Vuzix - Earnings Call - Q3 2020

Transcript

Speaker 0

Greetings, and welcome to the Vuzix Third 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 call is being recorded. Now I would like to turn the call over to Ed McGregor, Director of Investor Relations at Vuzix.

Mr. MacGregor, you may begin.

Speaker 1

Good afternoon, everyone, and welcome to the Vuzix third 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, 11/09/2020. 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 in this call who may not have already done so may wish to look at those documents as the company will provide a summary of the results discussed on today's call. Today's call may include non GAAP financial measures.

When required, reconciliation to the most directly comparable financial measures calculated and presented in accordance with GAAP can be found in the company's Form 10 Q filing at 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 third quarter financial results. We will 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 q three twenty twenty conference call. Vuzix is entering one of the strongest and most promising periods in our history in terms of smart glasses demand, product line strength, OEM developments, and the significant advancements being made on our next generation technology. We are executing on many fronts, and we have a healthy balance sheet to support our efforts. The increase in smart glasses demand, which began in this spring, strengthened further in q three as our smart glasses sales were the highest we've yet achieved as an enterprise wearable computer supplier, exceeding our previous record set in q two of this year.

Our q three sales of smart glasses totaled 2,700,000.0, up 15% sequentially and a 156% on year over year comparable basis. And these record sales were achieved in a quarter that included the summer months, which is often a slower period for many enterprise customers in The US and Europe due to planned vacations. We are pleased to see our products being used across our expanding client base to assist customers in solving the complex issues associated with today's business environment. Demand for our products has been and continues to be broad based across numerous market verticals and around the globe, most notably in health care, field service, manufacturing, and logistics. And the momentum behind our core enterprise smart glasses business has not slowed.

During the month of October, Vuzix recognized a single month record for smart glasses revenue outpacing our previous record. We're seeing replenishment orders from resellers, follow on orders from direct customers, and a continued stream of inbound sales from new customers as our core smart glasses business continues to accelerate across the globe. As a result, we believe we should be in a position to deliver yet another record quarter of smart glasses product sales in our final quarter of this year. At the same time, we continue to be successful in expanding the breadth and scope of our OEM and engineering service engagements, which currently total five with further opportunities visible on the horizon. I'd like to spend a moment to drill down a little deeper on our smart glasses sales trend.

Slide five depicts our quarterly smart glasses sales over the past four years, breaking out notable single orders in three instances. Over the last four years, our smart glasses sales base business averaged approximately $1,200,000 per quarter, with the majority of the sales coming from customer pilots. Over the last few quarters, we have witnessed many customers, both large and small, moving faster between pilot evaluation and deployment into their operations. To highlight this acceleration further, Vuzix's October smart glasses revenue alone was comparable to the 1,200,000.0 we used to do over an entire quarter. While the revenue growth we have experienced over the past several quarters have been broad based and not attributable to any one or two large accounts, we see the potential for significant orders from large accounts on our horizon, which, of course, we remain focused on closing and announcing.

As you can see, our customers are successfully deploying our products to become more competitive and adjust to the new normal. We are just getting started with broader smart glasses adoption by enterprise users, and as such, it begs the question for so many organizations still trying to figure this out. Why send a person when you can send a pair of Vuzix smart glasses? Deploying Vuzix smart glasses in enterprise is safer, cheaper, faster, and in many respects, a better way of doing business. We have been saying this for some time now, and the pandemic has forced the point.

Vuzix now fields what we believe to be the strongest lineup of smart glasses solutions in the market, not only in our own history, but more importantly, across the competitive landscape. Our three current leading solutions, m 400, the newly introduced m 4,000, and blade upgraded represent a range of competitive price points, form factors, and functionality. And it's safe to say that we see customer interest and demand for each continuing to build. The Vuzix m 400, which accounted for the majority of our smart glasses sales in q three, has clearly become the workhorse for a steadily growing list of enterprise customers. The m 400 was built to capture and broadcast industry leading four k 30 frame per second HD streaming video for field service workers with its image stabilized and auto focusing camera, and the OLED display delivers superb contrast with crisp video to its users.

And with further advanced voice controls now built into 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 and Zoom for health care, Skype for business, and Cisco Webex teams. And we have planned support for a number of other popular video conferencing platforms that are currently in the queue. Most recently, we rolled out Android nine across our m 400 and m 4,000 devices, which brings with it a series of improved features and functionality for enterprise customers, including improved Wi Fi and Bluetooth connectivity, enhanced security, improved foreign language support to support a broader global customer base, and increased video recording speeds of up to 60 frames per second of ten eighty p video, resulting in additional stability and usability for our enterprise customers.

It is the highest level of Android currently running on any pair of smart glasses in the industry. The Vuzix m 4,000 is a very exciting sister product for the m 400 built on the same x r one eight core ARM processor from Qualcomm, and it is now in volume production and shipping to customers. The optically see through m 4,000 gives our customers not one, but two enterprise workhorse products to choose from. The 5,000 nit display of the m 4,000 makes it not only one of the brightest optical see through devices on the market, but also extremely versatile, both indoors and out. The m 4,000 features an image size field of view that is nearly double that of the m 400.

And since it is see through, offers a non occluded view for the wearer, making it easier to see their work and surroundings safely. The m 4,000 is proven to be very complementary and virtually fully compatible with the m 400 on top of its enhanced features and provides a one two punch with an enterprise across health care, field service, manufacturing, and logistics to meet different customers' needs. The VUSE X Blade upgraded version includes a new built in stereo audio feature as well as an auto focus camera, both popular requests from our existing customers, and is now also in volume production and shipping as of the last week of Q3. Feedback from our enterprise customers to date has been excellent, and we have received indications that a number of our larger customers across several industry verticals are looking to roll out the new blade to support their operations in pharma, field service, manufacturing, and logistics. And as competitive as all these products currently are, we're working to push the envelope even farther with our next generation smart glasses solutions that I will comment on a bit more shortly.

COVID nineteen has forced changes in the way business is getting done across many organizations. And as a result, we are seeing our business grow. We expect much of this change to last beyond the pandemic and that our products will be more broadly adopted for the long run. COVID prompted new ways of doing business in many respects, which are becoming the future of how things will get done. Using smart glasses is not just about solving the short term COVID safety problem, but also about how to do business more efficiently.

There can be cost and time efficiencies, and they are much greener for the environment to use over physical travel. And now with the proof in the pudding, it seems broad continued adoption is inevitable. Vuzix smart glasses have been proven to be a successful tool for our end customers to combat and conquer the operational challenges that have been exacerbated by the COVID nineteen pandemic, and we believe adoption will continue expanding as more organizations see the wide array of benefits they offer. Salesforce's CIO recently noted that the pandemic has opened people's minds change and that his firm is seeing CEOs becoming ambitious about putting together plans to not only ride out the storm, but actually emerge from it stronger and more competitive. At the same time, global research and advisory firm Gartner Group recently stated that, quote, AR has reached maturity by several measurements and has become an industry proven technology that executives can safely invest in to improve and innovate their business.

Most importantly, they also offered, quote, AR is no longer considered an emerging technology and is now ready to move from pilots to productivity. We at Vuzix are witnessing this shift firsthand, and the trend is gaining momentum. Three specific verticals within enterprise that continue to accelerate their adoption of smart glasses since the COVID nineteen pandemic began in February include field service manufacturing and health care. Within each of these market sectors, we continue to see growing acceleration and adoption driven by business continuity plans and the urgent need to deliver remote expertise without having to send personnel on-site. In manufacturing and field service, we have companies like Clorox that have deployed the m 400 smart glasses across their operations to support manufacturing operations by connecting plant maintenance managers with operational staff on-site.

Clorox is also sending Vuzix smart glasses to facility sites to assist Ernst and Young in the performance of quarterly audits resulting in dollar savings on travel and time. Other deployments we recently announced in this space include those made by respective industry leaders such as Altus, SHL Group, Baumet, and others. Look for more in this space from us in the upcoming months and quarters. One of the hottest areas recently is health care. We have companies like Medtronic using our smart glasses to support medical equipment and technicians during surgery.

Health care usage elsewhere includes, among other things, 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 partners. The m 400 smart glasses are now also being used on the hospital floor to support virtual rounds, in ICUs for patient monitoring, and operating rooms to perform guided surgeries and for training purposes in surgeries such as heart and gastrointestinal, as well as clinical interaction with various medical professionals and patients. Our list of announced customers in this space continues to steadily grow. In one example, Vuzix Partners in Malaysia recently completed a successful clinical study showing that our m 400 smart glasses can be used as a successful tool to conduct rounds for neuro critical care patients during the COVID nineteen pandemic, and they are expanding across the Asia Pacific region with their product offering. In another, OHANNA one has deployed dozens of m 400 smart glasses and recently kicked off clinical studies at more than 15 hospitals worldwide to review mentor, mentee surgical site training utilizing Vuzix smart glasses.

We're excited to support OHANNA one to expand this program with the goal of over a thousand mentor mentee surgical pairs across the globe as they continue to scale. Our partner, Pixie Medical, continues to expand their distribution channel and perform successful knee replacement operations using our m 400 smart glasses as the primary AR navigation tool across Europe, while at the same time pursuing five ten k device clearance for The US market. Beyond knee surgeries, which total 600,000 operations annually in The US alone, Pixie has its eyes on enabling use of smart glasses and shoulder surgeries as well. Just last week, we also announced that Istanbul University faculty of dentistry is using the m four hundreds to support remote student learning and that Newcastle University in The UK is using m four hundreds to support its blood cell and COVID nineteen research. Our customer adoption list in the health care vertical just keeps growing and growing.

I'd like to give you a quick update on Verizon, which remains one of our strategically important partners. We are continuing to work with them to address key market verticals that can leverage their five g network alongside Vuzix smart glasses to drive increased efficiencies and capabilities. The EMS product bundle we first announced in July that is being co developed by Verizon to put together a world class turnkey solution centered around five g continues to progress well. This bundle of hardware and five g services is designed to bring situational awareness technology to public safety and first responders. This EMS solution is currently being prepped for customers, pilots, and feedback ahead of a nationwide rollout in early twenty twenty one.

Verizon could well become a significant smart glasses distributor for Vuzix within the next twelve months, and we hope to share more on this as well as other exciting developments with them as they materialize and are we are able to share. Vuzix is also engaged with several other significant telecommunications providers domestically and internationally around the globe, working together with these carriers on producing revenue generating services around five g focused on b to b, b to c, and the likes. Our OEM and related engineering services business is also gaining momentum this year as our customer portfolio continues to expand and moves towards anticipated volume production programs. We have formally announced four engagements and have several others in the works. The multiyear revenue potential associated with volume production for these programs related to aerospace and defense,

Speaker 3

health care, and the way forward based

Speaker 2

sharing some of these companies are when we can. But I thought in the interest of clarity, would try to add some additional color to what these programs are. Slide nine lays out the timelines and progress points for these OEM engagements. Partner one is a global aerospace and defense contractor. We're currently in the process of finalizing a supply agreement with this partner after completing four phases of development.

The supply agreement being negotiated is related to volume production of a customized head mounted display waveguide and HD display engine for both commercial aviation and defense usage, with initial deliveries expected to commence in the first half of twenty twenty one. Partner two is a major US defense contractor. And in October, we announced a phase two follow on project to further develop a customized waveguide based head worn AR display engine with most of this phase's work expected to be completed before the end of the year. We anticipate the successful completion and delivery of phase two to either lead to further NREs for subsequent refinement or straight to an eventual production program. Partner three is a major international defense contractor.

And in September, we announced a phase one development agreement to build a customized waveguide solution with most of this work expected to be completed before the end of the year. Two additional development phases are currently being contemplated before an accepted final product design would be expected to lead to a volume production order. Partner four is a US based medical partner, and we announced in October that we are developing a customized head mounted waveguide display based system for assisting cancer surgeries. Phase one is expected to be completed by the 2020 with expected further nonrecurring engineering revenues if awarded by the customer in subsequent phases before an accepted final product design and move to volume production orders. Please note that no engineering services revenues from these four programs were recorded in our third quarter results.

Partner five is a commercial firm with which we are engaged for a waveguide and projection engine development project related to next generation display technologies for both Vuzix and potential third party OEM customers. Beyond these efforts, we have a growing list of other projects that continue to progress towards finalized statements of work for new programs. Of course, we look forward to announcing further details and developments on these upcoming as well as existing opportunities when we can. We continue to grow our intellectual property portfolio, which now consists of over 179 patents and patents pending, up from 90 patents and patents pending three years ago, and up from a 166 in just the previous quarter. Our recently granted patent related to a near eye display with self emitting micro LED display engines is a good example of the progress we are making towards establishing Vuzix as the preeminent supplier of next generation solutions for use with and around micro LED displays and other advanced display engine technology.

In September, we released a video about our next generation smart glasses, which we plan to bring to market within the next year. Enterprise partners and customers are asking when they can have it. Interested players in the AR consumer space are asking, how did we do it? And consumers are asking, when can we buy it? If you haven't had a chance to view this video, which can be found under the technology tab on our website, I would encourage you to do so as it provides a true glimpse of the future of smart glasses and our continued leadership position within the space.

Although I can't offer too much in terms of details due to competitive reasons, I can say this next generation tech should be slated for market introduction during the second half of twenty twenty one. We expect this will be the first time any company in the AR or wearable computer space has figured out how to fit, as they say, 10 pounds in a five pound sack when it comes to highly functional fashion forward smart glasses. Similarly, on the OEM side of our business, our broad expertise and capabilities regarding the manufacture of optical waveguides and display engines, along with our status of being one of the few, if only, US manufacturers of such technologies should continue to serve as a major differentiator for us. This has been well evidenced by the growing engagements we have had in this space thus far this year. I'd like to now pass the call over to Grant so he can review some aspects of our third quarter financial results.

Grant?

Speaker 4

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. Our third quarter revenue rose 140% year over year to $2,800,000 largely due to increased sales of smart glasses, which increased 156% to $2,700,000 in the quarter. Sales of our M400 Smart Glasses accounted for the majority of this increase, a product that was not yet in full volume production in the comparable 2019 period.

There was an overall gross profit of $300,000 for the three months ended 09/30/2020, as compared to a gross loss of $200,000 for the same period in 2019. Subtracting from our Q3 twenty twenty gross profit figure was a $200,000 inventory obsolescence reserve taken for unique smart glass component inventories that are no longer expected to be utilized. On a product cost of sales basis only, product direct cost declined to 53% of sales in the 2020 period as compared to 64% in the prior year's period. The change primarily the result of higher margins earned on the M400 versus the M300 series in the prior year's period, which had begun to be discounted with the pending arrival of the newer M400 model. Manufacturing overhead costs, while increasing in absolute dollars by 8% for the three months ended 09/30/2020 over the 2019 period, decreased as a percent of total product sales to 17% from 40% in the same period of 2019.

Clearly, as we continue to see growth in our sales, these costs as a percentage of product sales should decrease further. R and D expense was $1,900,000 for the three months ended 09/30/2020, compared to $2,300,000 for the 2019 period, a reduction of approximately 20%. The decrease in R and D expense was primarily due to reduced external consulting fees related to the Blade software development programs and a small reduction in overall new product research and development costs. Selling and marketing expenses for the three months ended 09/30/2020, were $900,000 an increase of 21%, largely due to noncash stock based compensation expense. This was a direct result of the cash salary reduction program we implemented in May 2020, where for every $100 decrease in cash wages, the employees received a 150% of that amount as a stock award.

So hence, the net increase in non cash stock compensation across all our operating costs. General and administrative expense for the three months ended 09/30/2020, was $1,600,000 an increase of 6% over the '29 period, largely due to noncash stock based compensation related expense. Even with our increase in total sales versus the comparable 2019 period, our expense control efforts continue to be apparent in the quarter as total operating expenses, excluding depreciation, amortization and patent impairment charges declined 5% to $4,400,000 We expect continued comparative 2020 versus 2019 quarterly operating expense reductions going forward, especially with reduced travel and events costs contributing to our overall cost control efforts. The net loss for the three months ended September 2020 was $4,800,000 versus a net loss of $5,500,000 in the same period of 2019. The common share loss after accrued dividends were $0.13 versus an $0.18 loss for the same period in 2019.

Now on to some balance sheet highlights. Our cash position as of 09/30/2020, was 24,900,000 and we had a net working capital position of $30,100,000 For the three months ended 09/30/2020, the net loss after adding back noncash operating expenses was $3,000,000 versus $4,500,000 in the same period of 2019. Cash used for investing activities during the third quarter was $500,000 as compared to $200,000 for the prior year period as our investments in manufacturing, new product tooling and software licensing fees increased with the introduction of the M4000 and Blade upgraded models at the end of Q3 twenty twenty. Investing activities for Q4 twenty twenty should not exceed our Q3 levels. With that, I'd like to turn the call back over to Paul.

Speaker 2

Thanks, Grant. Our fourth quarter is off to a strong start in terms of Smart Glasses revenue through October. This momentum, along with the recent introduction of our new products, is expected to continue and ramp further. We're in a position to not only deliver yet another quarter of growth in our smart glasses revenue, but also set a new full year smart glasses sales record. It is encouraging to see that the growth of our business in 2020 is broad based and has not been tied to any single large customer.

We like the trend we are seeing here across our customer base and the ROIs they are achieving and believe enterprise behaviors appear to be changing permanently and for the better as a result of the pandemic. What we are finally witnessing firsthand is the birth of a new industry sector within technology, one that Vuzix has pioneered from the beginning and invested heavily in to build a valuable IP portfolio that positions Vuzix to win big over the long haul. Vuzix is and will continue to be a leader in a market that is expected to grow into a multibillion dollar industry over the coming years. With that said, I'd like to now turn the call back to the operator for Q and A.

Speaker 5

Thank

Speaker 6

You will hear a three tone rep prompt to acknowledge your request. If your question has been answered and you would like to withdraw your registration, please press the 1 followed by the 3. One moment for any questions. And as a reminder to those on the phone line, you can press 14 to register a question. And our first question is from the line of Christian Schwab with Craig Hallum Capital Group.

Please proceed with your question.

Speaker 7

Hey, good afternoon, guys. Can you talk about, OEM and engineering services? Would you expect a recovery in that in in q four? Or and and do you have a visibility, on when you you would expect that, to be more material again?

Speaker 3

Yeah. Christian, by the way. Hi. The q four numbers, we've already got a reasonable chunk of business that's pretty similar to what was in q two in the hopper. But we expect the bulk of it should deliver here in q four.

Speaker 7

Okay. Great. And then just from a just from a big picture, you know, I appreciate the the slide and kind of walking through, you know, some of the bigger things that you guys have, you know, talked about as well as, you know, talking about Verizon. How should investors, you know, you know, bracket the opportunity, you know, from a from a revenue perspective? Not, you know, next quarter or the quarter after that.

But in the next, you know, two to three years, should you be modestly successful? You know, can you give us a range of potential outcomes and what it could mean to the top line?

Speaker 3

Yeah. First, I you know, how it might unfold. I think you'll see, like, imminently even more and more coming out of our friends over at Verizon as this program starts to unfold for them. They've they've got a lot of work done already. You know, their five g network is already around.

And there's their efforts around what they're doing with Vuzix, there's, I think, six total companies in the cohort cohort program that's, like, really moving nicely. It's right on track. I think you'll see, knock on wood, if it unfolds, if it looks to q one will be the beginnings of a real sort of rollout of these efforts, and the numbers could be in the thousands to tens of thousands of pieces kinds of thing over the over that period of time you discussed.

Speaker 7

Okay. Great. And then and then, thank you for the Verizon color. If if we just kinda talk about, you know, the couple defense, you know, contract opportunities, you know, that you have, you know, I think there's three separate ones that you that you highlighted. Can you give us an idea?

Is is that, you know, thousands and tens of thousands over the same type of time frame as well?

Speaker 3

It should be in the tens of thousands over the next two to three years. Two of them each kind of in the same bucket.

Speaker 7

Fantastic. Great. I don't have any other questions. Thank you, guys. Good quarter.

Speaker 3

Thanks, Christian.

Speaker 6

And our next question comes from the line of Jack Vander Aarde with Maxim Group. Please proceed with your question.

Speaker 5

Great. Thanks, guys. Hi, thanks for taking my questions. Paul, you mentioned a record high revenue of smart glass product sales in October. And I think you alluded to it's comparable to like a full quarter's worth of $1,200,000 or so of revenue.

That gives me a good sense as to what you mean by the October level record. And then I also noted that you mentioned M400 represent the bulk of the third quarter product sales revenue. So what I'm wondering is can you provide any color around which smart glasses represent the bulk of this October product sales record specifically?

Speaker 3

Well, we do have some 4,000 in the mix and the blade in the mix. That said, right now, the m 400 is designed into so many programs. You you saw the the medical slide. I mean, there's so many companies that are using that thing, but there's a nice demand for it. People really like the 4,000, but we're just getting started with it, Jack.

So I I think if you we we don't for competitive reasons, we don't like to share too much of how this mix works. I mean, our next generation optical systems, we think, give us a big edge. And I think you'll see over time, the 4,000, you know, start to become a significant contributor. That actually will be the blade in pharma in those kinds of places. But in October, it's still right now the 400 is the the lead dog in the race, guess, a way of putting it.

Speaker 5

Okay. And and that makes sense. That's helpful. And then if I could just maybe dig in a little bit for the remainder of twenty twenty here and then looking into 2021, given all these, the M4000 and upgraded Void just began shipping at the very, very September. I guess, what would you expect for maybe like a normal seasonality now as you look I mean, there is no normal seasonality per se, but looking at to the first half of twenty twenty one, even if I can get ahead of myself, with these new product introductions that have higher ASPs and more applications with them, and you've also expanded your geographical reach, would you expect maybe a similar seasonal pattern?

Or would you expect a stronger first half than than typical because of these new products?

Speaker 3

So we first of all, with the way the world is right now, Vuzix is not really seeing the seasonal thing. I mean, I don't know what to expect here for Christmas and I mean, there's there's always those holiday things that happen, but the fact of the matter is the world is trying to figure out how to go back to work. And at the moment, COVID's winning. So we're not seeing a we're not seeing a seasonalness as much as a how do I solve these problems. And the optical see through systems that we have offer certain advantages, and in some cases, much lower error rates when you're using them because you see the real world and the virtual information at the same time.

That said, those advanced capabilities take a bit more time to implement. On the flip side of the coin, that waveguide right now has a it's a double the field of view of the m 400. All that said, we're designed in on all these programs on the 400. I think what you'll see is the 4,000 will be it'll continue to grow. There's an interesting upfront demand for it already.

Speaker 2

And as people are using it,

Speaker 3

the feedback we're getting is it's awesome. But it is not necessarily looking to replace the 400 at this point just yet. It has its own sort of places that it's, being successful in. I think in the long run, optical see through systems are going to be the best way to do this. And so as 2021 unfolds, you might start to see, you know, the 4,000 coming more and more online and it catching up a bit to the 400, but I think both of these products have a long ways to go.

This it's just getting

Speaker 2

started. Sorry.

Speaker 3

I know that's kinda roundabout there, but

Speaker 5

No. It's fair enough. It's helpful. Understood. And then and then just the last question is, I'm wondering if you can we can maybe further fine tune or be more measured as we talk about the engineering services revenue just because that can, you know, that can cause any quarter to be up or down relative to estimates or outlook.

So with I think you have about $700,000 of contracted revenue from these OEM engagements, and you think the bulk of it's going

Speaker 8

to hit the fourth quarter.

Speaker 5

What does that mean? I mean, let's say it's $500,000 or something in the fourth quarter. What does that mean in terms of the four quarters in 2021? There a replenishment though? Is it just depend on as you reach a new phase with the other contracts?

Or is it is it actually 700,000 is the entire contract for these five arrangements?

Speaker 3

No. Some of these programs will evolve into significantly higher engineering services revenues, and some of them should start to roll into actual production programs. But in 2021, some of these programs, if they come through like we think they will, you know, where they could be in the millions potentially worth of engineering services efforts through the year.

Speaker 5

Fantastic. That's helpful. Thanks. That's all that's all my questions. I'll I'll go back in the queue.

Speaker 3

Sounds good, Jack. Thank you.

Speaker 6

And our next question is from the line of Jim McIlray with Bradley Woods. Please go ahead.

Speaker 8

Yeah. Thanks, and good evening. Grant, if it it seems like engineering services are going to increase this quarter relative to Q3. And if that's the case, I'm assuming that some of the research overhead that you have gets allocated to those services. And so you could have a decline in R and D this quarter relative to Q3.

Is that scenario correct?

Speaker 4

Yes. You're correct. I mean, it won't be huge because, you know, these these projects probably, you know, no more than less than 25, 30% is internal labor and the, you know, the rest is, you know, out of pocket costs.

Speaker 8

Got it. Great. And then based on that slide five from the deck, it seems like the engineering services this quarter could be as large as or close to what you did in q two. Is that am I in the ballpark there?

Speaker 3

Yes, you are, Jim.

Speaker 4

Yes.

Speaker 8

Okay. Great. Paul, you indicated that the M4000 is in part of the October revenues, and I'm assuming it's small. But can you talk about production? Just remind us where your bottlenecks might be and or what potential, you know, parts you have to have enough of?

You know, just could you just update us on the on the m 4,000 product, manufacturing scenario?

Speaker 3

You know, Jim, we're you know, we have some inventories if you look. I I think we're in pretty good shape. I I will say that, you know, things like waveguides we make here. But our waveguide production, even though this is a brand new waveguide and it uses a brand new kind of grading structure within the waveguide, they're coming out beautiful. They they're yielding nice.

So we're having problems on waveguides. You know, it is true that a brand new product takes a little bit of time to come the curve from a production perspective. So it's gated a little bit by our, you know, learning processes, one. And number two, we are taking extra care on these first units that go out the door. You know, you don't get many first impressions.

So I, you know, I will say when the numbers you know, if they're cranking up to, you know, 10,000 per quarter and those kind of things, Vuzix will have inventory issues that it'll need to be, you know, getting in the queue. Some of the stuff like CPUs and cameras take more time to get in than others and those kinds of things. But at our current run rates and stuff, Vuzix is in really good shape on production.

Speaker 4

Yeah, Jim. 90% of the electronic components in the 4,000 are common to the the 400. So, you know, we can literally, you know, swing back and forth with whatever we wanna build. And the the Cobra two display engine that's in the the m 4,000 is, you know, had its its home in the, the blade. So, you know, we're we're pretty good at that.

The amount of new stuff, that hasn't been tested is is is pretty minimal. So we're we're pretty confident that we can manage production to meet demand.

Speaker 8

That's great. Thank you. And on the 1.2 ish million in October smart glass sales, and I would love to multiply that times three to get a quarterly number, but we've got Thanksgiving and Christmas holidays. Do those typically have a big impact on shipments or sales or activity?

Speaker 3

There's no doubt that December slows things down a bit, and November does up a little bit also. I will say that so far November's not doing bad. And, you know, sometimes there's year end year end dollars that folks like to get in the queue to make sure they get it spent before year end and the like. So it's really hard to say just yet, Jim. I you know?

Speaker 4

But I'd like to think now with a, you know, with a two more months for a full quarter of m 4,000 sales and the blade upgraded that, which weren't a big contribution in October that, you know, maybe that's the numbers you're suggesting could be feasible or better.

Speaker 3

Yes. Just to make sure you heard that, Chris, they were not they were not a big contributor in in October.

Speaker 4

Yeah. Sorry if I got that wrong. Yes. Definitely not. We've not a big contributor.

Speaker 3

You didn't agree. But I

Speaker 8

got that. Yeah. And then my last question was, is either the prior question or the first question on Verizon. I I know you're optimistic on it, but isn't it reasonable to think that the rollout is gonna be measured? That is, you know, Verizon will find a customer, the customer will try it, they'll do it in small volumes, and then they'll roll forward.

So those big volumes you're thinking of are certainly possible, but more likely in the second half of next year. Is it again, is that a reasonable way to look at it? Or am I being too pessimistic?

Speaker 3

No. You're no. That's not bad. It's not bad. We think that there'll be more like pilots in the first quarter and, you know, q two, three q four and into the year after will be more substantial rollouts, John.

Speaker 8

Alright. Fantastic.

Speaker 2

Okay, good. Sorry.

Speaker 3

No.

Speaker 8

All right. Well, thanks a lot guys and good luck with everything.

Speaker 3

Thank Thank you,

Speaker 6

And we have no further questions in the queue at this time. I will now turn it over to Paul Travers for final remarks.

Speaker 3

Thank you very much everybody for joining the conference call. Enjoy your holidays coming up and we look forward to sharing with everybody how the rest of the year goes and our first reporting next year. Knock on wood, if it keeps going like it is, it should be a very exciting, you know, end of the year, quarter for music and full year, frankly. One of the best music I've seen in probably quite some time. Thank you very much.