, not a lot of people are going on cruise ships. Not a lot of people are going to the baseball game. Not a lot of people are let me just think about a lot of what they were making was to address markets that are in a pretty tough spot right now, even baseball. No people in the stands and organizations are, you know, coming up with 19 plus of their players.

So they gotta with COVID, so they gotta close down. So, unfortunately, for them, that's that's a challenge. They they do have another product that they're coming out with. I I guess it's related to temperatures and those kinds of things. But their focus on the security side, unfortunately, has got a bit of a hiccup in it right now.

Speaker 4

Okay. Is the is the upgraded Blade or the the new version of the Blade, with the autofocus and the, stereo, is that going to address a different customer set? I'm I'm just trying to understand, you know, what happens with Blade going forward.

Speaker 2

It's across the board a much better solution, Jim. I mean, if you think about the way it was previously, there was no audio built in. So if you're an enterprise customer, what you had to do is put earbuds in your ears, and that made for safety issues, extra cables, extra things to take care of. Now you just put these guys on, and you got a full communication system just like the m 400 does. And with the auto focus, another important part when you're doing remote support and those kinds of things.

So this is gonna be for those folks that need to have remote support kinds of things and the likes, but they can't have that sort of out there look of an m 400. It's a great option. Security is part of that market still. You know, that said, it doesn't have the performance of an m 400. It just doesn't have the the camera support.

It doesn't it only runs in, on the 2.4 gigahertz WiFi, but there's lots of folks that like it. And right now, blades are picking up pace. We we we reduced the price to $4.99. And, yeah, they're they're selling, I think, pretty well at the moment. And we think that people will really like the upgraded blade here coming up.

Speaker 4

And will the upgraded blade price at the $4.99 or closer to the $8,800 to a thousand dollars that you had previously?

Speaker 2

We got enough margin in it that you know, when when we when we made this price change, the blade really seemed to kick in the overdrive a bit, and there's enough margin in it, especially on a direct sale basis, which we do a lot of. We are considering a price less than the $9.99 number, but I'm not sure Grant's in a position to where we'd like to share that just yet because we're still thinking it through.

Speaker 3

And we're and we're selling down the existing blade stock, but it won't it it it won't be more than the blade was when we reduced its price. So and that was $7.99. So that'll be the high side, I believe. And and all also, all new blades are gonna have safety glass lenses in them. Before that used to be a a premium option, and now all blade upgraded models are gonna have that included.

So just a nice feature and hopefully gonna be more attractive to some enterprise customers.

Speaker 4

Right. And I'm sorry, but just one more, if I might. So Paul, you talked about Q3 so far exceeding, I forget the words you used, the pace or the rate of Q2. Are you saying that if you took the Q2 sales and divided it by the number of days and did the same thing with Q3 to date, the number in Q3 is bigger? Is that another way to look at it?

Speaker 2

Yes. That's another way of looking at it.

Speaker 3

Average weekly sales for the Q2, we're running at a faster pace so far in Q3.

Speaker 4

Fantastic. That's great to hear. Congratulations. Nice numbers, and we'll talk again later. Thanks.

Thanks, Jim.

Speaker 0

Thank you. Our next question comes from the line of Jack Vandervliet with Maxim Group. Please proceed with your question.

Speaker 6

Hey, guys. Congrats on the solid results this quarter. Thanks for taking my questions. So Paul, I want to follow-up on the I know some other analysts have asked about it too, but I want to follow-up on the announcement regarding the Tier one aerospace customer that completed the Phase four of the program. Just so

Speaker 2

I understand, has anything changed in terms of the status of this relationship or just progress or since the July 16 announcement? Not that yeah. Has anything changed. It's just the program is just moving down the road. I mean

Speaker 3

Well, we are now negotiating a supply agreement for volume production, which just started during midway through Phase four. So they obviously seem to be pleased with what we're doing and want to move on to the next stage, namely production. That's not signed at this stage.

Speaker 6

Got it. Yes. And it's no doubt a clear positive in my mind as well. I'm just trying to understand. This is kind of I guess this is one of the major ones that finally made its way to the end now.

So I'm just trying to understand, do you have a sense as to how long it would take to get to production? Or is this are we kind of you know, creating the rules as we go here, until you guys, you know, strike that negotiation, that makes both sides happy?

Speaker 2

What we've delivered to them so far is, practically speaking production. There there's still a few minor adjustments, but, you know, I think you will see before this year is up a contribution to the production side of this. So you should see that Got it.

Speaker 6

Okay. And then, you know, let let's say, hypothetically, you guys you know, you reach an agreement, volume production begins. Just so I understand the reality or the potential reality, what might you expect, say, it's everything goes into volume production in Q3, could Q4's revenue or just units in total generate enough revenue that would, say, exceed all of last year's product revenue? Or would it be a linear ramping each quarter? How much revenue could possibly be generated like best case scenario?

And and would it would it ramp over time, or it'd be a linear thing?

Speaker 2

It's gonna ramp over time. And the volumes to start with, you know, it just takes time to fill a channel and to get it working to programs and, you know, those kinds of things. This these pot these are components that should get used in multiple programs. And as those programs start to unfold for our customer, our volumes will ramp up, you know, alongside it. So it's it's not gonna be instantly boom.

There's, you know, thousands of units a quarter being shipped. But it it should be a nice contribution in 2021 to our business. I I will say that if you look at sales in general, the it's broad based. You know, last year in 2019 in our second quarter, we had one customer take, you know, a thousand plus smart glasses from us. It's not the characterization of what we're selling today.

We have customers that are buying fifties and hundreds kinds of numbers, and so it's it's spread out. And we, at the same time with some of those customers, are in the process of quoting much larger volume production rollout. So, yes, it's very true that this defense customer is gonna be an exciting 2021, but I think you're gonna also see the standard smart glasses product lines of users have start to have some companies that buy in larger volumes. Understood. Okay.

That's helpful. The broad based stuff will be there, I believe, and it's you know, you you've heard how q three is going already. It looks like it's nicely picking up speed, but we're very hopeful at the same time that you'll see some contributions from some of these folks we're selling to that are bigger. Got it. Okay.

Speaker 6

And then and then if I if I turn away from product revenue and looking at engineering revenues, just so I understand, it's clearly you expect product revenue to be increasing each quarter. But what about the engineering services? I believe you mentioned you have two new, but maybe not formally announced OEM projects. So will these contribute to engineering revenue lines during the second half of twenty twenty? Or would you expect it to decline given this aerospace customer has exited the Phase four?

Yeah. What would I expect for, engineering services?

Speaker 2

You know, the the I think you're gonna see their engineering revenues be lumpy at Vuzix. There'll be some quarters where there's a lot of stuff going on and then the other quarters where, you know, it's it's more at a low because we delivered on stuff and you're going through a next phase. You know, we've got two new programs that we've discussed a little bit about, and there's others in the queue. So maybe when all when we get more happening here, usually sort of be a little less lumpy. But when you have less numbers of programs like that, there's times where you're busier with them, and there's times when you're less.

So that one's harder to peg, Jack.

Speaker 6

Okay. Fair enough. And that and that makes sense. That's reasonable. And then I guess, you know, just just lastly, have you seen any opportunities from the from you know, that were historically announced that may have been, you know, put on hold or delayed?

I don't know, such as, I I think, Ride On comes to mind to me, for example. Are you seeing anything like that? Any of those arrangements or delayed, projects, now coming back online?

Speaker 2

It's amazing to me how q one, as the pandemic started to come to the fore, how many programs got put on hold. You know, as it happens, our smart glasses are so good at this remote support problem and business continuity. You know, the the COVID stuff from that perspective accelerated a bunch of areas and some new areas came in. There's a lot of our business that slowed down, and and some of it, the brakes are just on completely. This security effort that Jim was talking about just a few minutes ago, that's one of those ones that's on hold right now.

And I don't know. You tell me when a cruise ship's ever gonna go out again or when we can go back to the ballgame. So so, yes, we we've got stuff we've got stuff that's the brakes are on. Some of that stuff is starting to free up, though. I mean, if people are trying to come back to work, they're all trying to figure this out, and it's messy.

But to the extent our products help open the doors, those are the areas where we're starting to see things pick up again and those programs start to come back online. Yeah. I look at that as a nice the the work that we've been doing over the last four or five years, I have to say a fair amount of it fits into that bucket, which is why Okay.

Speaker 3

Got it.

Speaker 2

For the time here has been a challenge to to that. But

Speaker 6

For sure. That's it for me again. Congrats on the strong quarter. Thanks guys.

Speaker 2

Thanks, John.

Speaker 0

Thank you. Our next question is from Brian Kislinger with Alliance Global Partners. Please proceed with your question.

Speaker 7

Hi, everyone. This is Jacob on for Brian. Thanks for taking our questions. First, you've had a number of press releases regarding the use of your smart glasses for remote medical response in hospitals. You talk about the progression of these customers?

Are they purchasing a few pairs in the beginning? And then if it goes well, purchasing more?

Speaker 2

I mean, that's how it's kind of been moving. There are in some spaces where, it's accelerating faster rather than less. There are some areas where they're using our glasses twenty four seven today, especially, in in Asia more so. I mean, in The States, they're using them, but I think they're on and off in some cases. So it's it's the pandemic's it causes challenges, pluses and minuses even for the folks that are on the front lines of all of that.

That said, there are some areas in the medical side of our business that are buying reasonably significant numbers of units today.

Speaker 7

Okay. And, what's your total installed base for health care remote working right now?

Speaker 2

We don't break it out that way, or Okay. I mean, from a competitive perspective, I'm sure there's more than one person on this call that competes with Vuzix, and we just don't feel a need to have to tell everybody on the planet where the most of the where our business is mostly at right

Speaker 7

That's 100%.

Speaker 3

Thank you.

Speaker 7

Last quarter, you talked about enterprise delays given plant closures and other COVID challenges. Outside of health care, can you comment on how the procurement process and sales cycle has changed over the last four months?

Speaker 2

You know, we've had a few items that we've had some challenges with, some some special glues and those kinds of things. And but but I have to say, for the most part, we've not run into significant effort issues on the manufacturing front. The plant floor is running well. We've got inventories. When we've had some glitches, we found alternative sources to stuff.

Does that sound right, Grant? Did I miss anything in that regard?

Speaker 3

No. No. That that that sounds sounds reasonable. I mean, it's not slowing it's not really slowing us down. I mean, it might have too long.

Some of the new products we got coming out have been delayed a a little more than day to day production.

Speaker 2

Yes. There's been some cases where stuff would get put delayed because the the mandate has been to produce products related to personal protective equipment and those kinds of things. So we have some windows that we got delayed on, those kinds of things because there's these really thin windows that go on the front and back of our waveguides. But we've found, like I said, alternative sources and stuff. And so little glitches and delays, but for the most part, it's been manageable.

Speaker 7

Okay. And lastly, what was the average price per pair of smart glasses sold during the quarter? And do you expect that to increase or decrease or remain the same over the remainder of the year?

Speaker 2

Grant, you wanna

Speaker 3

take that one? Excuse me. Our our retail is $17.99 for, like, an m 400. Clearly, you know, we do offer volume discounts. And as volumes increase, you know, the average number will drop down.

I mean, I would suggest let me see here. I mean, our m 4,000 that comes out shortly, it's gonna have an even higher selling price. But at best, I mean, I I would say we'd we'd average a 25% discount off our retail. It would be the average selling price of the products.

Speaker 7

Alright. Thanks. That's it for me.

Speaker 0

Thank you. We have reached the end of our question and answer session. I'd like to turn the call back over to mister Travers for any closing remarks.

Speaker 2

I'd like to thank everyone for your interest in participating on today's call today. We look forward to speaking with you again in the November timeframe when we report on our Q3 results. Stay healthy everybody. And again, thanks for stopping in to listen to the call.

Speaker 0

Thank you. This concludes today's conference. You may disconnect your lines at this time. Thank you for your participation, and have a wonderful day.