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Edited Transcript of VUZI earnings conference call or presentation 11-May-20 12:30pm GMT

Q1 2020 Vuzix Corp Earnings Call

Rochester Jun 6, 2020 (Thomson StreetEvents) -- Edited Transcript of Vuzix Corp earnings conference call or presentation Monday, May 11, 2020 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

* Jack Vander Aarde

Maxim Group LLC, Research Division - Equity Research Analyst

* James Mcilree

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Presentation

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Operator [1]

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Greetings, and welcome to Vuzix Corporation's First Quarter 2020 Conference Call. (Operator Instructions) As a reminder, this conference is being recorded.

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

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

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Good morning, everyone, and welcome to the Vuzix First Quarter 2020 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, May 11, 2020. Vuzix assumes no obligation to update these projections in the future as market conditions change.

This morning, the company issued a press release announcing its financial results and filed its 10-Q with the SEC. So participants on this call who may not have already done so may wish to look at those documents as the company will provide a summary of the results discussed on today's call.

Today's call may include non-GAAP financial measures. When required, reconciliation to the most directly comparable financial measures calculated and presented in accordance with GAAP can be found on the company's Form 10-Q filed at sec.gov, which is also available at www.vuzix.com.

I'll now turn the call over to Vuzix' CEO, Paul Travers, who will give an overview of the company's operating results and business outlook. Paul will then turn the call over to Grant Russell, Vuzix' CFO, who'll provide an overview of the company's first quarter financial results. Paul will then provide a few closing remarks, after which we'll move on to Q&A. 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 Q1 2020 Conference Call. Let me start by saying that all of us here feel deeply for those who have lost loved ones or whose health and well-being has been impacted by this viral outbreak and the disturbances it has created to all of our lives. We wish security and health for all of you as we collectively face this unprecedented challenge.

It has only been about 8 weeks since our last conference call, but I think it has been the most world-changing 8 weeks we have all seen for a long time, if ever. For Vuzix, we feel this has put us out in front of one of the largest technological transformations to occur in the world since the onset of mobile communications. I'm talking about the remote worker revolution that has been spawned by the travel restrictions and social distancing practices being implemented across the world in response to this novel coronavirus. At Vuzix, this has driven us to refine and adapt our sales strategy. We've been able to empower and service our customers and partners through informational marketing event webinars, demonstrating the solutions provided by our smart glasses and related applications, which is evidenced by the growing uptick in sales we are starting to experience. We cannot be sure how long this current uptick will last or how large it will become. But at the onset, it does feel like a paradigm shift in the way many firms must do business. It's as though we are out in front of a rather huge wave that's just starting to build.

Before we get into some of the specific deals and aspects of the past quarter and because you can all review the financials in our recent press releases over the last 8 weeks at your own convenience, I would like to share a little color with regards to what is going on right now at Vuzix.

COVID-19 is on everyone's mind, and it has had a dramatic and immediate impact on the day-to-day operations of many domestic and foreign businesses, including Vuzix. Back in March, we instituted immediate actions in order to minimize face-to-face interactions between employees and to provide effective social distancing practices within the office and on the production floor. Vuzix employees who can work from home have been working from home, and in-person management, engineering and development and customer meetings in the office have been replaced by daily virtual Zoom meetings. Employees working at the office are following best practices, including social distancing, regularly sanitizing, keeping all doors open to avoid touching handles and, of course, wearing masks while inside the building. Also, our HR, finance and legal teams are continually monitoring the latest legislation and guidance to ensure that we're operating within the constantly changing mandates and recommendations protecting our employees and their families and understanding and applying for available support from the state and federal governments being offered to employers during these trying times.

On the manufacturing front, we continue to have our production employees on-site, assembling smart glasses. But when the pandemic hit, we split them into 2 shifts to minimize the number of employees at the office at a given time and to reduce density on our production floor. They have done a great job under stressful conditions, which has allowed us to continue to meet ongoing customer demand for both our M-Series and Vuzix Blade products. In terms of component and product supply, the coronavirus impacted China at a difficult time, with many local companies just coming back from Chinese New Year. If we had not moved most of our M-Series Smart Glasses production out of China last year, we could have been more negatively impacted. But I'm pleased to report that the impact to date for Vuzix has been generally limited, mostly just resulting in some delays.

Business customers in Europe and the United States began going down during the first quarter and took several weeks to determine what aspect of their operations and manufacturing facilities would remain active and which divisions would be shuttered for a period of time. Business continuity plans are still being constantly tweaked as companies monitor the latest situational news related to the COVID-19, but one common trend that has emerged is that most firms have implemented strict travel restrictions on domestic and international travel between sites and locations as well as work-from-home programs to reduce in-office exposure risk. Another consistent trend is that hospitals and other health organizations have implemented measures to limit interactions between patients and health professionals and are seeking new, innovative and safe ways to perform training, mentoring and patient care.

While the coronavirus outbreak has slowed the progress of certain anticipated customer developments in our pipeline both on the enterprise as well as on the engineering services and OEM side, it has, at the same time, led to an acceleration of new interest from others for smart glasses usage that broadly includes remote support, business continuity, education and, in particular, telemedicine, which is rapidly becoming a critical tool in the frontline efforts and the fight against the coronavirus. Most importantly, since mid-March and through April and early May, we have seen inbound interest converting directly into increases in our enterprise and medical sales in the second quarter. The month of April was one of our strongest thus far in terms of smart glasses sales driven by broad demand from new customers, existing customers and Vuzix resellers. We're experiencing increases in customer order flow, average order size and the number of customers placing reorders. We're also seeing this growth domestically in the U.S. as well as across the pond in Europe and in the Asia Pacific region led by Japan. In fact, I'm pleased to report that total revenue realized thus far in our second quarter, together with engineering sales we are contracted to receive, have already surpassed the first quarter figure we just reported for the 3 months ended March 31, 2020. We're only about halfway through our second quarter, and we obviously have the rest of the year in front of us, but we like what we are seeing right now and have a lot of new and exciting opportunities in our pipeline that we look forward to closing and announcing as the year progresses.

There are currently 3 specific segments within enterprise that are seeing an accelerated interest level and growth from customers since the COVID pandemic: field service, including remote support and training; manufacturing, including work instructions, step confirmation and quality assurance; and telemedicine, including procedure assistance and remote video and recording. Within field service and manufacturing, we had seen an acceleration in adoption driven by business continuity plans and the urgent need to deliver remote expertise without having to send engineering resources on-site. In particular, we have seen increases in order flows from multiple large pharmaceutical companies in need of remote expertise in their labs and manufacturing facilities and to support their equipment deployed in hospitals around the globe. Vuzix' business across health care, including telemedicine, training and technical support for medical equipment has also accelerated since the pandemic. Our first quarter 10-Q referenced several of our larger volume health care-related customers, and we have a growing number of unannounced partners that are just starting their business relationship with Vuzix, all being driven by the COVID-19 pandemic.

There are 5 recent examples I would like to share. 1Minuut, an exclusive reseller of Vuzix smart glasses, has seen tremendous interest in Europe as well as the U.S. for their health care and telemedicine solutions. They've placed volume orders for Vuzix M400 in January, March and April as they continue to grow their business. The University of Louisville School of Medicine, which is currently testing the M400 across 6 different facilities, has plans to deploy our glasses across their network and expand the program into educational training in addition to patient care. Gemvision, a Vuzix reseller that has seen growth in health care and telemedicine demand, recently placed a replenishment order for M400 to support their efforts to meet COVID-19 remote health care needs in the Netherlands. In Thailand, Vuzix Blade Smart Glasses are now being used for COVID-19 patient care via our partner, Tely360 Ambulance 3rd Eye, at one of the country's main hospital sites used for quarantine of COVID-19 patients. And last but not least, we just announced that Johns Hopkins Hospital, which is affiliated with Johns Hopkins Medicine, one of the leading health care systems in the U.S., has become yet another customer that has quickly embraced the Vuzix M400 amidst a global pandemic, in their case to help with patient intubation and to host virtual patient rounds using our smart glasses.

Of course, the time frames for some expected enterprise business developments are getting a bit stretched out versus our pre-COVID expectations. For example, reductions in operating hours and the implementation of new shopping routes and rules for consumers have certainly disrupted the day-to-day operations and development plans of retailers across the U.S. That said, we remain in constant discussion with one of the larger U.S.-based retailers, and we still believe this account represents a great multiyear revenue opportunity for Vuzix beginning later in 2020 as they start to deploy our smart glasses in different areas within their operations. We also previously mentioned that we have numerous enterprise accounts across various industries and use cases that each could represent more than $1 million of pipeline revenue. We still feel confident that these opportunities have a reasonable likelihood of being deployed over the next 12 months even in light of the current disruptions caused by COVID-19.

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

Our M400 Smart Glasses as a scalable platform continues to mature, further differentiating it versus other vendor solutions. During the first quarter, we added support for several popular video conferencing platforms such as Zoom and Skype for Business. More recently, we announced support for Cisco Webex, Teams and Zoom for Healthcare. These popular applications each come with some specific advantages, which have made it very easy for large enterprise companies to get started with the Vuzix M400 and Blade Smart Glasses for video conferencing. But these applications generally lack advanced features such as camera control and voice control from the remote expert side as well as real-time illustration and advanced document sharing. This is actually a positive for Vuzix because we have typically found that one size does not fit all when it comes to hardware and software solutions. For customers that require advanced features, Vuzix has been successful in directly upselling solutions such as Vuzix Remote Assist and Ubimax Frontline or working through our partner channels with established companies like Bitnamic, Brochesia, Help Lightning, Librestream, PTC, SightCall, TeamViewer and others. In most cases, these upsells are helping to generate new revenue opportunities for Vuzix that can recur on an annual basis.

As it relates to public safety in COVID pandemic, we are also working with a number of partners to deliver solutions that incorporate our smart glasses to assist with screening crowds of people with elevated temperatures. One such firm is Librestream, with whom we also partnered along with Verizon to support health care and first responders. We recently announced a hands-free thermal imaging solution with Librestream focused around our M400 Smart Glasses. This combined solution enables first responders along with security and medical professionals to scan individuals within a crowd from a safe distance to rapidly measure human body temperatures for screening purposes by comparing those temperatures to a set reference point. The FDA recently published guidelines for using telethermographic systems for human temperature monitoring, and this solution follows these guidelines. Fever is a common symptom of COVID-19, typically appearing 2 to 14 days after exposure. Telethermographic systems are able to determine surface skin temperature when used correctly. The advantage of using these systems for initial temperature assessment for triage use is significant in high-throughput areas, such as airports, businesses, concert halls, sports venues, warehouses and factories, and also in settings where other temperature assessment products may be in short supply. As the world starts going back to work, we anticipate there will be a growing need for this solution to help with screening.

We have also just announced a partnership with Pixee Medical, the world's first orthopedic navigation system using AR smart glasses. Pixee just received CE marking certification for Knee+, its unique patented technology that combines proprietary computer vision and deep learning algorithms along with the use of our M400 glasses to precisely track instruments and implants during surgeries. Pixee is pursuing and expecting to receive FDA approval for Knee+ later this year and plans to next develop a shoulder implant navigation system, which will display a hologram in the surgeon's glasses to precisely guide them through the skin during an operation. With over 600,000 knee and shoulder operations performed every year in the U.S. alone at a cost of well over $10,000 per surgery, this is a very exciting technological development to say the least, and we're proud to play such a key role in it. Competing solutions are bulky and expensive, and we believe this system can bring a new level of price performance to the operating theater.

Given the accelerating customer interest levels we've been seeing and with the world being closed down for travel, we have been conducting a series of live webinars and product demos with numerous resellers and software partners, including 1Minuut, Bitnamic, Brochesia, Help Lightning, Librestream, Ubimax, Zerintia as well as several topical ones using Zoom. They have been a good way to share the value proposition of our smart glasses with partner software solutions virtually to both existing and target customers. The level of engagement and feedback has been tremendous thus far, and the video assets that we created have proved to be meaningful sales reference tools for our customers. Frankly speaking, these webinars appear to be even more productive and much less expensive than many of the conferences we used to attend. With most, if not all, conferences being canceled for this year, this is becoming a new way of doing business. It's a perfect fit for our products and what they are designed to deliver. It's not unusual to get several hundred people attending a given webinar, and the downloads afterwards have been significant. Recordings of our solution webinars can be accessed via a new Webinars page on our website. I highly recommend everybody to take a look.

In addition to the webinars, we also released a series of downloadable white papers to help educate customers across specific market verticals, including telemedicine, remote support and field service, manufacturing and worker training, and warehousing and logistics to provide further education on the usage, benefits and implementation of our smart glasses products. It's not unusual to get as many as 100 downloads a week for these white papers, and the numbers are growing with interest in how smart glasses can help with remote operations and business continuity, themes that are resonating with people with increasing frequency.

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

With a product refresh being introduced later this quarter, we expect the Blade to gain additional traction across enterprise due to its built-in stereo audio feature being added to the glasses as well as an improved autofocus camera replacing the current fixed focus versions. Its introduction along with a new Vuzix custom-built lithium-ion battery that one wears on their collar will deliver up to 10 hours of streaming video to remote experts in the field on a single charge. The Blade continues to hold its own within the security business as we have a number of solutions in process, some of which we have discussed previously, that are a great fit for its form factor and capabilities. The ability to use AI for facial database detection and deliver information hands-free to a security guard or first responder based on that remains extremely valuable.

In March, we announced our second OEM project, this one with a new major U.S. defense contractor, to build a customized waveguide-based optics engine. The first phase of this program is expected to generate initial nonrecurring engineering revenues for us over the next quarter with subsequent NRE phases expected thereafter before an accepted final product design leads to volume production order. In April, we received yet another follow-on development order from a global tier 1 aerospace partner. This one is for the fourth stage of this program. We expect to see this move to a production opportunity for us later in this calendar year.

Since our inception, Vuzix has invested heavily to develop our intellectual property focused on near-eye displays. Our intellectual property portfolio now consists of over 157 patents and patents pending. Our leadership and in-depth knowledge of not only near-eye displays but designing, developing and manufacturing AR smart glasses from the ground up puts Vuzix in a unique position to rapidly deliver new optical components and systems as well as innovative waveguide-based smart products for our customers, both direct, end users and OEMs. We also continue to make tremendous progress towards establishing Vuzix as a preeminent supplier of next-generation optical solutions for use with microLED displays. These new solutions should allow the creation of consumer-focused smart glasses for Vuzix and other OEMs to help eventually build Kingsman-style smart glasses for the mass market. We're looking forward to unveiling more here with our new partners in the upcoming months as we believe what we are working on is well ahead of the competition.

Notwithstanding a challenging business environment, we have made tremendous progress thus far this year in terms of meeting our operating goals for 2020. We're currently seeing growing overall sales demand and an increase in the average order size for existing M-Series Smart Glasses. We're currently on track to commence shipments of our M4000 Smart Glasses in volume during the later part of this year. We have continued to improve our waveguide manufacturing yields and capacity. And with the introduction of our upgraded Blade, we are preparing to further ramp production to support expected sales and the rollout of programs in security in the enterprise markets. We expanded the number of contracted engineering services, program engagements and are actively pursuing additional new ones as well as OEM programs. We are making great strides to develop our next-generation waveguide optics and creating very small but high-performing display technologies around microLEDs.

Finally, Vuzix and much of its staff at a personal level have worked hard to trim the cost of operations and will continue to be prudent in our spending while focusing on revenue-generating initiatives. Meeting or furthering each of these objectives will serve to increase Vuzix' net cash flow from operations. And while we are encouraged by all of these developments, we still have more work to do. Our ultimate goal is to own the smart glasses for enterprise industry, which would result in substantially increasing our top and bottom line and by extension, our shareholder value.

I'd now like to pass the call over to Grant, so he can review some aspects of our first quarter financial results. Grant?

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

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Thanks, Paul. As Ed mentioned, the 10-Q we filed this morning with the SEC offers a detailed explanation of our quarterly financials. So I'm just going to provide you with a bit of color on some of the numbers.

Our first quarter revenues rose 12% year-over-year to $1.5 million, largely due to increased engineering services revenues; and secondly due to strong sales of our M400 Smart Glasses, which drove a 35% increase in overall M-Series glasses revenues. Sales revenues of Blade Smart Glasses decreased by nearly $0.3 million or 55%, primarily driven by a 20% decrease in our average selling price and lower unit sales. As Paul mentioned, the pandemic did slow the progress of certain customer developments in the period. So while we began the quarter with a somewhat higher sales expectations versus the one we achieved, we were generally pleased with our results of operation given the global pandemic situation.

There was an overall gross profit of $81,000 for the 3 months ended March 30, 2020 (sic) [March 31, 2020], as compared to a gross profit of $40,000 for the same period in 2019. On a product cost to sales basis only, product direct costs were 54% of sales in the 2020 period as compared to 52% in the prior year's period, the change primarily the result of lower selling prices for the M300XL in the first quarter of 2020 versus the same period in 2019, and that was before the M400 was introduced.

Manufacturing overhead costs for the 3 months ended March 31, 2020, as a percentage of total product sales, increased to 37% from 30% in the same period, 2019, with the majority of this increase representing additional personnel year-over-year all to support the movement of M-Series Smart Glasses production back from China to Rochester. Our operating expense control efforts continue to be fruitful as we realized an overall decrease of just under $1 million or 15% during the first quarter of 2020 as compared to the same period in 2019.

R&D expense was $2 million for the 3 months ended March 31, 2020, as compared to $2.5 million for the comparable 2019 period, a reduction of approximately 20%. The decrease in R&D expense was primarily due to reduced external consulting fees related to Blade software development. Selling and marketing expense was $1.2 million for the 3 months ended March 31, 2020, compared to $1.4 million for the comparable 2019 period, a reduction of approximately 19%. The decline was largely due to the decrease in advertising and trade show costs, salaries and stock-based compensation as well as external consulting fees. General and administrative expense for the 3 months ending March 31, 2020, was $1.5 million versus $1.9 million in the prior year's period, a reduction of approximately 19%. The decline was largely due to decreases in legal fees and IT and security consulting fees. We expect continued comparable 2020 versus 2019 quarterly operating expense reductions going forward, especially with reduced travel and event costs augmenting our overall cost control efforts throughout the year.

The net loss attributable to common shareholders after accrued preferred dividends for the 3 months ended March 31, 2020, was $5.9 million or $0.18 per share versus a net loss of $6.8 million or $0.25 per share for the same period in 2019.

During the first week of May, we adopted a compensation adjustment plan that is expected to save the company an additional $1.2 million of cash between mid-May and year-end. Virtually all employees receiving more than a base salary of $60,000 will be taking cash pay reductions ranging from 15% to 25%, while senior executives and Board members will take a cash 50% compensation reduction. To help keep overall compensation at an appropriate level and also to incentivize and retain employees through the adjustment period, affected employees are receiving Vuzix restricted stock awards under the company's 2014 incentive plan at a rate of 150% of the net cash reductions. These shares will fully vest on January 15, 2021, and cannot be resold by the employee or officer until July 15, 2021. We consider this action to be preferable one versus a broad headcount adjustment as we feel we currently have a very solid team in place. Speaking on behalf of our employees, I can say that we are -- all remain united in our belief of great success in our company's future, and we'll continue to deliver world-class and changing solutions for our customers and shareholders.

Now for some balance sheet highlights. Our cash position as of March 31, 2020, was $6.1 million, and our net working capital position totaled $11.8 million. Cash used in operations, excluding changes in working capital, totaled $4.4 million in the first quarter of 2020 as compared to $5.3 million in 2019, a decrease of 19%. In April, Vuzix properly filed for and received total proceeds of $1.56 million under the Paycheck Protection Program administered by the U.S. Small Business Administration. Cash used for investing activities during the first quarter of 2020 was $0.2 million as compared to $1.3 million in the prior year's period as our investments in manufacturing, new product tooling and other equipment purchases decreased substantially year-over-year.

CapEx for the balance of 2020 is expected to remain well under 2019 levels in total. In addition to our compensation adjustment plan, we will remain, of course, focused on minimizing our cash burn through the numerous previously discussed measures, including selling our existing M300XL finished goods and Blade component inventory, disposing of as many of our written-down products and components as possible, increasing our efforts to further promote our engineering services programs, continuing to pursue licensing and strategic opportunities around our waveguide technologies with potential OEMs, decreasing trade show and related travel expenditures, and delaying or curtailing discretionary and nonessential capital expenditures not related to near-term new products, reducing the rate of new product introductions and leveraging existing platforms as much as -- reduce new product development and engineering costs as well as further reducing the rate of research and development spending on new technologies, particularly the use of external contractors.

With that, I would like to turn the call back over to Paul. Paul?

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Paul J. Travers, Vuzix Corporation - Founder, Chairman, CEO & President [5]

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Thanks, Grant. In summation, as you can see from the orders we have been receiving, the partnerships we have been striking, the use cases we have been creating and the overall breadth of customer interest we have been seeing, Vuzix is emerging to become a critical go-to supplier of smart glasses during a period when the world is turning to them as needed solution. While many other suppliers in our space continue to struggle, some increasingly so, our solutions and market positions continue to get stronger and stronger. We're more excited than ever about what the future holds for our industry and more importantly our place in it, and we intend to keep pushing the envelope in terms of our industry-leading products and technology. We're a team here at Vuzix, and this has been a team effort to get us to where we currently are. So I'd like to thank all of our employees that might be listening in for all of your time and effort, particularly during this most challenging of times.

Expected revenue growth in combination with the expense management measures discussed will reduce our cash burn as we grow and execute upon these opportunities. That being said, there is presently much uncertainty in both the financial markets and the global business environment as many companies continue to reduce scale or shut down operations and unemployment soars to record levels. Given this volatile and unpredictable scenario, we have decided to strengthen our balance sheet. As just announced, we have entered into a stock sale agreement whereby we will be selling 5 million common shares of Vuzix at a price of $2.25 per share. This sale, expected to close this Wednesday, May 13, is a common stock offering only with no warrants attached, and the stock will be distributed among 6 existing or previous institutional shareholders of Vuzix. This is a derisking move that better positions Vuzix for greater growth and provides additional financial security in uncertain times. Our business is currently accelerating, and we want to be able to expand and deliver to it to meet expected customer demand. Management and the Board feels that this move will be supported by a vast majority of our stakeholders as well as by our employees and customers and will provide us the ability to grow, innovate and deliver world-class solutions throughout 2020 and well into 2021.

I'd like to now turn the call over to the operator for Q&A.

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Questions and Answers

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Operator [1]

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(Operator Instructions) Our first question today comes from Brian Kinstlinger of Alliance Global Partners.

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Brian David Kinstlinger, Alliance Global Partners, Research Division - Head of TMT Research, MD & Senior Technology Analyst [2]

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We've seen a number of press releases discussing demand for the telemedicine industry for smart glasses and you've talked about it a bit here. Can you quantify roughly how many smart glasses have been sold for telemedicine purposes in 2Q? Are we talking several hundred? Are we talking tens? Just if you can give us a magnitude of the demand you're seeing.

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

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It's many hundreds. And if you think about it, Brian, there's a new normal coming here. And even to go back to work in hospitals, today, hospitals don't want anybody in their facilities that might be carrying the virus. And so these big medical firms that make medical products that have their equipment sitting in the hospital, they all need maintenance. They all need support on a daily basis almost. And it used to be the only way to do that was to send that person from that firm into the hospital. And what's happening now is literally, they are sending a pair of glasses. The tech that already is qualified to be in the hospital is doing the remote support from some of these bigger companies. So the kinds of volumes we're talking about here, it's not like 1 or 2 per hospital kind of a thing. It could be a significant number ultimately in all of these hospitals going forward. Hospitals are -- is only one example. I mean it's going to be the same thing in the industry. People don't want to send their employees. In fact, you can't get an employee on a plane to China today and back and forth without 14 days of quarantine when you land. So this is becoming a new thing. And quite frankly, for smart glasses, we have been saying this for a long time but people were dumb, fat and happy, spending a ton of money putting people on airplanes than wearing out their staff when they could have simply just used smart glasses all along. This is forcing that change, and I think we're going to see a big move towards this direction in the future.

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Brian David Kinstlinger, Alliance Global Partners, Research Division - Head of TMT Research, MD & Senior Technology Analyst [4]

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Great. And then I think Grant intimated as much 8 weeks ago, you had thought revenue would build sequentially every quarter and there were only 3 quarters left -- sorry, 3 weeks left in the quarter. So what was the biggest inhibitor to growth -- that sequential growth for those 3 weeks?

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Paul J. Travers, Vuzix Corporation - Founder, Chairman, CEO & President [5]

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You're talking about last quarter?

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Brian David Kinstlinger, Alliance Global Partners, Research Division - Head of TMT Research, MD & Senior Technology Analyst [6]

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Yes. I think that Grant said in his prepared remarks. And I think in the last conference call, you said you'd expect sequential growth first quarter compared to second quarter, and there were only 3 weeks left. So in those 3 weeks, what happened? Was there massive -- some large orders that got delayed that you thought would be back-end-loaded? I'm just trying to understand.

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Paul J. Travers, Vuzix Corporation - Founder, Chairman, CEO & President [7]

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So the first quarter was about $1.5 million in revenues. And then the second quarter, almost just all in April, it's about $1.5 million in revenues also, maybe a little bit more. It's bigger than what the first quarter was. So we are seeing sequential growth here, Q1 to Q2.

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Grant Neil Russell, Vuzix Corporation - CFO, Executive VP, Treasurer & Director [8]

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

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Brian David Kinstlinger, Alliance Global Partners, Research Division - Head of TMT Research, MD & Senior Technology Analyst [9]

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Okay. And then can you speak to the supply chain? Last quarter, you said there was a few parts procured from China that's not having a significant impact. Has anything changed from a supply chain perspective?

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Grant Neil Russell, Vuzix Corporation - CFO, Executive VP, Treasurer & Director [10]

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Right now, no. I mean to be frank, I mean there -- we did say it slowed down some of our new product introductions. There was a period in the last couple of months when all-new mold base, the steel bases in China had to be allocated to building masks and PPE. So we had to wait our turn to get them, but that pushed out our new product introduction about 3 weeks. It's not the end of the world, and it's on track and we're getting samples now, but I mean there's been little glitches like this in the chain as well as it takes longer to clear products through customs going into Europe. Stuff has got to sit in quarantine material. So everything has taken a little longer along the supply chain.

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Brian David Kinstlinger, Alliance Global Partners, Research Division - Head of TMT Research, MD & Senior Technology Analyst [11]

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Okay. Last question. In terms of liquidity, ahead of this morning's announcement on the raise, I'm curious how much cash you had as today. By my math, where you ended in your burn before it went down significantly, I'm figuring $3 million plus the federal loan puts you at about $4 million and change. Is that where you were or maybe a little bit lower?

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

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We're above that. And we don't issue monthly cash balances to anybody. We were above that.

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Paul J. Travers, Vuzix Corporation - Founder, Chairman, CEO & President [13]

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A fair bit.

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Operator [14]

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The next question comes from Jim McIlree of Bradley Woods.

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James Mcilree, [15]

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

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

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We don't break it down that way, Jim, sorry. I think -- we just don't break it down that way.

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Grant Neil Russell, Vuzix Corporation - CFO, Executive VP, Treasurer & Director [17]

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M-Series products is being stronger, for sure. They're the bigger -- the biggest portion of that. That's why we're seeing demand related to telemedicine and video conferencing. The Blade participates in that but to a lesser extent.

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Paul J. Travers, Vuzix Corporation - Founder, Chairman, CEO & President [18]

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The Blade doesn't have autofocus cameras. So it has a bit of an Achilles' heel in a comparison. And it will shortly have autofocus cameras. That's what this new upgrade is all about. The M400 has got a broadcast-quality camera and it's amazing how good it is. You can record 4K video with it. And so when you're streaming HD, it's just so easy to see and resolve issues because you can read the text on the page, the fine print, et cetera.

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James Mcilree, [19]

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And when you refresh the Blade, I think, Paul, you said it was this quarter. Is that with the same price? Or is there a price change as well?

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Paul J. Travers, Vuzix Corporation - Founder, Chairman, CEO & President [20]

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We haven't fully finalized, Jim. I think you're going to see it start at least at $1,000.

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Grant Neil Russell, Vuzix Corporation - CFO, Executive VP, Treasurer & Director [21]

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

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James Mcilree, [22]

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

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

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I think we say in the Q, we got about a little over $600,000 in previously booked engineering services expected in Q2, we put in our last Q. I mean we're expecting the award of 1 and perhaps 2 new programs before quarter end. I mean how much we -- work will get done on them by then. But I mean it's -- what have we put in here? I think it was a little over $600,000 we said we had to complete. Just trying to find it in our...

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James Mcilree, [24]

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I'll dig it out. You don't need to.

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

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We do make a statement.

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James Mcilree, [26]

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That's good. Yes. Okay. I'll look for that. And then I'm just -- I'd like to understand a little bit better the price delta that you're contemplating, the M400 versus the M4000 as well as what different applications or end markets that you are intending to address with the 4000 that you don't with the 400. I mean I'm really trying to get at that -- the product transition or the -- how those 2 products are going to look together when the 4000 gets introduced.

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Paul J. Travers, Vuzix Corporation - Founder, Chairman, CEO & President [27]

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So the M4000, which is the one with the optical see-through, will carry a -- it's about a $2,499 price point. We haven't finalized that out, but that's what we're thinking right now. So it's a significant raise in price. It will do a lot of what the M400 can do. However, with the optical see-through display, sometimes it's not as handy to do remote support. In fact, it's not -- it's probably not as good because an occluded display is better there. But there's other applications where you're looking at stuff in the real world and you want the digital world to be overlaid on top of it and seeing it so that you're not having to think about picture-in-picture kinds of things. So if you think about looking into an occluded display or even at a laptop, right, you look over at the laptop and then you decide what you're going to do based on what you're seeing there and then you go back to the real world and you've got to try to remember it. Even though your eyes are just moving a little ways, that's what happens on an M400 today. The M4000, you'll look out in the real world and the information will be floating out in front of you in the real world. And so it makes it so that the odds of getting something wrong go down a fair bit. But it takes time to write software to do that kind of feature set, that AR kind of advanced feature sets.

So out of the gate, the M4000 and the M400, we think, are going to coexist very, very well together. There's going to be people that want to pay for that ability to get higher performance and more accuracy, and there'll be people that absolutely love the fact that what they're getting on an M400 with this super bright, beautiful display that's occluded that allows you to be able to read it well for remote support kinds of applications, they'll be more than happy with that. So they'll coexist. There'll be a reasonably large difference in price between the 2, and people will pick based on their needs, we think.

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James Mcilree, [28]

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And it's going to be through the same distribution partners, the same software partners? Or do you have to come up with a whole new set of partnerships in order to get the product out?

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Paul J. Travers, Vuzix Corporation - Founder, Chairman, CEO & President [29]

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Out of the gate, many of the same software works, right? So there'll be plenty of just slide it in and then go with it. However, some of those advanced features I was talking about, some of our current partners want them and we'll enable them in the glasses, but it will take them a little bit of time to get that software written for it. But in the meantime, their current software will just work with it. It would be something they'll be able to upgrade to over time.

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James Mcilree, [30]

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Got it. Got it. And just finally, I'd like to understand a little bit better about the improvement you've seen in demand and since -- at least in some segments due to the COVID lockdown. I'm assuming that these are with customers who have already gone through the testing and evaluation, and now it's the lockdown that has pushed them off the decision point. So one, could you just say if that's -- my assumption there is sure or not. And then secondly, is -- what about the new customers, the new testing? Is that just all put on hold for now? Or is there -- what's happening with that portion of the selling and marketing process?

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Paul J. Travers, Vuzix Corporation - Founder, Chairman, CEO & President [31]

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There's a portion of our business that is on hold right now, and it's all the stuff that you might imagine is not so critical to deal with when your plants are shut down. As Grant said, in the car industry right now, since the plant floors aren't even operating, nobody cares so much about trying to increase the efficiency there. There was a group of folks that Vuzix has been working with all along that have been wanting to do remote support. And in those cases, often, it just caused them to move into overdrive. In the medical space, there were very few people that were using our products in that space. That space moves like molasses. To make a change there, you normally have to go through sometimes years of testing even. But this virus has completely changed people's mindset on how they need to operate. And so they're doing things expeditiously now. And so in that space, it's -- there's been a -- like an avalanche of new business and a lot of it's coming really fast.

And when it comes to the medical supply side of it, the larger companies that make medical equipment that they have to keep running in these hospitals, they're trying to solve some big problems here. I mean nobody wants to be in a hospital today because it's ground zero for the virus. This equipment, everybody is like going back to work, right? We're going to go start doing operations again. We're going to do the stuff that's being put on hold. And the hospitals are running under extreme circumstances to try to make that work. They don't want anybody in the buildings. So they're all trying now to solve problems they've never had before. And it's happening very, very quickly in that side of it, Jim. So those are people, companies that we haven't worked with before that are finally -- well, they have no choice. They have to figure out how to make this stuff work and Vuzix' stuff works well for it. So there's a part of our business that actually is on hold. The -- even some of the in-store picking kinds of things and stuff, that's on hold because those employees that work in that side of the business, they're at home stuck in -- so you can't deploy something in a store when the people who would normally be doing that can't even go to work yet. That stuff, the brakes came on. All this other stuff about trying to bring the world back to life, those are the things that are starting to kick into overdrive and new customers coming out of the woodwork for Vuzix.

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James Mcilree, [32]

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Got it.

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Paul J. Travers, Vuzix Corporation - Founder, Chairman, CEO & President [33]

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Yes. Thank you, Jim. When the world shuts down -- it's around the world, it's extremely amazing how the impact and what people try to do to be creative to get back to normalcy.

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Grant Neil Russell, Vuzix Corporation - CFO, Executive VP, Treasurer & Director [34]

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

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Operator [35]

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The next question is from Jack Vander Aarde of Maxim.

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Jack Vander Aarde, Maxim Group LLC, Research Division - Equity Research Analyst [36]

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I was wondering if you can -- I know there's been a lot of questions on kind of revenue ramp. I want to just follow up on the engineering services revenue. I just checked the 10-Q as well. So the revenue from engineering services was a result of just 2 waveguide and display engine development projects, and that began in 1Q '20. So one, is that correct? They're just related to these 2 projects. And then how much...

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Grant Neil Russell, Vuzix Corporation - CFO, Executive VP, Treasurer & Director [37]

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That's correct. That's correct.

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Jack Vander Aarde, Maxim Group LLC, Research Division - Equity Research Analyst [38]

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Okay. And then I think you said $695,000 or so is remaining on these 2 contracts. So that would imply that the revenue produced from these contracts in Q1 is absolutely below what you expect for Q2 at least related to these 2 contracts?

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Grant Neil Russell, Vuzix Corporation - CFO, Executive VP, Treasurer & Director [39]

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

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Jack Vander Aarde, Maxim Group LLC, Research Division - Equity Research Analyst [40]

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Got it. Okay. That's helpful. And then I want to reference a specific customer example. It was described in the January presentation. Can you share additional color on volume Blade shipments as it relates to RideOn? I believe you're expected to expand that in Q1 2020 to fulfill their seasonal resale orders. So given COVID-19 and everything, has that played out accordingly? And if not, where is that? If you could give me a status update in terms of where you expect revenues to come from that particular relationship.

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Paul J. Travers, Vuzix Corporation - Founder, Chairman, CEO & President [41]

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That's sort of like the March Madness basketball and all the other sports industries that have shut down. You can't go to swimming pools today to swim either. So you can imagine what happens to anybody who makes swimming products. I mean unfortunately, for RideOn, this has impacted them. I mean we have sold them some but -- and honestly, we don't break out by account, who we sold and how much we've sold to. That said, they've had some challenges because of this.

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Jack Vander Aarde, Maxim Group LLC, Research Division - Equity Research Analyst [42]

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Okay. And that's understandable. And then I guess just lastly, last quarter, you guys provided an update on waveguide manufacturing capabilities and production yields. They've definitely improved significantly at least last quarter, around -- or I think exceeded 85% pretty consistently. Can you maybe talk about where that's trended over the last few weeks and then kind of what your outlook is for that production yield throughout the remainder of 2020?

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Paul J. Travers, Vuzix Corporation - Founder, Chairman, CEO & President [43]

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Yes. It's going great on the plant for waveguides. And in fact, one of the reasons why we're getting a lot of this OEM business is that's related to the fact that we manufacture our own waveguides, we can do them cost-effectively, and we do them here in the United States of America. And that's a big plus especially on these defense-related activities. Our competitors that make these kinds of things are out of China for the most part, in fact almost exclusively now. And that's very problematic if you're a U.S. defense supplier, as you might imagine, knowing the climate between us and China these days. So the plant's floor is going great. We've now got 3 replication pieces of gear on the plant floor, and our yields have never been better.

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Jack Vander Aarde, Maxim Group LLC, Research Division - Equity Research Analyst [44]

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Okay. That's fantastic. And actually, if I can sneak one more question in here as it relates to gross margins. Product gross margin, I think it's negative here if my model is correct. Engineering gross margin was strong. I mean this is up a very, very small amount right now, of course, but maybe can you talk about like what your expectation is for gross margin, which came in around 5% this quarter? What's it going to take for that to -- how large can that ramp be? How quickly can it happen where gross margin is -- gets some lift here due to higher volume shipments maybe? And is that 84% or so engineering gross margin indicative of what you would expect at even higher revenue scales from engineering services?

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Grant Neil Russell, Vuzix Corporation - CFO, Executive VP, Treasurer & Director [45]

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I mean the 84%, it's not going to be that high on a long-term basis. It's just the way the work and the progress billing did. I mean it's -- that was primarily internal work and we didn't have external costs and contractors, which we can make a lot less money on. But we do get to reclass some of our engineering wages and added up the cost to sales. But yes, product gross margins are less. I mean manufacturing overheads are -- they're over 30% of our sales. And it's all volume related. I mean we built this infrastructure. We have an ISO 9000 factory. We need the infrastructure, and it's all a matter of volume. So our long-term goal is still to get north of a net 40% and not with any -- not with expected unusual big increases in engineering gross margin. I mean we do to -- try to do our best there, but I mean it's strictly volume. So until we can get our sales way up, then that -- the fixed cost, as listed in our cost of goods table, we've got to amortize those fixed overheads.

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Operator [46]

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

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Paul J. Travers, Vuzix Corporation - Founder, Chairman, CEO & President [47]

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

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Operator [48]

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