Vuzix Corp Q3 FY2021 Earnings Call

Greetings and welcome to the Vuzix Third Quarter ending September 30th, 2021 Financial Results and Business Update conference call. At this time, all participants are in a listen-only mode. A brief question-and-answer session will follow the formal presentation. As a reminder, this conference is being recorded. Now, I would like to turn the call over to Ed McGregor, Director of Investor Relations at Vuzix. Mr. McGregor, you may begin.

Good afternoon, everyone, and welcome to Vuzix third quarter 2021 and September 30th financial results and business update conference call. With us today, are Vuzix's 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 the legal and regulatory requirements. In addition, any projections as to the Company's future performance represent management's estimates as of today, November 8th, 2021. 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 this 10-K with the SEC. So participants in this call who may not have already done so may wish to look at those documents as the Company will provide a summary of the results discussed on today's call. Today's call may include certain 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 quarterly filing at sec.gov, which is also available at www.vuzix.com. I will now turn the call over to Vuzix's 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 will provide an overview of the Company's third quarter financial results. We will then move on to the Q&A session and finally wrap up with a few closing remarks by Paul.

Thank you, Ed. Hello, everyone, and welcome to the Vuzix Q3 2021 conference call. We grew total revenue both sequentially and year-over-year for Q3. Total Q3 sales were up 9% over the same period and up 34% for the 9 months ended September 30, 2021, versus the prior year. This increase was led by Smart Glasses sales growth of 12% and 51% as compared to the quarterly and year-to-date periods of 2020 as we continued to see steady demand from some of our largest repeat customers, which continues to be a driving force of our base business on a quarterly basis. While the quarter came in on the low end of our expectations for a variety of factors, including logistics and shipping challenges internationally, and the exact timing of some of our expected larger customer opportunities, our competitive position has never been stronger, and our growth prospects never brighter. In addition to repeat customer orders, we also continue to expand our distribution channels across multiple regions, including the EMEA, Latin America, and Canada to support industrial use cases, applications, and customers. We saw continued strength in our healthcare business segment, specifically in the operating room related to patient surgeries, and we have made steady progress with our software partners towards what would be the largest deployment of Smart Glasses ever with some of the leading companies in the world to support their warehousing, logistics, and training for onboarding new employees. We have already shipped initial orders against programs that are rolling out, and we expect follow-on orders to be significant as the deployments expand into 2022. Additionally, our OEM prospects continue to grow as new engagements are being added with follow-on NRE programs commencing and with multi-year product supply agreements being negotiated that should generate important business in 2022 and beyond. Lastly, we ended the third quarter with cash of roughly $129 million which provides Vuzix ample runway to grow our business, drive ongoing product development, and expand strategic initiatives. As Slide 5 illustrates, our quarterly and annual Smart Glasses sales growth has been steadily trending upward for Vuzix over the last 5 years. Year-to-date, our Smart Glasses sales have grown approximately 51%, almost equaling our total for 2020, and we expect our full year total for 2021 will show a solid year-over-year gain. And as nice as these growth trends are, the total top-line revenues are modest just yet, as the expected AR Smart Glasses industry’s growth phase has only just begun. We will clearly move beyond the proof-of-concept stage with many senior management at several major corporations and signed on with their support, and we're now working through the logistical details for high-volume rollouts. Industry forecasts for the Smart Glasses industry indicate that it is expected to grow to millions of units on an annual basis over the next five years. Gradual enterprise adoption is underway today across a variety of market verticals, and we are confident that Vuzix is winning over the competition. There has been a lot of buzz about the Metaverse over the past few weeks following Facebook's now Meta platform’s broad statements about building it out, along with Microsoft's announcements of their own Metaverse initiatives. That said, the Metaverse is not a new thing, at least as it relates to Vuzix's long-term vision. And as we expect, these announcements will bolster our position and direction. These new industry initiatives should represent a significant positive for both Vuzix and the AR Smart Glasses industry as a whole. It's worth keeping in mind that the Metaverse is not just about virtual worlds that users congregate, socialize, or play games in, and it's basically been a cornerstone part of the AR, VR, and Smart Glasses industry all along, especially for enterprise. There's going to be an almost infinite number of enterprise use cases. Imagine accessing IoT sensors and systems simply as a function of where you are looking live on the plant floor, or receiving changing work instructions on the fly through our AR Smart Glasses or live remote guidance of complex medical procedures and network digital equipment. And in the world of logistics, support for picking and pallet stacking with advanced AI, telling workers where to stack or what to pick, all communicated while being hands-free. The bottom line is that Vuzix AR Smart Glasses and the technology help bring the Metaverse and the real world together for the user, and in doing so create cost savings and, in some cases, bring new capabilities, not in some distant future with the coming Metaverse, but now. Without a doubt, this is game-changing technology and clearly the future of computing. And Vuzix is out in front of this as a leader in the technology of connecting people to all of this Metaverse information. We're seeing growth in all of our major geographic regions driven by customer success within healthcare and the broader enterprise market segments with continued demand from our major customers and partners. As we look to the remainder of 2021 and into 2022, we expect growth of Smart Glasses adoption to continue as the industry matures. Before COVID, logistics was one of the largest and most active verticals for Vuzix Smart Glasses. Activity in this vertical paused during the most challenging periods of this disease, but it is now heading back on track and accelerating as the need to gain supply chain efficiencies comes to the floor. We are seeing expanding engagements with many leading players in this market segment. Our customer success team is in close communication with these customers and our software partners. And in many cases, we have been on-site regularly to support the business groups. In multiple cases, we have moved beyond pilots, and we're on the functional rollout stages in select locations. These next steps should be network-wide and or global deployments. Over the last several weeks, we announced a few of the follow-on orders that we have received to support the needs of some of these larger customers. These customers are among the most innovative companies on the planet, and the overall feedback regarding Vuzix Smart Glasses and the solutions running on them has been fantastic, well beyond the initial wow factor and focused on the operational benefits. In several cases, we are up against companies that have been solving logistics problems for our customers for years with older alternative technologies. To replace these legacy solutions requires robust, tested improvement solutions that bring better value while integrating into existing IT architecture, and our Smart Glasses with vision picking brings just that. Our customers love the performance of our Smart Glasses products, especially the noise-canceling microphones required in the noisy environments our Glasses are being used in. They love our crisp, high-contrast OLED display, critical for successful vision picking. They love the on-device scanning provided by our Smart Glasses HD camera, allowing a one-device solution for even barcode scanning. They love the white wake and easy wear design of our solutions with their ergonomic wearability options. And most importantly for them, Vuzix Smart Glasses are a multitasking and programmable device that can remove their need to use multiple devices throughout their operations, which means an investment in one area can get leveraged across others. The volume potential associated with these opportunities represents many thousands of units, and we believe this is a market vertical that Vuzix can and will ultimately own. And for more than a few of these customers that are now beyond testing and proof-of-concepts with Vuzix, the planning stages for broad rollouts are underway. That said, at the moment, healthcare is our largest growth sector. According to Research Nester, the Global Healthcare Augmented Reality market is expected to reach $27 billion by the year 2030, representing a 19 times increase in size and a compounded annual growth rate of over 33% from 2020 to 2030. Vuzix has made considerable inroads into the healthcare market over the last 18 months and has quickly grabbed the attention of research analysts and has been recognized as one of the preeminent players in this sector. Vuzix Smart Glasses routinely get called out in their report as the latest state-of-the-art technology available. Again, healthcare continues to be one of our fastest-growing market verticals and accounted for a significant portion of our total revenue in Q3 as our key healthcare solution providers and direct customers continue to scale. The upcoming customer slide shows some of the progress that is being made with a few of these key accounts. Within healthcare, patient care, medical training and education, and surgery account for nearly 70% of the global healthcare market by application for Smart Glasses and are expected to grow by over 1800% by 2030. Patient care is one segment that Vuzix has gained early traction to support better outcomes for patients and their healthcare providers. The advantage for providers is it allows patients to stay at home while home care nurses take their Smart Glasses with them to provide a communication link to the hospital to support regular checkups in therapy. Medical training and education is another segment Vuzix is gaining commercial traction. We have discussed Ohana One in the past, a global surgical training nonprofit organization that is working with prestigious teaching universities such as John Hopkins, Stanford, Oregon Health and Science, and private practices to connect surgeons around the globe and to provide remote surgical training and education through Vuzix Smart Glasses. Ohana's goal is to have their program grow to 1,000 plus mentors plus mentee peers, using Smart Glasses; they are having great success. Their partners and supported doctors love the solution and they are off to a strong start on hitting this goal. Surgery is a third segment that Vuzix is gaining commercial traction in, and there's one segment that is emerging as one of the exciting market verticals for the Company as a whole. Over the last 18 months, Vuzix has gone from 0 to having its products used in well over 1,000 operating rooms worldwide to support surgeons across a variety of specialties to provide better patient outcomes inside the operating room while lowering the cost of care at the same time. Medacta, a Switzerland-based international supplier of innovative orthopedic products and accompanying surgical techniques with annual sales of $400 million, is a Vuzix Smart Glasses-based Augmented Reality surgical platform provider that continues to make waves in this surgical community with their next day AR solution for knee, shoulder and spine surgeries. Medacta continues to place recurring orders for the Vuzix Glasses as they gain traction within the surgical community. As they expand through Europe, most recently, they announced the successful completion of their first shoulder surgeries in France. Pixee Medical, based in France, is another Vuzix Smart Glasses-based Augmented Reality surgical platform provider that is also gaining commercial traction. During the quarter, the first medical report on the preliminary results of the AR surgical platform was published and confirmed the accuracy and effectiveness of their knee plus solution. Pixee Medical is now primarily focused on commercial traction and marketing efforts within the surgical community. Pixee has hundreds of Vuzix Smart Glasses in the field and has completed a significant number of surgeries guided by Vuzix Smart Glasses in the operating room. In fact, Pixee's first knee plus total knee replacement surgery in the U.S. was recently performed by Brigham and Women's Hospital in Boston, which is a significant milestone as the U.S. is the largest market for total knee replacement and represents 50% of the total market at over 800,000 total knee replacement surgeries a year. Over the next 12 months, we expect demand from our AR surgical partners to increase significantly as they continue to support their current markets and for new market growth. Rajan Cones, a provider of a fully virtual surgical collaboration platform, has placed hundreds of Vuzix Smart Glasses into operating theaters with leading medical device companies and hospitals across the EMEA, and is now U.S., Latin America, and Asia Pacific. A recent example of a use case was the live streaming of a robotic esophageal surgery for an advanced medical training course. I recommend you go to LinkedIn to view their most recent video, welcome to the world of rods and cones to get a firsthand feel for how seamless their solution is. Medtronic, the world's largest medical device Company, is another global user of Vuzix Smart Glasses and has hundreds of M400s already deployed and being used in operating theaters around the world with over 100,000 employees, many of them service and medical technicians. Medtronic represents a significant deployment opportunity for Vuzix. Similar to the growing demand from AR our surgical partners, we expect demand from Medtronic and others in this sector of healthcare to increase significantly over the next 12 months. In summary, the healthcare industry is embracing AR Smart Glasses, and they are becoming part of the operational framework, not in the future, but now. Most major organizations in healthcare have mandates to grow their AR-XR initiatives from the operating room to the ICU, and as such, AR is now a permanent part of this industry. With all this momentum, we are confident we will see accelerating opportunities into the foreseeable future. As Slide 13 illustrates, we currently generate the bulk of our revenues from the sale of Smart Glasses hardware. But as we have said on previous calls, we are focused on the long-term objective of creating a base of business that will be driven by three major indicated segments of Smart Glasses hardware, Smart Glasses SaaS software, and OEM supply of products and technologies to the broader market. Vuzix has a concerted effort to augment our business model beyond a focus primarily on Smart Glasses hardware by also moving upstream closer to the ultimate customer with complete solutions. In particular, the ability to generate meaningful SaaS-based revenue centered around our Smart Glasses with our software partners and ourselves will help provide us with a not only substantially larger revenue base, but one that is recurring and with much higher margins. Vuzix continues to invest in our core business, including Smart Glasses software and customer service to help accelerate Smart Glasses sales and industry adoption. We are continuing the development of our next-generation Smart Glasses based on micro LED displays and remain on track to deliver our first DVT or design validation test units before the end of this year. We have also been working on enhancing our core M-Series solutions with new features and line extensions, and we expect to introduce three new monocular Smart Glasses products in 2022. Vuzix also continues to focus on building out our internal infrastructure with key hires in support of our customers in their coming deployments and end-product development as we prepare for our next phase of top-line revenue expansion. Our organization has grown over the last five years from 50 to over 100 employees. I'm very proud of the level of teamwork and employee satisfaction that exists within our organization. And for Vuzix to be named one of Newsweek's top 100 most loved workplaces for 2021. We are amongst some of the most recognized brands in the world. Vuzix continues to make investments in our people. And we have a great team in place that is focused on winning in enterprise with Smart Glasses-based solutions and winning with our core technologies to grow our OEM customer base and supply to the broader Augmented Reality and Metaverse markets. In addition to the technology already under the hood of Vuzix, Vuzix maintains an active list of potential companies in our space from SaaS-based solutions to the core technology itself, but could significantly enhance portions of our business and generate high-margin accretive SaaS-based revenue and bring Vuzix even closer to the customer. We currently have multiple active irons in the fire and we're progressing well in our due diligence and selection process. Finally, this will be an ongoing activity for Vuzix going into the future. On the internal solutions development front, our Vuzix Custom Solutions group, formerly Integrated Solutions Business Unit, ISBU, is focused on the acceleration of enterprise-centric solutions in both new and underserved market verticals. The group will support current and future partners by assisting in developing and implementing innovative SaaS-based solutions around specific use cases in various industries. The core team is streamlined and focused with a strong background in building such solutions. The group has already been engaging with a number of organizations to drive requirements around solving problems and implementing into complex enterprise environments using Vuzix existing Smart Glasses hardware with the enhancement of custom software. Vuzix produces some of the leading Smart Glasses in the industry and our current and coming deployments are proving it. We also believe our core technologies, which include optics, displays, and systems represent the keys to the kingdom for future AR Smart Glasses. The Metaverse and related software solutions across the entire space puts Vuzix as a front-runner. Take our Waveguide technology alone, for example. Recent transactions in the waveguide space from a few competing waveguide technology companies reflect valuations in the $500 million range for companies that only produce waveguides. We not only have high-volume waveguide production in hand at Vuzix, we're pushing the envelope with some that finish waveguide made to-date at less than 0.5 millimeters. We're quickly moving to support high refractive index designs with high-volume manufacturing. And we are also producing some of the highest efficiency solutions available with capabilities providing very unique features for micro LED displays that are just now starting to enter the market. In this area alone, we feel that Vuzix has built a significant value proposition for waveguide and display projector solutions that will lead in the Augmented Reality space. This is just one area in Vuzix's technology portfolio. We have hundreds of patents and patents pending. We are working on other critical areas that will ultimately be needed for the broad AR markets to flourish. Our patents and patent pending portfolio increased by another 23 in this last quarter alone, which is one of our largest jumps, and we have a lot more on our drawing boards. As this industry achieves even larger scale, the control and ownership of these key technologies that we believe are essential to deploying Smart Glasses, optics, and displays at scale will significantly enhance shareholder value. As I stated last quarter, 2021 is a transformational year for Vuzix, and frankly, it has been for the entire AR industry at large. We are making solid progress against our key operating goals for 2021, and we look forward to 2022 unfolding. I'd like to now pass the call over to Grant for his financial review.

Thank you, Paul. As Ed mentioned, the 10-K 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 now. Our third quarter total revenues for the 3 months ended September 30th, 2021 rose 9% over the prior year's period to $3 million. The increase was the result of the 12% gain in Smart Glass sales led by continued growth in our M400 and M4000 Smart Glasses. We had no engineering services revenues in the quarter versus $0.1 million in the prior year's period. There was an overall gross profit of $0.6 million for the 3 months ended September 30th, 2021, as compared to a gross profit of $0.3 million for the same period in 2020. Overall, net gross profit margin was 19% for Q3 2021 as compared to 13% for Q3 2020. The increase was related to an improvement in product direct margins and the fact that the prior year's period included a $0.2 million inventory reserve for obsolescence. R&D expense was $3.3 million for the 3 months ended September 30th, 2021, compared to $1.9 million for the comparable 2020 period, an increase of approximately 74% and consistent with the spending guidance we provided on our last earnings call. The higher R&D expense was primarily due to increases in external development expenses related to our next-generation Smart Glasses, higher salary benefits, and non-cash stock-based compensation due to headcount additions and increased product compliance testing for new markets and higher R&D consulting fees. Selling and marketing expense for the three months ended September 30th, 2021 rose 70% year-over-year to $1.6 million due primarily to increases in salary benefits and non-cash stock-based compensation expenses from headcount additions, more foreign sales consultants, and higher advertising expenses. General administrative expense for the 3 months ended September 30th, 2021, was $3.1 million, an increase of 90% or $1.5 million, largely due to headcount additions resulting in higher salary and stock-based compensation related expenses, which rose $1.1 million, inclusive of a $0.4 million non-cash charge related to stock-based compensation, mainly under our new L-TIP plan. Increased legal fees of $0.3 million and $0.1 million extra for insurance costs accounted for the balance of the overall increase. The net loss attributable to common shareholders for the three months ended September 30th, 2021 was $7.9 million or $0.13 per share, versus a net loss of $5.3 million or $0.13 per share for the same period in 2020. Now, for some balance sheet highlights. Our balance sheet remains strong with the cash and cash equivalent position of $128.7 million as of September 30th, 2021, and a net working capital position of $140.3 million. Cash used in operations, excluding changes in our working capital, totaled $5.8 million for the third quarter of 2021 as compared to $3 million in 2020. Cash used for investing activities for the third quarter of 2021 was $4.3 million as compared to $1.2 million in the prior year's period, as our investments in manufacturing equipment and tooling increased along with an investment in a new display chip design project. As of September 30th, 2021, the Company does not have any current or long-term debt obligations outstanding. Looking forward to the balance of 2021, while we expect to see continued similar quarterly year-over-year increases in our main operating expense categories over the 2020 comparable period, the rate, however, of sequential operating expense growth per quarter in 2021 will slow. Investing activities are also expected to increase in Q4 of 2021 as compared to the prior year as we continue our investments in new product tooling, development, and IP. To that, I would like to turn the call back over to Paul.

Thanks, Grant. Nice job. Let's now turn the call over to the operator for Q&A.

Thank you. And ladies and gentlemen, at this time, we will be conducting a question-and-answer session. Our first question comes from Tyler Burmeister with Craig-Hallum. Please state your question.

Hey guys, this is Tyler on for Christian Schwab. Thanks for letting us ask a question. Paul, first question, it seems like the healthcare end market you are clearly the most excited about now and into the future. So, framing comparatively to that, maybe I was wondering the retail warehouse logistics, as well as the OEM product development, are kind of two other pieces of your business. Relative to healthcare, how should we think about those three businesses as we focus going forward?

First of all, I want to emphasize that healthcare is very immediate. The positive aspect is that it has been in place and is accelerating, largely due to COVID. Although it's unfortunate to say it that way, it has transformed many aspects of the AR space. The entire retail picking sector is going to become very significant. As substantial as healthcare is, there are numerous individuals and organizations involved in logistics—the process of moving items from one location to another is a vast industry. From the SaaS model perspective in healthcare, which we are focusing on with our partners, I believe there are ample growth opportunities. Of course, we will also be selling a substantial amount of hardware, but the picking side of the business is particularly noteworthy. This segment will start to expand and develop for Vuzix, especially into 2022. It's encouraging to see these companies, after a long time, finally making commitments. They are beyond pilot programs now and are figuring out how to fully implement these solutions. Thus, in 2022, I believe we will witness a significant contribution and growth in this area of our business, which I've always anticipated, but it's reassuring to see it materializing. When comparing healthcare to the logistics sector, healthcare will ultimately be larger. Right now, it's clearly focused on healthcare. Concerning the OEM side of our business, it's intriguing. In the early stages, we received larger amounts for engineering custom solutions, but now we have standard offerings that many companies can utilize. They are purchasing these products and integrating them into their programs, and we anticipate ongoing volume from these initiatives in the upcoming years. This segment will grow, albeit at a slower pace. It could evolve into a substantial business, but it will require a longer view to fully realize that potential. Broader markets take considerable time to mature, and it all hinges on the companies involved. As you know, getting a program off the ground can take time, but once it does, you're in. Therefore, the foremost area will be enterprise logistics onboarding training, which I believe will be the largest market to get started. Following that will be the medical space, and then the OEM aspect today. However, we will have to see how that develops in the long term.

Thanks, Paul. That was perfect. Then a follow-up question on this Fortune 50 customer that you've announced a couple of orders during this quarter; to the degree that you can provide any more color on what business, what end-market, geography that customer would be in, and then do you expect future orders from them imminently or how far along on their total deployment do you suspect they are?

It's more than one Fortune-50, Tyler. In fact, it's probably bigger than a handful, and it's from onboarding to logistics, warehousing, and some of it's in retail and some of it's in the big distribution channels that have warehouses all over the U.S. and world. So, it's a continuing thing from them right now. These are follow-on orders that are part of deployment orders, not just, well let's try a test PLC here. So, what we're working through are the logistics associated with doing the rollouts to those companies, so they can do them in a bigger way throughout their organizations. We are up against companies that have been incumbents for the last 75 years, using their tools to pick out of the warehouse. From voice picking to bar scanner picking kinds of things, and our Smart Glasses with vision picking brings a lot to the table. But it takes a bit of time to do the final changes around the processes and procedures to implement those things and go live. That said, they've been working on this for a long time. COVID put a hole in it for a while, but these guys are back with a vengeance. It seems like, with all these logistics problems going on in the world, that has lit a fire under a lot of these companies. And like I said, there's more than five kind of a thing that are in this boat.

That's great. I appreciate the color there. And last one, and I'll let others ask questions. I don't think I really heard too much of an update on your M&A pipeline; any color there? I think we were talking earlier about some potential software M&A opportunities that were close, any update there would be great.

We actually have a list of folks, Tyler, and it's true there are a few of them that I would like to think are very close. There's been lots of due diligence done. The progress has been going down the road. It feels great, but they're not done yet, and we're not done until they're done. That said, we have high expectations that these would be good relationships and opportunities for Vuzix. As I said, there's more than a few though, and as we move forward with those over time, we'll be selectively sharing where it's appropriate. I wish I could share more than that right now. I can just say that things are moving forward.

Yep. Completely understand. It sounds great. Alright, that's all from us. Thanks, guys.

Thanks, Tyler.

Our next question comes from Rachel Freeman with BTIG. Please state your question.

Hi, this is Rachel, I'm on for Matt VanVliet. Thanks for taking my questions. Just firstly, on the next-gen products that you're planning on introducing next year, what sort of visibility do you have into sales for these products, and when do you expect that to start flowing through to the model? Just any color you could give on timing or projections will be great.

Between now and the first quarter, I believe people will learn more about when and how our new products will be released. I anticipate that these products will be available in the first quarter, and I'm confident about that. They are well-designed and visually appealing, resembling high-fidelity glasses, although they are intended for enterprise use. They feature more sensors than we've previously had, and while they maintain the familiar safety glasses form factor, they also have a sleek and attractive design. We have high expectations for them, targeting different segments of the market. For example, we don't expect them to be used in warehouse settings, but there are many promising applications in pharmaceuticals and quality assurance testing thanks to the built-in sensors that can measure and record data in real-time. These glasses will effectively connect information in the Metaverse with the real world. We see substantial business potential across various areas, but do not anticipate direct competition with our current products, except for the Blade. However, I must note that the Blade is gaining traction, and we encountered supply chain issues that limited our ability to ship more of them during the third quarter, despite an increasing demand.

Okay. That's great. And then just on the internal solutions development unit, just beyond what you mentioned in your prepared remarks just on customer engagement. Can you provide any more details on the progress that this group has made before and maybe an update on what your expectations are for how quickly it can start to ramp just to meaningfully contribute to sales moving forward?

These individuals are skilled at what they do, and they have various opportunities and projects underway. They are just starting out; to be fair to them, they have submitted multiple proposals. This group is interesting because they are offering software solutions that address issues for companies where no current options exist. Consequently, we can expect some engineering fees from this group for a while. Additionally, they are developing our own solutions tailored to specific verticals, and I anticipate that in 2022, we will see some revenue generated from this segment as it begins to come online. Therefore, we will notice recurring engineering revenues, and the software development aspect will also begin to contribute in 2022.

Thank you.

You're welcome, Rachel.

Your next question comes from Jack Vander Aarde with Maxim Group. Please state your questions.

Thank you for the update and for answering my questions. Paul, could you provide more insight into your monetization strategies or any ideas you are considering for launching software, possibly in an organic way? Regarding the discussion on acquisitions, if you were to introduce an organic software offering, what are your thoughts on monetization? Are there various options you are contemplating? Is there a core software offering in mind, and how soon can we expect to see it launched?

That relates well to Rachel's last question. The Vuzix solutions group is focused on developing custom solutions that address specific problems, and we've identified several key areas of importance. However, developing that core software takes time. In the meantime, they are collaborating with select companies. We frequently receive requests from companies seeking solutions that currently require custom software development. Their strategy involves a dual approach: assisting these companies in solving their challenges while simultaneously building the essential core software for our own offerings. Over time, you'll see engineering services being introduced, and we will begin to generate recurring revenue from the software developed around those engineering projects. This approach not only funds our activities but also allows us to engage with customers who are eager to find solutions, enabling us to test the software and ensure it functions as intended.

That's helpful. In addition, maybe I'll mention this theme that is affecting every company and every industry. You already touched on it, but can you quantify the impact of the global semiconductor shortage on your revenue for the quarter or on your sales momentum for the rest of the year? Is there any way to quantify that?

It's hard to know the future per se, but let me just say in the third quarter, our blade had silicon supply shortages; that was part of the reason why we didn't ship more. And it's hundreds, several hundreds plus more that we could have shipped. And on the other side of the coin, there's also tight shipping problems around the world today. And sadly, Vuzix had stock sitting in a warehouse that was unable to get out the door due to shipping problems and logistics associated with that to the tune of another couple of hundred plus and 400s. So, it wasn't insignificant necessarily. We're hoping that that's not going to be the case here in the fourth quarter.

I mean, we're good other than the one product that Paul has referred to. So, we are well positioned for 400 sales and that's our bulk of our revenue. We're good.

Understood. And then just in terms of the Metaverse, obviously, quite the buzz lately, it's quite pulling the rising. Where do you guys see yourself fitting in beyond VR and AR and, in general, there's also the aspect of conference, virtual conferences and kind of business use cases. Do you think you guys have a natural utility or placing in the Metaverse when it does get rolled out or however that transpires? Where is your place in the Metaverse and how do you see it or is it too difficult to pin down, or the use cases are endless? Just any more thoughts you can provide will be helpful.

It's interesting, you coined the phrase Metaverse, and I think that our friends over at Facebook did that because they're into the VR side of it more so in the virtual world that you can step up inside of, but the reality in the Metaverse is it's about the entire world of the internet creating virtual worlds inside of it, but also connecting all that virtual Metaverse data into the real world. And this is really the part of the Metaverse that Vuzix plays in. Example, a cool video coming here in the next couple of days; you should keep an eye out for. But the bottom line is Vuzix already is a player in the Metaverse. You've heard of digital twins before, you've heard of the internet of things. These are all these internet-based devices that literally are connected through the cloud. Our Glasses are designed to take that internet information, the Metaverse datasets, and connect it to the real world. This is where the Metaverse gets exciting. When you look at Apple's paradigms in top processes about it, it's about changing the way people do things in the real world, not necessarily stepping inside a virtual space. And Vuzix does that today; we do it in so many different ways. Now, standardization around how the Metaverse might work would be great. If you look at even Microsoft just in their last conference call, they reported about how they are doing things to standardize how the Metaverse will work and how those digital systems can be connected to the real world. I think it's great that these bigger companies are building these standards and stuff because it will only make this happen faster.

Well, sounds exciting. I appreciate the update. I'll hop back in the queue. Thank you.

Yeah, you bet, Jack.

Thank you. I will now turn the call back over to Paul Travers for closing comments.

I'd like to thank everyone for their interest and participation in today's call. We have a lot on the calendar over the coming months, including multiple investor conferences, AWE this week, CES is coming. I think that should be a very exciting show for Vuzix. So, we're in the main Hall. We're back at it again; it should be interesting. The world's finally coming back to work. We look forward to our next call with you in margin. And again, thank you very much everybody for joining the call. 2022, here we come. Thanks again.

Thank you. This concludes today's conference; all parties may disconnect. Have a good evening.