Edited Transcript of VUZI.OQ earnings conference call or presentation 10-Aug-20 8:30pm GMT

Rochester Aug 13, 2020 (Thomson StreetEvents) — Edited Transcript of Vuzix Corp earnings conference call

Rochester Aug 13, 2020 (Thomson StreetEvents) — Edited Transcript of Vuzix Corp earnings conference call or presentation Monday, August 10, 2020 at 8:30:00pm GMT

* Paul J. Travers

Craig-Hallum Capital Group LLC, Research Division – Senior Research Analyst & Partner

Greetings and welcome to the Vuzix Second Quarter 2020 Financial Results and Business Update Conference Call. (Operator Instructions) As a reminder, this conference is being recorded.

Now I would like to turn the call over to Ed McGregor, Director of Investor Relations at Vuzix. Mr. McGregor, you may begin.

Thank you, operator, and good afternoon, everyone. Welcome to the Vuzix Second 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, August 10, 2020. Vuzix assumes no obligation to update these projections in the future as market conditions change.

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

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

I will now turn the call over to Vuzix CEO, Paul Travers, who will give an overview of the company’s operating results and business outlook. Paul will then turn the call over to Grant Russell, Vuzix’s CFO, who’ll provide an overview of the company’s second quarter financial results. We’ll then move on to the Q&A session, after which Paul will provide some closing remarks. Paul?

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

Thank you, Ed. Hello, everyone, and welcome to the Vuzix Q2 2020 Conference Call.

Q2 sales and gross profits were the highest we’ve achieved as an enterprise product supplier. We’re pleased to see our products being used across our client base to assist customers in solving the complex issues associated with today’s business environment. Our sequential revenue growth in Q2 for product sales was nearly double, 98% to be exact, as compared to Q1, driven by a record $2.3 million worth of Vuzix Smart Glasses revenues in the quarter, representing a quarterly year-over-year increase of 183% compared to Q2 of 2019. Our second quarter Smart Glasses sales were driven by new customer acquisitions and follow-on purchase orders from existing customers.

COVID-19 has changed the way business is getting done by most organizations. And as a result, we are seeing our business growth become part of the new normal. Our third quarter is off to a strong start with revenues continuing to show further growth. As a result, we believe we’re in a position to deliver continued growth in this quarter and over the remainder of 2020.

We’re now 6 months into the COVID pandemic, and the business activities to support enterprise customers and business continuity continues to accelerate, precipitating for many a shift in terms of urgency and interest to deploy smart glasses. The global pandemic is currently showing no signs of letting up, and all indications are that we have entered a new normal for business to operate regionally and globally.

This has and continues to accelerate adoption for most of our key business verticals, most notably field service, telehealth and health care. There are also similar needs for customers operating in manufacturing, warehousing and logistics and retail, both online and in-store pickup, all of which were negatively impacted by coronavirus but are now trying to come back online in spite of COVID. Companies of all sizes are significantly restricting or even eliminating most travel altogether, and conferences and trade shows around the world have all gone virtual. The International Air Transport Association is forecasting that air travel may not return to pre-COVID-19 traffic levels until 2024 at the earliest. The IATA commented further in their recent report that video conferences have made significant impacts as a substitute for in-person meetings and have greatly reduced the need for corporate travel. As a matter of fact, Vuzix is using our own technology in this regard as well. As you can imagine, Vuzix needs to qualify vendors and supply sources from around the world. And as an example, just over the last few months, we have been bringing online a relatively expensive piece of new manufacturing equipment being custom-built for us that is coming from China. And instead of flying someone halfway around the world and letting them sit in quarantine for 14 days, we sent the supplier a pair of Vuzix M400 Smart Glasses. On our first call, using the M400, we were able to test out the equipment and go through QA remotely without having to send a person. It begs the question for us and probably every other firm out there, why send a person when you can send a pair of Vuzix Smart Glasses? It’s safer, cheaper, faster and in almost every way, a better way of doing business. We have been saying this for some time now. The pandemic is forcing the point.

Internally, Vuzix continues to operate under directives put in place in March to minimize COVID risk, including avoiding face-to-face interaction between employees when at all possible, practicing social distancing and requiring face coverings within the office and on the production floor and conducting regular COVID screening. Vuzix employees who can work from home have continued to work from home, and in-persons meetings at the office have been almost entirely replaced with virtual Zoom meetings.

On the manufacturing front, our on-site production employees are as distanced as possible while assembling smart glasses on our production floor, and other protections have been adopted to further limit COVID risks, such as enhanced facilities and equipment cleaning and staggered clock-in and clock-out for shift workers.

The Vuzix M400 has clearly become the workhorse for a steadily growing list of enterprise customers. 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 technician. And with advanced voice control now in the base OS, it has 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 half of 2020, we added support for several popular video conferencing platforms, such as Zoom, Zoom for Healthcare, Skype for Business and Cisco Webex teams. Most recently, we have added incremental improvements and features to these applications based on feedback received from the field to increase the ease of use and provide additional functionality, such as 1 click joining of meetings, zoom in, zoom out camera capabilities and enhanced free usage. I can’t emphasize enough how these popular conferencing applications make it very easy for large enterprise companies to get started with the Vuzix M400 and Blade Smart Glasses for videoconferencing.

For our customers that require advanced features not offered by these software applications, Vuzix continues to be successful in directly upselling solutions such as Vuzix Remote Assist and Ubimax Frontline or working through our partner reseller channels. In most cases, these upsells are generating new software revenue opportunities for Vuzix that can recur on an annual basis. In July, we formalized a collaborative partnership with ProGlove, a leading supplier of small wearable barcode scanners, to offer a combined product solution that addresses the growing need for greater efficiency and safety in industries spanning retail, transportation, logistics and manufacturing. We expect that this partnership has the potential to increase the customer reach for both firms in the warehouse and logistics markets going forward with firms like BMW and others already starting to use our combined solution.

The 3 specific verticals within enterprise that continued to accelerate since the COVID-19 pandemic began in February remain field service, manufacturing and health care. Within each, we continue to see an acceleration in adoption driven by business continuity plans and the urgent need to deliver remote expertise without having to send engineering personnel on site. One of the hottest areas is health care, which includes remote patient care, telemedicine, training and education, medical equipment servicing and surgery assistance, all driven by the top-notch performance of our M400 Smart Glasses, coupled with a variety of software applications being sold by Vuzix and our partner channels.

A number of our key accounts that each could ultimately represent more than $1 million of pipeline revenue within the next several quarters are now coming online, which is resulting in recurring monthly sales as these accounts begin to scale. One prime example is a global medical device manufacturer that came to Vuzix in March with initial units going to 1 site in Europe, but rapidly expanded to more than a dozen locations with deployments of hardware and software across the U.S. as well as Europe and Asia.

And we are not just seeing revenue growth coming from 1 or 2 of our largest accounts. Instead, it’s across many customers that are expanding their use of smart glasses, which helps accelerate Vuzix’s customer footprint and our revenue growth. As a result, we continue to see an increase in customer order flow, average order size and the number of customers placing reorders. We are seeing these trends occur domestically as well as in Europe and the Asia Pacific region, the latter led by Japan with revenues rising significantly over the previous year.

As reported a few weeks back, we now have regulatory approvals, and the M400 has started shipping into China. As China is a manufacturing center of the world, we expect to see considerable sales growth in the region as companies around the world address business continuity issues while not easily being able to visit the country. Everywhere we look around the world, we see our glasses being put into service. Other new use cases and technological developments that we have announced recently include use for auditing and meat plants, knee replacement surgery, and gastrointestinal surgery.

I want to spend some time to provide an update on our relationship with Verizon. The story around the Verizon 5G network and the connected workforce with Vuzix Smart Glasses across a variety of market verticals is gaining momentum internally at Verizon with key business sponsors, executives and the Verizon B2B sales team. The ongoing effort inside Verizon to scale up their sales efforts is beginning to bear fruit, and we expect a broader coordinated effort and marketing push from Verizon, integrating Vuzix Solutions around their 5G and mobile edge compute platform. Organizations like Verizon often take time to get the ship moving, but it’s finally rolling now. We’re working with Verizon to address key market verticals, including retail, most notably big-box retailers, distribution centers and logistics, all of which can leverage Verizon’s 5G network alongside Vuzix Smart glasses for order picking and AR vision to drive efficiencies and cost savings.

Another major focus is on health care, telemedicine and first responders. Last month, Verizon announced in a press release that Vuzix was selected as the AR Smart Glasses solution provider for the Verizon EMS bundle. The EMS bundle will be co-developed by Verizon and Vuzix alongside some other exciting companies to put together a world-class turnkey solution centered around 5G by bringing situational awareness technology to public safety and first responders. It’s one thing for Vuzix to enter this market alone, but with the technical support, ecosystem, financial muscle and 5G network of Verizon in place, it should help bring this turnkey solution to the market very quickly. Verizon’s EMS solution will be marketed and sold nationwide by Verizon to public safety organizations across the United States. Verizon is planning to launch its EMS solution nationwide by early 2021.

Verizon is well positioned to become a significant smart glasses distributor for Vuzix over the next 12 months, and we hope to share our other exciting partnership developments involving Verizon over the remainder of the year as they materialize.

The Vuzix M4000 is a very exciting sister product for the M400. Built on the same XR1 silicon, we expect this offering to be very complementary to the M400 and provide a 1-2 punch within enterprise. The optically see-through M4000 will give our customers not 1, but 2 enterprise workhorse products to choose from. Product development and tooling for our new optically see-through M4000 smart glasses is complete. Pre-production units of the M4000 have been shipped out to select partners over the last several weeks, and we expect to ship production units during the current quarter.

The Vuzix Blade upgraded version, which will include a new built-in stereo audio feature as well as an improved auto focus camera, will start shipping in volume this fall. We have also shipped early production units to select enterprise customers, and their feedback thus far has been excellent. We expect this new Blade to gain additional traction across not only the enterprise space, but for prosumers as well due to these added features.

Our OEM business portfolio continues to expand and move towards volume production programs. We now have 4 programs, 2 of which we have discussed before and 2 more nondefense programs that are yet to be announced. The multiyear revenue potential associated with volume production for these programs for Vuzix in this space could be significant and, of course, grows with each additional agreement signed. During the second quarter, we delivered a customized waveguide-based optics engine to a major U.S. defense contractor for a project we first announced back in March this year. This customer was pleased with the initial product delivered, and we expect to see additional NREs in subsequent phases of the program before an accepted final product design leads to potential volume production orders.

In early July, we delivered a customized waveguide-based head-mounted display system to the global Tier 1 partner we first announced back in 2018. We now have completed 4 phases of this product development program, receiving cumulative NREs of $1.3 million from this partner to date. Importantly, this waveguide-based head-mounted display system has been qualified not only for commercial aviation use, but for defense as well. As a result, we are now negotiating a supply agreement with this customer for volume production of this customized head-mounted display waveguide and HD display engine product for both aviation and defense usage with deliveries potentially commencing as early as this fall.

Beyond these efforts, we have a growing list of other projects that continue to progress towards signed OEM programs. Of course, we look forward to announcing further details on all of these opportunities when we can. Vuzix remains diligent regarding the development of our intellectual property focused on the Smart Glasses product solutions and technology. Our intellectual property portfolio continues to grow and now consists of over 166 patents and patents pending, up from 90 patents and patents pending just 3 years ago.

As a U.S.-based company, our leadership and in-depth knowledge of not only near-eye displays, but designing, developing and manufacturing AR smart glasses, head-mounted displays generally and optical systems from the ground up puts Vuzix in a unique position to rapidly deliver new optical components and systems as well as innovative waveguide-based smart products for our customers, both direct end users and OEMs, including global defense companies.

As the graphic on Slide 10 illustrates, we have broad expertise and capabilities regarding the manufacture of optical waveguides. We can make them in volume, in various shapes, sizes and structures. And we are one of the few, if not the only company making them here in the U.S.A., a critical factor for many of the OEM customers we have.

We also continue to make progress towards establishing Vuzix as the preeminent supplier of next-generation optical solutions for use with and around microLED displays in other advanced display engine technology. Vuzix will be sharing more about these exciting developments in due course. But let me say that these new solutions should facilitate some of the most advanced enterprise and consumer-focused smart glasses for Vuzix and our OEM partners to help build stylish smart glasses for use across the board. The smart glasses pictured on Slide 10 are already in the prototype stage. And unlike others preparing to enter this space in 2022 or ’23, we expect to see products like these reaching the market in the much nearer term.

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

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

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Thank you, Paul. As Ed mentioned, the 10-Q we filed this afternoon with the SEC offers a detailed explanation of our quarterly financials. So I’m just going to provide you with a bit of color on some of the numbers. For the 3 months ended June 30, 2020, total revenues increased $0.8 million to $3 million versus the same comparable period in 2019. The increase was driven by higher sales of our non-OEM smart glass products, which rose 183% year-over-year. Sales of OEM products were 0 for the 3 months ended June 30, 2020, as compared to just under $1 million in the 2019 period. We do not currently contemplate further orders of that OEM smart glasses model.

Engineering services revenues for the quarter was $0.7 million versus $0.4 million in the prior year’s period. There was an overall gross profit of $0.8 million for the 3 months ended June 30, 2020, as compared to a gross profit of $0.2 million for the same period in 2019 driven by improved product gross margins and stronger gross margins earned on our engineering services program. Product gross margin before overheads and other items was 50% of this — for the 3 months ended June 30, 2020, as compared to 24% in the prior year’s period, with the improvement primarily the result of higher margins earned on the M400 versus the M300 series in the prior year’s period when the M400 was not yet available for sale.

Manufacturing overhead costs for the 3 months ended June 30, 2020, as a percentage of total product sales decreased to 16% from 20% in the same period in 2019 with the majority of the decrease being attributable to higher levels of sales versus the previous year’s comparable quarter. In addition to its normal reserve for obsolescence provisions, the company wrote down to net realizable value all of its unique component parts related to our original Blade in the amount of $0.3 million for which several items went end of life. Our manufacturing efforts have had to shift to the production of our newer Blade upgraded version, which should ship by the fall of this year.

For the 3 months ended June 30, 2020, we reported a gross profit from our product sales of $0.2 million or 9% of product sales as compared to a gross loss of $0.1 million in the same period in 2019. Research and development expense was $1.8 million for the 3 months ended June 30, 2020, compared to $2 million for the comparable 2019 period, a reduction of approximately 10%. The decrease in R&D expense was primarily due to a reduction in overall new product research and development costs as well as reduced external consulting fees related to Blade software development.

Selling and marketing expense were down 3% to $0.8 million for the 3 months ended June 30 as compared to the 2019 period as lower travel costs and staff reductions implemented in Europe last spring of 2019 were offset by higher commissions paid to TDG pursuant to our amended noncompete agreement as a result of increased revenues from our defense-based customer engineering services programs.

General and administrative expense for the 3 months ended June 30, 2020, was $1.8 million, nearly unchanged from the prior year’s period as lower travel expenses and legal fees were offset by increased stock-based compensation and IR and shareholder-related expenses. Even with the recent increase in total sales, our expense control efforts continue to show reductions with total operating expenses, excluding depreciation and amortization, declining 4.8% to $4.4 million for the 3 months ended June 30, 2020, versus the corresponding 2019 period. We expect continued comparative 2020 versus 2019 quarterly operating expense reductions going forward, especially with reduced travel and trade show costs contributing to our overall cost control efforts.

The net loss attributable to common stockholders before accrued preferred dividends for the 3 months ended June 30, 2020, was $4.2 million as compared to $5.1 million for the same period in 2019. The net loss after accrued dividends for Q2 2020 was $0.13 per share versus a net loss of $0.20 per share for the same period in 2019.

Now for some balance sheet highlights. Our cash position as of June 30, 2020, were $13.2 million and our net working capital totaled $20.1 million. Cash used in operations, excluding changes in our working capital, totaled $2.9 million for the second quarter of 2020 as compared to $4 million in the 2019 comparable quarter, a decrease of 29%. Cash used for investing activities during the quarter was $0.4 million as compared to $0.9 million in the prior year’s period as the required investments in manufacturing, new product tooling and other equipment purchases decreased substantially year-over-year. CapEx for the balance of 2020 is expected to remain well under 2019 levels in total.

The company has a $1.6 million debt obligation as of June 30 under a Paycheck Protection Program loan that it received in April 2020. The company intends to apply for forgiveness of the amounts received under this loan once rules are finalized and further guidance is issued with the amount eligible forgiveness expected to equal the sum of payroll costs, covered rent obligations and coverage utility payments incurred by the company during the 24-week period beginning on April 21, 2020, calculated in accordance with the rules and other terms of the CARES Act.

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

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

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Thanks, Grant. Our third quarter is off to a strong start in terms of smart glasses revenue through the first week of August and is currently outpacing our second quarter sales rate. This bolsters our belief that we are in a position to deliver continued growth in the third quarter and over the remainder of the 2020 year. 2020 is proving to be a transitional year for Vuzix. And it is encouraging to see that the growth in our business to date is broad-based, but not dependent on any single project or customer. We’re also seeing growth across multiple market sectors. And with the world changing as a result of the pandemic, we see that growth continuing into the foreseeable future. Again, why send the person when you can send the pair of glasses? They’re faster, cheaper, safer and more. What Vuzix delivers in relation to COVID is going to be part of the new normal. And when people finally get back to work at scale, adoption of smart glasses and many other use cases, as we have discussed in the past, should expand our business even further. Augmented reality and smart glasses in general are the computing platform of the future, and Vuzix is positioned well to be a winner in the space.

With that said, I’d like to now turn the call back 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 comes from the line of Christian Schwab with Craig-Hallum Capital Group.

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Christian David Schwab, Craig-Hallum Capital Group LLC, Research Division – Senior Research Analyst & Partner [2]

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Great. Congratulations on a very strong quarter. I was just looking for the growth commentary. Is that a comment regarding year-over-year growth in ’19 to ’20? Or is that a comment regarding sequential growth from the just-finished June quarter?

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

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

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Christian David Schwab, Craig-Hallum Capital Group LLC, Research Division – Senior Research Analyst & Partner [4]

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Okay. Perfect. It — when the avionics opportunity that we’ve already been qualified in, can you give us any potential range of outcomes over the course of the next few years between 0 and obviously something else, so we could kind of gauge the opportunity there and what would be a fair ASP, if you’re willing to share, plus or minus that we should be thinking about?

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Ed McGregor, Vuzix Corporation – Director of Institutional IR [5]

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I don’t know. Gee, this is really difficult without — let me say this. If you follow the defense space in — when it comes to smart glasses and things like the HoloLens being employed, et cetera, there’s a lot of big defense suppliers that aren’t part of that HoloLens effort, and they are already delivering wearable technology today. And if you take a look at what our friends were doing over on that side of the house, it’s a significant piece of potential business here. I mean there’s a lot of defense guys out there and gals that need to have access to equipment like this. And it’s going to be in programs, we believe, at least what we’re being told, upgrades to stuff that’s in the field and brand-new programs. So you’ll see these things in a lot of different places. They have to be qualified to defense-level performance. And so it’s not as inexpensive as purchasing a enterprise-level solution just because it has to meet all these other sort of specifications. So you look at even a finished product at Vuzix, these subcomponents are probably going to be more expensive than that. Hard to give you a hard number on that, again. But it’s greater than $1,500 to $2,000 kind of numbers. And the volume could be significant. And we’ve mentioned a couple of players in this regard. The technology, the future is all wearable, and see-through optics is a critical part of it. And the cool thing is Vuzix manufactures these things in the United States. And if you pay attention at all to world politics, you know that, that could be a very important edge.

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Christian David Schwab, Craig-Hallum Capital Group LLC, Research Division – Senior Research Analyst & Partner [6]

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Great. I’ll just ask one more quick question and get back in the queue. We have a vast expansion of opportunities that we kind of talked through, so I won’t let you regurgitate that. But what I was thinking about is a couple of the other opportunities that kind of stood out, I thought, which was the Verizon opportunity on a couple fronts as well as marching through NRE engineering with a U.S. defense contractor. Would you expect or be disappointed if there wasn’t some sort of potential material volume from both of these customers in 2021?

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Ed McGregor, Vuzix Corporation – Director of Institutional IR [7]

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Oh, we definitely should see significant contributions to revenues not just there, Christian. Think about knee surgeries. There’s over 600,000 knee surgeries done a year in North America. I mean there’s a lot of places where the technology Vuzix makes should have nice contributions to the revenue side of things. And in the Verizon side, we have high expectations. And in some of our OEM programs, we have high expectations. And 2021 will not be a bad year for them, knock on wood.

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Operator [8]

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Our next question comes from the line of Jim McIlree with Bradley Woods & Company.

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James Mcilree, [9]

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Paul, you mentioned in your commentary 2 nondefense engineering programs. And to the extent that you can elaborate on that, are those for see-through optics as well? And we haven’t seen the engineering part of that yet, correct?

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Paul J. Travers, Vuzix Corporation – Founder, Chairman, CEO & President [10]

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That’s correct.

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James Mcilree, [11]

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

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Paul J. Travers, Vuzix Corporation – Founder, Chairman, CEO & President [12]

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Well, we’re in development on them now. So I would anticipate you’ll see some contribution to the pile here from an engineering — nonrecurring engineering OEM perspective, even in this quarter, for Q3, on some of them, Jim. And there’s smart glasses and optically see-through-related programs — optically see-through optics. It’s just, I wish I could share more. I’m hopeful that…

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James Mcilree, [13]

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No. I understand.

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Paul J. Travers, Vuzix Corporation – Founder, Chairman, CEO & President [14]

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Shortly here, we’ll have a bit more color we can put on those for everybody.

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James Mcilree, [15]

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Okay. You also mentioned in your comments …

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

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

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James Mcilree, [17]

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In your commentary, you also mentioned increases in sales to international customers. I was hoping you could give us some indication about how much of sales was deployed in, let’s just go broadly, Asia, Europe, North America. Not necessarily where the sale was made, it might be made to a North American customer who deploys it internationally. But the end deployment, do you have an indication about how that would divide up in those 3 geographies?

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

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

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Grant Neil Russell, Vuzix Corporation – CFO, Executive VP, Treasurer & Director [19]

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Sure. I mean the U.S. is still the prime market, Europe #2, and then — but Asia, particularly Japan, really grew in the last couple of quarters. So it’s a bigger percentage. So I mean historically, it’s Asia, Japan as being 10%, 12%. And I think it’s probably of recent crested the 20% level. So it’s coming on. So international sales are rapidly going to become the — probably greater than domestic, excluding the engineering services programs in 2020.

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James Mcilree, [20]

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

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

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Well, we think there’s still some room for improvement. Obviously, the higher the volume, the more we can spread some of our close to more fixed overhead costs. I mean we still had a fairly large reserve for obsolescence regarding the Blade as we transition to the next generation of it. So those are always pull-downs. And hope — we don’t like to have to take those provisions, but it’s — we were kind of forced to the way everything worked out. So — but I think we’re getting there. And our goal is still ultimately try to get to a gross profit number of 40% or greater with — provided we got the total revenues up top to amortize those costs.

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James Mcilree, [22]

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

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Ed McGregor, Vuzix Corporation – Director of Institutional IR [23]

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From the perspective of COVID, unfortunately, for those guys, not a lot of people are going on cruise ships. Not a lot of people are going to the baseball game. Not a lot of people are — just think about a lot of what they were making was to address markets that are in a pretty tough spot right now, even baseball, no people in the stands and organizations are coming up with 19-plus of their players — so they got a — with COVID, so they got to close down. So unfortunately for them, that’s challenged. They do have another product that they’re coming out with, I guess, that’s related to temperatures and those kinds of things. But their focus on the security side, unfortunately, has got a bit of a hiccup in it right now.

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James Mcilree, [24]

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

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Ed McGregor, Vuzix Corporation – Director of Institutional IR [25]

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It’s across the board a much better solution, Jim. I mean if you think about the way it was previously, there was no audio built in. So if you’re an enterprise customer, what you had to do is put earbuds in your ears, and that made for safety issues, extra cables, extra things to take care of. Now you just put these guys on and you’ve got a full communication system just like the M400 does and with the auto focus, another important part when you’re doing remote support and those kinds of things. So this is going to be for those folks that need to have remote support kinds of things and the likes but they can’t have that sort of out-there look of an M400, it’s a great option. And security is part of that market still. That said, it doesn’t have the performance of an M400. It just doesn’t have the camera support. It doesn’t — it only runs in — on the 2.4 gigahertz WiFi, but there’s lots of folks that like it. And right now, Blades are picking up pace. We reduced the price to $499. And yes, they’re selling, I think, pretty well at the moment. And we think that people will really like the upgraded Blade here coming up.

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James Mcilree, [26]

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And will the upgraded Blade price at the $499 or closer to the $800 to $1,000 that you had previously?

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Ed McGregor, Vuzix Corporation – Director of Institutional IR [27]

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We got enough margin in it that when we made this price change, the Blade really seemed to kick into overdrive a bit, and there’s enough margin in it, especially on a direct sale basis, which we do a lot of. We are considering a price less than the $999 number, but I’m not sure Grant is in a position to where we’d like to share that just yet because we’re still thinking it through.

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

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And we’re selling down the existing Blade stock, but it won’t be more than the Blade was when we reduced its price. So — and that was $799. So that will be the high side, I believe. And also, all new Blades are going to have safety glass lenses in them. Before, that used to be a premium option and now all Blade upgraded models are going to have that included. So just a nice feature, and hopefully going to be more attractive to some enterprise customers.

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James Mcilree, [29]

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

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

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

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Grant Neil Russell, Vuzix Corporation – CFO, Executive VP, Treasurer & Director [31]

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Yes. Average weekly sales for the Q2 were running at a faster pace so far in Q3.

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James Mcilree, [32]

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Fantastic. That’s great to hear. Congratulations, nice numbers.

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Operator [33]

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Our next question comes from the line of Jack Vander Aarde with Maxim Group.

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Jack Vander Aarde, Maxim Group LLC, Research Division – Equity Research Analyst [34]

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Congrats on the solid results this quarter. So Paul, I want to follow up on — I know some other analysts have asked about it, too. But I want to follow up on the announcement regarding the Tier 1 aerospace customer that completed the Phase 4 of the program. Just so I understand, has anything changed in terms of the status of this relationship or just progress or since the July 16 announcement?

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

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Not that — yes. Has anything changed? It’s just — the program is just moving down the road. I mean..

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

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Well, we are now negotiating a supply agreement product for volume production, which just started during — midway through Phase 4. So they obviously seem to be pleased with what we’re doing and want to move on to the next stage, namely production. But that’s not signed at this stage.

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Jack Vander Aarde, Maxim Group LLC, Research Division – Equity Research Analyst [37]

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Got it. Yes. And it’s no doubt a clear positive in my mind as well. I’m just trying to understand. This is kind of — I guess this is one of the major ones that finally made its way to the end now. So I’m just trying to understand, is — do you have a sense as to how long it would take to get to production? Or is this — are we kind of just creating the rules as we go here until you guys strike that negotiation that makes both sides happy?

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Paul J. Travers, Vuzix Corporation – Founder, Chairman, CEO & President [38]

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

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Jack Vander Aarde, Maxim Group LLC, Research Division – Equity Research Analyst [39]

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

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

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It’s going to ramp over time. And the volumes to start with, it just takes time to fill a TAM and with the — get it worked into programs and those kinds of things. But these are components that should get used in multiple programs. And as those programs start to unfold for our customer, our volumes will ramp up alongside it. So it’s not going to be instantly boom, there’s thousands of units a quarter being sent, but it should be a nice contribution in 2021 to our business. I will say that if you look at sales in general, it’s broad-based. Last year, in 2019 in our second quarter, we had 1 customer take 1,000-plus smart glasses from us. It’s not the characterization of what we’re selling today. We have customers that are buying 50s and hundreds kinds of numbers. And so it’s spread out. And we, at the same time, with some of those customers, are in the process of quoting much larger volume production rollout. So yes, it’s very true that this defense customer is going to be an exciting 2021, but I think you’re going to also see the standard smart glasses product lines Vuzix have start to have some companies that buy in larger volumes.

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Jack Vander Aarde, Maxim Group LLC, Research Division – Equity Research Analyst [41]

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Understood. Okay. That’s helpful.

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

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The broad-based stuff will be there, I believe, and it’s — you’ve heard how Q3 is going already. It looks like it’s nicely picking up speed. But we’re very hopeful at the same time that you’ll see some contributions from some of these folks we’re selling to that are bigger.

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Jack Vander Aarde, Maxim Group LLC, Research Division – Equity Research Analyst [43]

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Got it. Okay. And then if I turn away from product revenue and looking at engineering revenues, just so I understand, it’s clearly you expect product revenue to be increasing each quarter. But what about the engineering services? I believe you mentioned you have 2 new but maybe not formally announced OEM projects. So will these contribute to engineering revenue lines during the second half of ’20? Or would you expect it to decline given this aerospace customer has exited the Phase 4? What would I expect for engineering services?

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

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I think you’re going to see there, engineering revenues had been lumpy at Vuzix. There’ll be some quarters where there’s a lot of stuff going on than at the other quarters, where it’s more at a lull because we delivered on stuff and you’re going through a next phase. We’ve got 2 new programs that we’ve discussed a little bit about and there’s others in the queue. So maybe when we get more happening here at Vuzix, it will be a little less lumpy. But when you have less numbers of programs like that, there’s times where you’re busier with them and there’s time that you’re less. So that one’s harder to peg, Jack.

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Jack Vander Aarde, Maxim Group LLC, Research Division – Equity Research Analyst [45]

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Okay. Fair enough. And that makes sense. That’s reasonable. And then, I guess, just lastly, have you seen any opportunities from — that were historically announced that may have been put on hold or delayed? I don’t know, such as I think RideOn come to mind to me, for example. Are you seeing anything like that? Any of those arrangements or delayed projects now coming back online?

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

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It’s amazing to me how Q1, as the pandemic started to come to the fore, how many programs got put on hold. As it happens, our smart glasses are so good at this remote support problem and business continuity that the COVID stuff from that perspective accelerated a bunch of areas and some new areas came in. There’s a lot of our business that slowed down. And some of it, the brakes are just on completely. The security effort that Jim was talking about just a few minutes ago, that’s one of those ones that’s on hold right now. And I don’t know, you tell me when a cruise ship’s ever going to go out again or when we can go back to the ball game. So yes, we’ve got stuff that’s — the brakes are on. Some of that stuff is starting to free up, though. I mean the people are trying to come back to work. They’re all trying to figure this out. And it’s messy. But to the extent our products help open the doors, those are the areas where we’re starting to see things pick up again and those programs start to come back online. I look at that as a nice — the work that we’ve been doing over the last 4 or 5 years, I have to say a fair amount of it fits into that bucket, which is why we got a bit of time here that’s been a challenge today, but…

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Operator [47]

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Our next question is from Brian Kinstlinger with Alliance Global Partners.

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Unidentified Analyst, [48]

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This is Jacob on for Brian. First, you’ve had a number of press releases regarding use of your smart glasses for remote medical response in hospitals. Can you talk about the progression of these customers? Are they purchasing a few pairs in the beginning and then if it goes well, purchasing more?

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Paul J. Travers, Vuzix Corporation – Founder, Chairman, CEO & President [49]

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I mean that’s how it’s kind of been moving. There are, in some spaces, where it’s accelerating faster rather than less. There are some areas where they’re using our glasses 24/7 today, especially in Asia, more so. I mean in the States, they’re using them, but I think they’re on and off in some cases. So it’s — the pandemic’s caused challenges, pluses and minuses even for the folks that are on the front lines of all of that. That said, there are some areas in the medical side of our business that are buying reasonably significant numbers of units today.

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Unidentified Analyst, [50]

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Okay. And what’s your total install base for health care not working right now?

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Paul J. Travers, Vuzix Corporation – Founder, Chairman, CEO & President [51]

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We don’t break it out that way. Or…

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Unidentified Analyst, [52]

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Okay.

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Paul J. Travers, Vuzix Corporation – Founder, Chairman, CEO & President [53]

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I mean from a competitive perspective, I’m sure there’s more than one person on this call that competes with Vuzix. And we just don’t feel a need to have to tell everybody on the planet where the — where our business is mostly at right now, from that perspective.

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Unidentified Analyst, [54]

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Yes. I understand. Okay. Last quarter, you talked about enterprise delays given plant closures and other COVID challenges. Outside of health care, can you comment on how the procurement process and sales cycle has changed over the last 4 months?

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

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We’ve had a few items that we’ve had some challenges with, some special glues and those kinds of things. And — but I have to say, for the most part, we’ve not run into significant effort — issues on the manufacturing front. The plant floor is running well. We’ve got inventories. When we’ve had some glitches, we found alternative sources to stuff. Does that sound right, Grant? Did I miss anything in that regard?

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Grant Neil Russell, Vuzix Corporation – CFO, Executive VP, Treasurer & Director [56]

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No. No, that sounds reasonable. I mean it’s not really slowing us down. I mean it might have — too long. Some of the new products we got coming out have been delayed a little more than day-to-day production.

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Paul J. Travers, Vuzix Corporation – Founder, Chairman, CEO & President [57]

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

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Unidentified Analyst, [58]

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

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Paul J. Travers, Vuzix Corporation – Founder, Chairman, CEO & President [59]

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Grant, you want to take that one?

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Grant Neil Russell, Vuzix Corporation – CFO, Executive VP, Treasurer & Director [60]

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Yes. Retail is $1,799 for like an M400. Clearly, we do offer volume discounts. And as volumes increase, the average number will drop down. I mean I would suggest — let me see here. Just — I mean our M4000 that comes up shortly is going to have an even higher selling price, but at best, I mean I would say we’ve averaged a 25% discount off our retail. It would be the average selling price of the products.

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Operator [61]

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We have reached the end of our question-and-answer session. I’d like to turn the call back over to Mr. Travers for any closing remarks.

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Paul J. Travers, Vuzix Corporation – Founder, Chairman, CEO & President [62]

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

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Operator [63]

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

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