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Edited Transcript of VUZI earnings conference call or presentation 9-Aug-19 12:30pm GMT

Q2 2019 Vuzix Corp Earnings Call

Rochester Aug 19, 2019 (Thomson StreetEvents) -- Edited Transcript of Vuzix Corp earnings conference call or presentation Friday, August 9, 2019 at 12:30:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Ed McGregor

Vuzix Corporation - Director of Institutional IR

* Grant Neil Russell

Vuzix Corporation - CFO, Executive VP, Treasurer & Director

* Paul J. Travers

Vuzix Corporation - Founder, Chairman, CEO & President

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Conference Call Participants

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* Brian David Kinstlinger

Alliance Global Partners, Research Division - Head of TMT Research, MD & Senior Technology Analyst

* Christian David Schwab

Craig-Hallum Capital Group LLC, Research Division - Senior Research Analyst

* James Patrick McIlree

Chardan Capital Markets, LLC, Research Division - Senior Research Analyst of Industrial and Consumer Technology

* Nehal Sushil Chokshi

Maxim Group LLC, Research Division - MD

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Presentation

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Operator [1]

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Greetings and welcome to the Vuzix Second Quarter 2019 Financial Results and Business Update Conference Call. (Operator Instructions) 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. McGregor, you may begin.

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Ed McGregor, Vuzix Corporation - Director of Institutional IR [2]

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Good morning, everyone, and welcome to Vuzix Second Quarter 2019 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'd 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, August 9, 2019. Vuzix assumes no obligation to update these projections in the future as market conditions change.

Prior to the market opened this morning, 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, reconciliations to the most directly comparable financial measure calculated and presented in accordance with GAAP can be found in the company's Form 10-Q quarterly filings 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 second quarter 2019 financial results and business outlook. Paul will then turn the call over to Grant Russell, our CFO, who will provide an overview of the company's second quarter operating results. Paul?

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Paul J. Travers, Vuzix Corporation - Founder, Chairman, CEO & President [3]

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Thank you, Ed. Hello, everyone, and welcome to the Vuzix Q2 2019 Conference Call. A lot has happened in the second quarter at Vuzix. We have made great progress with our ATEX certified partnership with Eaton, and are now expanding the effort to include our entire line of Vuzix Smart Glasses. We also entered into a long-term microLED supply agreement with Plessey Semiconductors. The future of AR will require glasses that people will want to wear, and this agreement forms the basis for next-generation displays that we expect will significantly shrink the form factor and power required to drive them. These microLEDs are being tailor-made to work with Vuzix waveguides. We made progress on the OEM side of our business, with follow-on engineering services orders from an avionics partner and inbound requests for further OEM relationships around Vuzix waveguides and wearable technology from market-leading companies continues to build. Vuzix Blade in the security and first responder market made its debut in the first half of 2019, with the announcement of multiple new programs that we expect to generate significant revenue streams. A timely intro when you look at the news headlines that the U.S. has seen of late. We also have been significantly expanding the Vuzix Blade's capability, both with core upgrades to the software and hardware and third-party applications. These new applications and upgrade open new markets and sales opportunities. For example, the new Blade application supporting DJI drones, the leading drone manufacturer in the world with an estimated over 74% of the drone market. And the new Blade Safety Glasses that can now be used for many applications in enterprise space requiring safety eyewear.

I'm also happy to report that the company raised an additional $20 million in gross proceeds to support our expected growth over the coming months. Our business currently consists of 3 key business segments that we expect will drive revenues, growth and value for our shareholders: The M-Series Enterprise Smart Glasses; the Vuzix Blade for enterprise, prosumers and security markets; and the waveguide-based OEM projects.

We see great business opportunities for the occluded devices that we currently produce, like the M300 and M400. But over time, we feel optically see-through systems will win the day. We can see this happening already with the doors that are opening around the Blade as our first waveguide-based product, and also the incoming OEM opportunities around our waveguides. This is the reason Vuzix has invested so heavily in our waveguide-based optics. As a result, over time, we expect all of our smart glasses products to migrate to Vuzix waveguide-based display solutions.

Let me now provide an update on the enterprise space in our M-Series Smart Glasses, where our current M300XL remains a highly functional and productive solution that is being qualified by numerous industry-leading customers. We expect the M300XL to remain a workhorse for us that will be deployed in significant volumes by many of our customers.

We expect one such customer, a large retailer, to begin deployment of thousands of M300XL units as part of its current programs, with the potential for significantly more M-Series systems being deployed in 2020, as they roll out their various Smart Glasses programs throughout their stores. This one has been in the works for quite some time, and this relationship continues to progress well. This is one of the many customers Vuzix has discussed in the past and is continuing to work towards full implementation of the Smart Glasses programs. These customers collectively represent a pipeline of business of tens of millions of dollars, which we fully expect, ultimately, will move forward with expanded deployments employing Vuzix products. The development of our Qualcomm XR1-based M400 Smart Glasses continues to progress well. The M400 was commercially announced in May, and DVT units are now being delivered to key customers and software partners. Aside from its many superior capabilities, the M400 offers a much needed Android OS upgrade required by many of our large customers for broad deployments. As you all know, technology continues to march forward, and the M300 with its limited ability to update the OS, posed a challenge for some customers. The M400 is truly best-in-class, and in our view the leading smart glasses in the market, with a pass to OS upgrades through Android version Q, at least.

The M400 is opening up doors with both new and existing customers that require the latest Android OS, AI support and other powerful features afforded by the SXR1 chipset from Qualcomm. Another positive about the M400 is that it can coexist with the M300XL as part of the several new sizable programs that are going live. The streaming video performance, barcode scanning and crispness of the OLED display, by way of example, puts the M400 at the top of the food chain in terms of device performance when compared to any other competitor in the enterprise space. Many existing AR titles work on the M400 right out of the box with much faster performance and much lower power consumption. We announced the availability of M400 Early Adopter program during the second quarter and we recently shipped our first design verification test units, or DVTs, to a select group of key accounts for testing and feedback. Their response has thus far been very positive. And as such, we expect the performance upgrade associated with the M400 to excite most of our existing customer base. As we have previously indicated, we intend to start commercially delivering M400s to customers beginning in the third quarter.

Regarding our intrinsically safe M300IS Smart Glasses solution and now potentially the entire line of Vuzix Smart Glasses, we continue to work closely with our OEM partner, Eaton Crouse-Hinds, on device certification to bring our co-branded and co-marketed intrinsically safe smart glasses to market as soon as possible. We're excited to have Eaton on board as a partner and to receive support from their leadership. Both companies are focused on building a long-term successful business together and building a line of world-class smart glasses products to service harsh and hazardous work environments. Customer interest in this product has been broad and initial shipments are expected to commence this fall.

As for our other OEM smart glasses relationships, we shipped several thousand M300 Type C Smart Glasses to Foxconn-owned Dynabook, Inc., formerly Toshiba, during the second quarter. The expected relationship and smart glasses program with Foxconn will continue, potentially including other products as we move forward. These 2 OEM relationships are off to a good start. And as we have mentioned in the past, Vuzix also has multiple new OEM relationships around waveguides that we're working on. They include such diverse areas as aviation, shipping, automotive and defense.

On the aviation side, we have received 2 follow-on engineering services programs for our commercial aviation partner in the second quarter. This project ultimately could represent a significant business opportunity with our partner, as the waveguide-based HMD system that we are building for them will not only be qualified for commercial aircrafts, but potentially for military aircraft also. This project should pave the way for sizable production programs for Vuzix, with sales beginning as early as the second half of 2020.

Further on the waveguide-based OEM front, RideOn Vision, an OEM partner that we alluded to in a June PR, has been making great strides as an OEM of the Blade-based solution that is being placed in their smart ski helmet, and which should begin shipping in volume this fall. You can learn more about this new use case for our technology by going to their website at www.rideonvision.com. It's really worth a look, folks. They're doing a fantastic job. The product is already up and operational. They've got really good feedback from their customers at the same time. Four new OEM relationships are now moving forward, with 3 of them being new to Vuzix. There are more being worked on, and we look forward to sharing as the business is closed with these new partners.

Moving on to our Vuzix Blade Smart Glasses. The business opportunities in use cases with our customer deployments of the Blade continue to flourish across multiple market verticals ranging from prosumer sports, virtual customer visits, security and others. An important and growing area is to utilize the Blade to help keep innocent people safe and out of harm's way. Vuzix has a growing list of security partners that have solutions that are being sold into the market, including NNTC, ST engineering and SWORD. Our team recently visited with SWORD and found the integrated security product that SWORD has developed around the Vuzix Blade and Apple's iPhone to be quite impressive. The ability to deliver a video feed and alert real-time from the SWORD to a Blade where literally it gives security personnel eyes in the back of their head, while allowing them to stay remotely connected and informed away from their station. The SWORD security product is currently being marketed by a number of exclusive and nonexclusive resellers based on the market. We expect these and other security programs to continue to expand over the remainder of 2019, and represent potentially millions of dollars in pipeline revenue for us, starting this fall and accelerating into 2020.

Another emerging market for the Blade in our M-Series Smart Glasses is supporting the drone market, starting with DJI drones. In 2019, the FAA expects commercial drone sales in the U.S. alone to exceed 200,000, and more than 500,000 units sold annually by 2022. Currently, DJI drones represents approximately 74% of the drone market. Despite only recently announcing support for a series of DJI drones, the team at Vuzix is communicating regularly with DJI's drone team, and Vuzix has been invited to attend DJI's largest annual drone summit this fall. I personally took my DJI Mavic Pro out for a spin using the Vuzix Blade equipped with our clip-on shades, and it clearly provided a safer and more engaging experience by enabling me to maintain line-of-sight without having to look down at my phone. By law, drone users are required to maintain eye contact with your drones. It's called line-of-sight, and the Blade removes the need to have a separate person serve as a spotter to help make this happen.

For enterprise users. This August, we'll begin offering an ANSI Z87.1 safety glasses rated version of the Vuzix Blade. This new option for the Blade is already certified. We're starting production now and will be going live next week on Vuzix' website. This version of the Blade is priced at $999 and is an ideal fit for enterprise customers that require safety glasses on the manufacturing floor and the ladder out in the field. We are excited to offer these all-in-one safety eyewear rated smart glasses, and we have already started taking orders on early adopters, including a large communications company that is evaluating rolling out Blade safety rated smart glasses to their field technicians. For prosumers, over the last month, the Blade with its Amazon Alexa built-in certification began selling on the Amazon marketplace. The Blade now supports over 70 application titles that run natively on the glasses, including numerous web browsers, social media platforms and support for streaming video content providers like Netflix and Amazon Prime Video.

In a short few weeks of being on Amazon, the Blade has quickly become the #1 selling smart glasses product available. Due to the success of the Blade in the Amazon marketplace, our Amazon Business Development manager, who has over 250 other accounts, has told us that the Blade has quickly become his #1 selling product based on sales revenues. We are now preparing to step it up with Amazon by expanding the number of warehouses Amazon is selling through, and we'll begin doing some co-marketing of the Blade on their site. So far, everything we have achieved here has been done organically, with no active sales and marketing efforts. In addition to the Amazon marketplace, we're also looking at expanding our online distribution channels and growing with selected brick-and-mortar outlets.

The Blade continues to gain momentum, and we have seen growing Blade product orders from enterprise developers and prosumers. This year, we have seen a number of new developers signing up to support Vuzix' newest products increase significantly over 2018 levels. Just in the last few weeks, since our Amazon listing, the developer sign-ups for Blade have almost tripled. In fact, 97% of all developers signing up are interested in supporting the Vuzix Blade product to develop AR applications for enterprise and consumers. Separately, our Blade app developer contest has now attracted approximately 140 entrants.

I'd like to spend a few minutes on the telecom sector now. First, our relationship with Verizon continues to evolve, both on smart glasses projects for internal use at Verizon where a number of projects are underway, and for external projects for coordination with Verizon client solution enterprise team. As many of you know, Verizon has gone through quite a bit of restructuring that has impacted sales in other areas of the company. And to date, Vuzix has received modest orders from Verizon sales team. Vuzix Smart Glasses solutions continue to be evangelized within Verizon among their enterprise leadership and their extensive client solution enterprise team. Vuzix and Verizon are putting our focus now on their top accounts and on actionable in-person demos with key decision-makers, and we expect our enterprise relationship and sales volume attributed to Verizon to pick up over the remainder of 2019.

During the second quarter, Vuzix also partnered with Verizon's 5G team to bring to market the first real-time language translation application on the Vuzix Blade with Zoi Meet. The beauty of real-time language translation is that this service can be optimized with 5G running edge computing. Real-time language translation on the Blade has drawn significant interest from wireless carriers interested in partnering with Vuzix. If you have not already done so, I would encourage everyone to visit Zoi Meet on Twitter to check out the videos there and see just how powerful a solution this is.

Beyond Verizon, we're exploring several other partnership opportunities with wireless carriers to deliver new products and/or service with recurring revenue opportunities with Vuzix. With our future Blade products, we are looking to deliver location of our content and taking advantage of the rollout of 5G cellular service. The Blade opportunities include potentially developing fully integrated smart glasses with a cellular radio, such as LTE and/or 5G, and retail distribution of Vuzix Blade Smart Glasses through wireless carrier stores. Wireless carrier opportunities could clearly be significant for Vuzix. And we'll continue to push the competitive envelope in their other extensive retail distribution channels on factors that pack increasingly more punch in the terms of functionality and performance. The main takeaway here is that Vuzix continues to be in the race to stay ahead of the competition, as the wireless carriers get very serious about rolling out new programs and committing millions of dollars of budget to support consumer-facing AR solutions in 2020 and beyond.

I'd now like to pass the call over to Grant, so he can walk through our second quarter financial results. Grant?

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Grant Neil Russell, Vuzix Corporation - CFO, Executive VP, Treasurer & Director [4]

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Thank you, Paul. Before I begin, I would like to encourage interested listeners to review our 10-Q that we filed today with the SEC for a more detailed explanation on some of the quarterly year-over-year variances, as I will be highlighting just a few. For the 3 months ended June 30, 2019, Vuzix reported $2.2 million in total revenues as compared to $2.6 million for the same period in 2018. The overall reduction in sales in smart glasses was driven by a combination of factors, including the timing of what was the company's largest single smart glasses shipment to date at the end of June 2018, along with price reductions implemented during Q2 on the current M300 and M300XL products. Additionally, we observed some customer order deferrals in advance of the new and more powerful M400 Smart Glasses arriving later this summer. New shipments to OEM partner, Dynabook, formerly Toshiba, did not fully offset the impact of those factors. Vuzix Blade Smart Glasses sales continued to accelerate in the second quarter of 2019, and represented 46% of Vuzix branded product sales for the quarter. Engineering services revenue for the second quarter of 2019 was $0.4 million versus 0 in the last year's second quarter.

Looking out on the balance of 2019, we expect our revenue for Q3 will be similar to this last second quarter, but should accelerate nicely in the fourth quarter of 2019 with our new products and indicated customer demand. Our overall gross profit from sales in the second quarter of 2019 was $0.2 million versus a gross profit of $0.7 million in the 2018 period. On a product cost of sales basis only, our product direct costs were 76% of sales in the 2019 period as compared to 48% in the prior year's period. The increase resulting from lower margins earned on our OEM smart glasses, which was a large portion of our sales mix as compared to our M-series glasses -- smart glasses, along with the impact of price decreases implemented in May. Our research and development expenses totaled $2 million for the 3 months ended June 30, 2019, compared to $2.6 million in the prior year's period. The reduction in R&D expenses was primarily the result of the decreased use of external software contractors as compared to the 2018 period, when the Blade was still in active development. Much of this work is now performed more cost effectively in-house. Selling and marketing expense was $0.8 million for the 3 months ended June 30, 2019, versus $1.5 million for the comparable period in 2018, or down 47%. The decline was primarily due to decreases in advertising, marketing and trade show spending; and a decrease in salary, commissions, benefits and stock compensation expenses due to staff reductions.

General and administrative expense for the 3 months ended June 30, 2019 was $1.8 million versus $2.3 million in the prior year's period. The overall decline was primarily due to the decrease in salary benefits and stock compensation expenses related to staff reductions. The net loss after the revision for accrued preferred stock dividends was $5.5 million or $0.20 per share in the quarter as compared to $6.6 million or a loss of $0.24 per share in the second quarter of 2018. The net cash operating loss after adding back noncash adjustments for the second quarter of 2019 was $4 million as compared to $5 million for the second quarter of 2018, and down from $5.3 million in the first quarter of 2019. Our expense control efforts have started to bear visible fruit in the second quarter of 2019, and we are continuing to control our spending.

And now for some balance sheet highlights. In early July, Vuzix raised $18.8 million of net cash from a registered direct equity offering with 2 institutions. Our pro forma cash position, immediately following this raise, was approximately $22 million, sufficient to fund our operations through 2020. The proceeds from this raise will be used for important business activities in the upcoming quarters, including accelerating the development of our next-generation waveguide-based smart glasses products, additional manufacturing equipment and ongoing R&D work for our new display technologies. In the second quarter of 2019, while our inventory levels rose modestly and are expected to do so again in Q3, they are expected to decrease over the balance of 2019 as we manufacture and sell-through our new and existing products in Q4. Cash used for investing activities in the second quarter was $0.9 million versus $0.6 million in the prior year period.

The second quarter's total included $0.6 million, primarily for the purchase of additional waveguide manufacturing equipment and the near-completion of leasehold improvements for our plant expansion. Also included in the 2019 second quarter's investment amount was the final $250,000 payment made to reacquire certain rights that were subject to the noncompete agreement amended in 2018. Our capital spending for the balance of 2019 is expected to be less than the first half of 2019.

As discussed on our last call, we will of course remain flexible in evaluating our cash needs as the business evolves, as any responsible company would. In this regard, we continue to investigate strategic partnerships with potential customers that may involve product-exclusive market access arrangements and, of course, custom and co-branded new product offering, accompanied by significant initial commercial purchase commitments. Such relationships could include capital investments and order prepayments.

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Questions and Answers

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Operator [1]

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(Operator Instructions) Our first question comes from the line of Nehal Chokshi with Maxim Group.

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Nehal Sushil Chokshi, Maxim Group LLC, Research Division - MD [2]

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Yes. So Blade increased pretty significantly as a percent of revenue, which is great. And you pointed out that the product cost, as a percent of product revenue, did tick up Q-o-Q. And you did talk about how that was a result of the price drop. So is that safe to say that the waveguide-based GM is healthily above the prism-based GM?

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Grant Neil Russell, Vuzix Corporation - CFO, Executive VP, Treasurer & Director [3]

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Not at this stage. I mean, the impact of margin was the sales of our OEM Smart Glasses to Dynabook. I mean, the margins there are about half what we normally make selling a smart glass. The decreases in the pricing implemented on the M300 and M300XL was done for competitive reasons as well as the commercial introduction of the M400. So that reduced our margin. We went from $1,500 retail price to $1,000 retail price, and clearly, no change in our cost. So that pretty -- that reduced our margins going forward. The Blade, at the end of the quarter, actually we did also implement a price reduction on that. We went from $1,000 down to $699. That had a minimal impact on the Q1 gross profit -- I mean, Q2 gross profit. But during summer, you'll start seeing some of the impact. But our margins on the Blades are still over 40%.

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Paul J. Travers, Vuzix Corporation - Founder, Chairman, CEO & President [4]

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Let me add a little bit to that. The Blade, here next week, we also have a version that is really focused on the enterprise markets because it's got Z87.1 ANSI certification for safety glasses, and that is a $1,000 price point. So we're not determined yet whether or not we will be permanently keeping that $699 price point. It was part of a special program that we did for a dads and grads kind of a thing. But it's working fairly well, quite frankly. So odds are it'll stay.

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Grant Neil Russell, Vuzix Corporation - CFO, Executive VP, Treasurer & Director [5]

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But long term, we do feel our waveguide-based products will be able to earn a superior margin than the prism-based products going forward.

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Nehal Sushil Chokshi, Maxim Group LLC, Research Division - MD [6]

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Right. Okay. And then thanks for the color on the expectations as far as how revenue plays out for remainder of the calendar year. Previously, you did talk about that towards the end of calendar year, you thought you did get towards breakeven. Does that guidance still include that possibility? And where would you put the probability of that possibility happening if it does?

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Grant Neil Russell, Vuzix Corporation - CFO, Executive VP, Treasurer & Director [7]

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Well, it's clearly not impossible, but I'd say the probability of that has decreased a little. So I mean, probably the loss for Q4 will clearly be much less than Q1, Q2, Q3. But just looking at the timing of some of the new products and other factors, I don't think we're going to achieve that in Q4.

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Paul J. Travers, Vuzix Corporation - Founder, Chairman, CEO & President [8]

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It will be close.

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Operator [9]

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Our next question comes from the line of Christian Schwab with Craig-Hallum.

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Christian David Schwab, Craig-Hallum Capital Group LLC, Research Division - Senior Research Analyst [10]

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Can you tell us what -- on the revenue ramp in Q4, which products or customers, if you could elaborate on, that you anticipate driving them? And then secondly, as we look to 2020, we did talk about a host of many customers and applications for the products. Can you give us any type of expectation for what you would anticipate revenue in 2020 looking like?

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Paul J. Travers, Vuzix Corporation - Founder, Chairman, CEO & President [11]

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So this fourth quarter, our M-Series products are going to be a good contribution. There will be, I believe, an uptick in the OEM business that we're doing and clearly Blade -- I mean, so you're going to see it through all 3 sort of business sectors that we have.

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Grant Neil Russell, Vuzix Corporation - CFO, Executive VP, Treasurer & Director [12]

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The M400 should be a big contributor there because we foresee some good pent-up demand for that.

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Christian David Schwab, Craig-Hallum Capital Group LLC, Research Division - Senior Research Analyst [13]

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Okay. Okay. So getting roughly to breakeven, are we anticipating revenues to ramp up closer to $6 million? Or right now, we just feel better about -- better than Q3 guidance?

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Grant Neil Russell, Vuzix Corporation - CFO, Executive VP, Treasurer & Director [14]

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I think we can confidently say better than Q3 guidance. I mean, it should be a multiple of that. But really can't confirm that we'll achieve $6 million at this stage.

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Christian David Schwab, Craig-Hallum Capital Group LLC, Research Division - Senior Research Analyst [15]

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Okay. Okay. And then just a follow-up on the outlook for 2020. As you look to 2020, is there 1 product or 1 or 2 customer that you're the most excited about that we should be monitoring the most closely?

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Paul J. Travers, Vuzix Corporation - Founder, Chairman, CEO & President [16]

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Well, there are -- our guys have this pipeline of -- frankly, Christian, it's over $100 million. And there are [whales] in there, and there are guys that are modest. I mean, it's across the board. I think there'll be a lot of exciting customers that will start getting rolling and there's a few guys that are going to go in a big way. So it's a bit of everything. I will say, it's amazing to me the size of the business that we've identified from accounts that -- there are reasonably high percentages that these things are going to start rolling into real business. The M400 is going to be a big impact in that regard. But the M300 has also gone through 1.5 years of qualifications and there's many companies that really like it and are planning on rolling with it also. So M300 and M400 would do well in 2020 together.

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Operator [17]

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Our next question comes from the line of Jim McIlree with Chardan Capital.

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James Patrick McIlree, Chardan Capital Markets, LLC, Research Division - Senior Research Analyst of Industrial and Consumer Technology [18]

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Paul, when you talked about the retailer and the deployment the retailer is going to make, were you referring to the M300 or the XL or the M400? What is it that, that retailer is deploying?

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Paul J. Travers, Vuzix Corporation - Founder, Chairman, CEO & President [19]

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I'm sorry, can you hold just 1 second, Jim? Bear with me, okay? It's -- that particular client is qualified the XL, the M300XL.

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James Patrick McIlree, Chardan Capital Markets, LLC, Research Division - Senior Research Analyst of Industrial and Consumer Technology [20]

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Okay. Great. And I'm a little bit confused by the transition from the 300 to the 400 in the Q, and then in your commentary, you talked about delays in the 300 as customers wait for the 400. But also in the call, you talked about big deployments of the 300. I'm just -- I'm puzzled as to what's going on here? Is -- was the Q2 delays just a function of specific customers, but other customers aren't waiting for the 400? It just seems a little bit contradictory what I heard.

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Paul J. Travers, Vuzix Corporation - Founder, Chairman, CEO & President [21]

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It's sort of it. There's a lot of factors that are going into the dynamics around M300 and M400 with users and/or customers. First of all, going into the spring of the year, we knew that our friends from Google were going to preannounce this next-generation pair of glasses that they have. And we thought it was important that we, in a partnership with our friends at Qualcomm, make this announcement, and we did partially because of that. We've also got a bunch of customers, not all of them, but a bunch of them coming to us as they're going through their rollout efforts, and the IT departments are saying, "Well, we need OS level blank on Android."

And unfortunately, the M300, it's a workhorse, as we said. It's been qualified. It's -- there's [our] guys that don't even want to talk about anything else. They're very happy with the M300XL. It's taking them this long to get there and they're okay with it. But there are other guys that are saying, "If I can't get OS 8.0 or 8.1 model or better, we're not going to deploy." So that -- we were facing that issue also. We also have another competitor that had rolled their product up because they could there on a different platforms. Unfortunately, Intel Atom, it just doesn't have the support any longer to get this OS upgrade. So we had competitive reasons. We had customers coming to us that said they really needed this OS change. We needed to show the world and our customers that this next-generation product was coming. So they kind of sit on top of each other. That said, we fully expect M300XLs to be very successful in the marketplace still. People love the things. And there's going to be a price differentiation going forward, the XL versus the M400.

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James Patrick McIlree, Chardan Capital Markets, LLC, Research Division - Senior Research Analyst of Industrial and Consumer Technology [22]

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Okay. I think I see what you're getting at. And as far as inventory goes, the -- as long as the M300 is as successful as you think it's going to be, then there's not worry that you have stranded inventory. But on that issue as well, how much of the inventory is the video ware? How much is still remaining on that?

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Grant Neil Russell, Vuzix Corporation - CFO, Executive VP, Treasurer & Director [23]

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The Blade, 30%.

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James Patrick McIlree, Chardan Capital Markets, LLC, Research Division - Senior Research Analyst of Industrial and Consumer Technology [24]

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I'm sorry, Grant, what was your answer?

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Grant Neil Russell, Vuzix Corporation - CFO, Executive VP, Treasurer & Director [25]

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30%, little under...

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Paul J. Travers, Vuzix Corporation - Founder, Chairman, CEO & President [26]

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Grant's assuming you mean the Blade, right?

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James Patrick McIlree, Chardan Capital Markets, LLC, Research Division - Senior Research Analyst of Industrial and Consumer Technology [27]

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Yes. No, I thought you still had some of the old consumer video wares in there.

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Grant Neil Russell, Vuzix Corporation - CFO, Executive VP, Treasurer & Director [28]

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Oh, the eyewear is gone. Zero.

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James Patrick McIlree, Chardan Capital Markets, LLC, Research Division - Senior Research Analyst of Industrial and Consumer Technology [29]

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That's all done. Okay. Great. All right. That's great. That's helpful.

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Paul J. Travers, Vuzix Corporation - Founder, Chairman, CEO & President [30]

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[We don't expect] anything to happen with the M300.

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James Patrick McIlree, Chardan Capital Markets, LLC, Research Division - Senior Research Analyst of Industrial and Consumer Technology [31]

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Right. Right. And then in the Q, you talked about volume manufacturing and sale of the M100 Smart Swim. Did you address that in the -- in your opening remarks and I just missed it or...

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Paul J. Travers, Vuzix Corporation - Founder, Chairman, CEO & President [32]

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We did not address it. I will say that we've got our first units in. They look fantastic. And through the rest of this year, the goal is to get it all finished, qualified and roll out.

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Operator [33]

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Our next question comes from the line of Brian Kinstlinger with Alliance Global Partners.

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Brian David Kinstlinger, Alliance Global Partners, Research Division - Head of TMT Research, MD & Senior Technology Analyst [34]

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The Smart Glasses revenue in the quarter, looking at the Q, is $836,000 and was the lowest in 6 quarters. So -- and history has told us that ramping up new smart glasses products, the Vuzix is taking some time for that ramp or the adoption. So what gives you confidence that 4Q is at ramp? And are there actually orders in hand already?

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Paul J. Travers, Vuzix Corporation - Founder, Chairman, CEO & President [35]

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We have multiple accounts right now, Brian, that are in the million-plus kinds of numbers that we know that they're rolling.

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Grant Neil Russell, Vuzix Corporation - CFO, Executive VP, Treasurer & Director [36]

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There's also, in this case, compatibility near 90 -- right at 90% between M300, 300XL and the new M400. The M400 just gives you everything the earlier models do plus a whole bunch more. So in the initial pilots and testing with our software partners, they're finding 100% compatibility to a little bit of tweaking. And of course, there's those software partners that want to take advantage of some of the new capabilities. So we anticipate the adoption rates to go much better than in the past. And in most cases, you can drop it in and people won't really notice other than it's got a nice gorgeous OLED display in it now.

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Paul J. Travers, Vuzix Corporation - Founder, Chairman, CEO & President [37]

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Oh, and it's performed so much better. I mean, the streaming video, as an example, is just -- it's outstanding with the M400.

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Grant Neil Russell, Vuzix Corporation - CFO, Executive VP, Treasurer & Director [38]

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All the accessories are compatible, batteries, everything. So it's...

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Brian David Kinstlinger, Alliance Global Partners, Research Division - Head of TMT Research, MD & Senior Technology Analyst [39]

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Look, I don't doubt the technology is stronger. I just questioned whether in the fourth quarter you're shipping $1 million orders to customers as opposed to a handful that they try and maybe 2 quarters out is when they start to buy in more bulk. I guess, that's what I was getting here.

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Paul J. Travers, Vuzix Corporation - Founder, Chairman, CEO & President [40]

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We're expecting bulk orders through the following year, Brian.

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Brian David Kinstlinger, Alliance Global Partners, Research Division - Head of TMT Research, MD & Senior Technology Analyst [41]

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Okay. And the large retailer you mentioned, following up to Jim's question. I think, if I'm not mistaken, you said there was 1 particular large retailer that are looking at thousands of pieces. First, is that a brick-and-mortar store or is that online? And then in terms of timing, is that a fourth quarter event or is that more 2020?

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Paul J. Travers, Vuzix Corporation - Founder, Chairman, CEO & President [42]

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We're expecting -- we know here in the third quarter even there will be some that start to deploy. And it's a brick-and-mortar that's doing it. And it's not -- they're not doing it to sell to customers. They're using these as a tool in store.

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Brian David Kinstlinger, Alliance Global Partners, Research Division - Head of TMT Research, MD & Senior Technology Analyst [43]

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Okay. And then, I missed the number. I think you actually provided the numbers for Dynabook, and I didn't get through it in the Q. Can you just provide what that number, in terms of orders, were in the second quarter?

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Paul J. Travers, Vuzix Corporation - Founder, Chairman, CEO & President [44]

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We shipped them a couple thousand pieces.

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Brian David Kinstlinger, Alliance Global Partners, Research Division - Head of TMT Research, MD & Senior Technology Analyst [45]

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Thousand pieces. Okay. And then what were total pieces?

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Paul J. Travers, Vuzix Corporation - Founder, Chairman, CEO & President [46]

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I'm sorry, Brian, 2,000.

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Brian David Kinstlinger, Alliance Global Partners, Research Division - Head of TMT Research, MD & Senior Technology Analyst [47]

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2,000. And what were the total smart glass pieces you shipped in the quarter?

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Paul J. Travers, Vuzix Corporation - Founder, Chairman, CEO & President [48]

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We don't break it out that way for all kinds of reasons.

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Brian David Kinstlinger, Alliance Global Partners, Research Division - Head of TMT Research, MD & Senior Technology Analyst [49]

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And then finally on the engineering side. I think you've got a lot more visibility typically on that. Is there expected projects? Can you -- is the second half of the year, are those quarters looking more like 2Q as well? Is there a ramp? Is there kind of a pullback there?

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Paul J. Travers, Vuzix Corporation - Founder, Chairman, CEO & President [50]

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Looking at the pipeline of stuff that we quoted, it's going -- it should ramp maybe a fair bit.

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Brian David Kinstlinger, Alliance Global Partners, Research Division - Head of TMT Research, MD & Senior Technology Analyst [51]

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Right. Okay. Would suggest that third quarter product sales will be slightly lower than the second quarter if we're looking at a similar quarter?

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Paul J. Travers, Vuzix Corporation - Founder, Chairman, CEO & President [52]

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Yes, that's probably right. We're just being cautious here on our third quarter revenue numbers. We will see where it really goes. We're comfortable with the more modest numbers, but it could be bigger.

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Grant Neil Russell, Vuzix Corporation - CFO, Executive VP, Treasurer & Director [53]

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In the (inaudible), Brian, and I know you probably had no time to read it yet this morning, we did say there's remaining existing performance obligations of $315,000 for Q3, Q4 of this year. But the -- we're expecting some other programs that might come in on top of that. So you'll see at least $315,000 between now and the end of the year.

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Operator [54]

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I'd now like to turn the call over to management for final remarks.

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Ed McGregor, Vuzix Corporation - Director of Institutional IR [55]

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Thank you, operator. We did get some questions submitted prior to the call, and I'd like to take a few. Some of them have already been answered in our dialogue on this call. But here's one, Paul. You have great technology, so why not create other products for people to be able to enjoy other than glasses?

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Paul J. Travers, Vuzix Corporation - Founder, Chairman, CEO & President [56]

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That's a good question. Vuzix does have amazing technology, and it can be employed in a lot of different ways. And in fact, we are working with third-party partners where our technology is being put in their products, and it's not glasses related. We haven't been able to share that to the folks just yet, but we will be sharing more about that going down the road. I will say, we have a tight focus on smart glasses. We know this is going to be a very big marketplace. So we're focused on being successful there.

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Ed McGregor, Vuzix Corporation - Director of Institutional IR [57]

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Okay. Another question. We'd really like some hard info on production capabilities. How many Vuzix Blades are being produced monthly?

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Paul J. Travers, Vuzix Corporation - Founder, Chairman, CEO & President [58]

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Currently, we're at a run rate of 250 a week. And if you look at the CapEx spend in the second quarter, you'll see there was a chunk of dollars spent on equipment upgrades, and that's going on the plant floor. That equipment is being qualified right now and should show up on the plant floor here within the next couple, 3 weeks. And it's all related to Blade manufacturing and improving the number of units on a monthly basis.

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Ed McGregor, Vuzix Corporation - Director of Institutional IR [59]

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One more question. There have been multiple patent applications released including 1 from Disney and another from Samsung that use illustration, 95% accurate to that of the Vuzix Blade Smart Glasses, which are produced by Vuzix. Is Vuzix aware of these patents? And is the company involved with any of these potential devices?

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Paul J. Travers, Vuzix Corporation - Founder, Chairman, CEO & President [60]

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Vuzix can't comment on the business relationship side of what may or may not be happening within some of those companies. And I have to say that this is a [sprinkling] of companies that are applying for patents in the augmented reality space, and they often reference Vuzix because we're one of the leaders. Our technology shows where the future is going and so it's good to wrap other technology around what we're doing. Now that doesn't always thrill Vuzix because, frankly, some of that is intellectual property that Vuzix is already owners of. And so in some cases, this is straight because it's collaborative and in other cases, it's actually inappropriate and Vuzix is dealing with that on a case-by-case basis.

Thank you, everybody. I really appreciate the participation on today's call. I would like to reiterate that Vuzix has a clear roadmap to success in multiple areas in the AR markets. We have the infrastructure in place at the company, the technology behind us and the needed capital to deliver. So we're really excited about the next 1.5 years at Vuzix. This should be a very exciting ride. We look forward to speaking to you again in November, when we report our third quarter 2019 results. Thanks again.

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Operator [61]

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