Back in February, Vuzix Corp (VUZI, Financial) announced that it had entered into a development agreement with Toshiba Client Solutions Ltd., a wholly owned subsidiary of Toshiba Corporation (OTCMKTS:TOSBF).
At the time, information surrounding the agreement was relatively limited. All that the two companies revealed was that they were working together on the development of a new smart glasses product and that, in line with this development, they had embarked upon what was back then referred to as a rapid development program, which would see Vuzix eligible to receive more than $1 million in milestone payments as it matured towards completion.
We also learned that the development program was expected to bear fruit at some point during the fourth quarter of 2017.
We are now in the fourth quarter of 2017 and, on Thursday, Dec. 7, Vuzix filed this 8K with the U.S. Securities and Exchange Commission.
The update details the conclusion of the development agreement mentioned above and outlines a fresh agreement, a supply agreement, that's now in place with Toshiba.
The supply agreement will see Vuzix sell the smart glasses technology that was developed under the terms of the development agreement to Toshiba and the product will be co-branded as a Toshiba product, powered by Vuzix. Toshiba expects to sell the product on a global basis and, as per the terms outlined in the agreement, will bundle the smart glasses unit with a specially designed mobile edge computing system that the company principally developed for this program.
So what does all this mean?
In short, this is very big news for Vuzix and its shareholders.
The exact price and quantity of products sold under the terms of the agreement haven't been revealed (indeed, there's a good chance they haven't even been established in-house yet) but we do know that Toshiba has committed to purchasing a minimum of $5 million worth of the co-branded smart glasses devices from Vuzix.
For anybody not familiar with Vuzix, it's a company that I have covered on a couple of occasions over the last 12 months and is one that, as part of my previous coverage, I have suggested is very well-positioned to take advantage of a fast-growing, yet nascent, industry – augmented reality.
According to reports, the augmented reality market was valued at $2.39 billion in 2016 and is expected to reach $61.39 billion by 2023, growing at a compound annual growth rate (CAGR) of 55.71%.
So where does Vuzix fit into this?
The company designs, develops and sells smart glasses technology for use, primarily, in a commercial environment – that is, technology designed to make workplace environments more efficient, safer, more productive – that sort of thing.
Vuzix already sells its products to some household names – Toshiba isn’t the first and only company to validate the company's technology – and, as outlined in my previous coverage of the stock, the company's client list includes BMW (BMW), DHL, Daimler (DAI) and many others, all of which have adopted Vuzix's hands-free smart glasses solutions.
With the Toshiba supply agreement in place, however, we are seeing the beginnings of what could be a major inflection point for the company.
This is the first time that a name like Toshiba has taken Vuzix's technology and branded it under its own moniker, while also crediting Vuzix as "powering" the smart glasses device.
This sort of validation could help Vuzix expand into the consumer market much faster and to a much larger degree than might have otherwise been the case without Toshiba. This very much serves to reinforce my suggestion that Vuzix provides strong long-term exposure to the global AR industry.
In terms of market response to the latest news, Vuzix has already gained somewhere in the region of 7% on its market capitalization during premarket activity, and there is a good chance that this is just the start of a substantial upside revaluation as we head into the end of 2017.
What comes next?
Markets will now look to the production phase of the supply agreement as the next major catalyst for Vuzix, with said production phase set begin during the first quarter of 2018.
Between now and then, any insight into the product that Toshiba and Vuzix have developed and will be selling as a co-branded technology into the consumer market could serve to drum up some speculative market interest in the stock. In other words, a first look at the product could really get markets excited about both companies' futures in AR and, with a name like Toshiba driving marketing efforts, markets can expect this first look to be designed for maximum impact.
Keep in mind that this remains a nascent industry and, even with big-name validations in place, Vuzix is a small cap play that's likely going to need to bolster its balance sheet before it reaches cash flow positivity.
With that said, however, the $5 million deal with Toshiba goes a long way towards doing exactly what, in turn, mitigates a large portion of the risk an investor is required to take on when they pick up an exposure at current prices.
Disclosure: the author holds no positions in any of the stocks mentioned in this piece.
