VUZI - NASDAQ

Greetings, and welcome to the Vuzix's Fourth Quarter and Full Year ending December 31, 2023 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. [Operator Instructions] As a reminder this call is being recorded. Now, I would now like to turn the call over to Ed McGregor, Director of Investor Relations at Vuzix. Mr. McGregor, you may begin. Please hold. We are experiencing technical difficulty. Thank you for standing by.

Good afternoon everyone. And welcome to the Vuzix's fourth quarter and 2023 full year ending December 31st financial results and business update conference call. With us today are Vuzix's CEO, Paul Travers; and our 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 of performance represent management's estimates as of today, April 15, 2024. 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 final 2023 financial results and filed its 10-K with the SEC. So participants on this call who may not have already done so may wish to look at those documents as the company will provide a summary of the results discussed on today's call. Today's call may include certain non-GAAP financial measures. When required, reconciliation to the most directly comparable financial measures calculated and presented in accordance with GAAP can be found in the company's Form 10-K annual filing at sec.gov, which is also available at www.vuzix.com. I'll now turn the call over to Vuzix CEO, Paul Travers, who will give an overview of the company's operating results and business outlook. Paul will then turn the call over to Grant Russell, Vuzix CFO, who will provide an overview of the company's fourth quarter and full year financial results. Paul will then return to make some closing remarks, after which we'll move on to the Q&A session. Paul?

Thank you, Ed. Hello, everyone, and welcome to the Vuzix's Q4 and full year 2023 conference call. As disclosed in our January 17th press release, Vuzix instituted cost-cutting initiatives across our operations, designed to streamline our operations and organizational structure to remove redundancy without sacrificing revenue generation or overall customer support. These measured reductions across sales, marketing and product development will extend our financial runway, improve our margins and allow the company to refocus resources aligned with the highest growth opportunities over the short to medium-term. Let me now get into a bit more about the state of the industry and the growth areas that Vuzix is positioned to benefit from. Although the augmented reality smart glasses market has developed slower than most expected over the past five years, there are increasing signs that adoption is finally starting to grow. Some of the largest players in the technology, products and eyewear markets are just now entering this space with first generation virtual reality and mixed reality and smart glasses products and continue their investments in this category. Meta and Luxottica have seen a growing positive reception of their second product that now includes some audio only AI-driven capabilities with their smart glasses carrying the Ray-Ban brand. Industry reports estimate over 300,000 units were sold in the first 12 months and they don't even have displays in them yet, a key feature that many could argue questions the validity of the reference to even call them smart glasses. Apple also recently launched the Apple Vision Pro and sold out in even larger numbers at a much higher price point. And although our enterprise based product revenue line has not shown it just yet, our inbound new business pipeline is expanding nicely on many fronts and should result in us achieving that growth very soon. Vuzix has invested significant capital and other resources to create a foundation of key intellectual property that positions the company as one of the global leaders in the wearable computing and augmented reality smart glasses space. We have led much of the industry with the core technology developed needed right through to addressing the enterprise markets in general. Our growing focus on offering OEM and ODM solutions of optics and display engine components for the enterprise, defense and broader consumer markets is readying us for the rapid growth we see coming with much of the investment and costs already realized. We are positioning to deliver to our customers and market in short order. The advancement of our core technologies is becoming more evident every day in our products, waveguides and micro-display component solutions. Our

Thank you, Paul. As Ed mentioned, the 10-K we filed this afternoon with the SEC offers a detailed explanation of our annual financials. I'm just going to provide you with a bit of color on some of the full year as well as quarterly numbers. For the year ended December 31, 2023, Vuzix reported $12.1 million in total revenues as compared to $11.8 million for the prior year. Product sales increased by 2% year-over-year driven by increased smart glasses revenues. Sales of engineering services for the year increased 3% to $1.4 million from $1.3 million. Please note as disclosed in our 10-K, we have a $2.9 million worth of remaining performance obligations over the revenues already recognized under a current waveguide development project. For the three months ended December 31, 2023, Vuzix reported $1.1 million in total revenues versus $2.9 million in the prior year's fourth quarter. The revenue decline was primarily due to reduced unit sales of our M400 smart glasses. Please note, the Q4 2023 revenue total achieved was below the initially indicated amount in early January pursuant to our cost reduction press release update, as one significant customer order had to be moved from when it originally shipped in December 2023 into the 2024 revenue year, due to shipment and delivery issues discovered later during formal closing procedures. For the full year ended December 31, 2023, there was an overall gross loss of $2.6 million as compared to a $1.5 million gross profit for 2022. Included in 2023's cost of sales was a $4.4 million inventory obsolescence reserve, well above the $0.3 million in obsolescence reserves accrued in our 2022 fiscal year. The large additional inventory reserve amount was related to expected surplus component parts and obsolescence in excess of currently planned existing future product builds in 2024 and in early 2025 and all part of our planned transition to expected new smart glass models in 2025. No finished goods have been included in this reserve. As a disposal value of these excess components that will not likely be used in future product models is unknown. A 100% obsolescence provision was accrued. Research and development expenses for 2023 fell 3% to $12.3 million as compared to $12.7 million for the 2022 period. The decrease was largely due to a $0.9 million reduction in external development and consulting expenses, partially offset by an increase in salary and benefits related expenses and a $0.4 million accrual for severance related costs for staff reductions, which took place in early January 2024. Sales and marketing costs for all of 2023 rose 57% to $12.7 million from $8.1 million in 2022, with the most significant factors being a $2.1 million increase in salary, commissions and benefits related expenses, driven by headcount increases, at $0.4 million provision for staff reductions in this area, which took place in early January 2024, and an increased bad debt reserve allowance of $1.6 million and a $0.6 million increase in advertising and trade show expenses. General and administrative expenses for 2023 decreased 12% to $18.6 million, as compared to $21 million for the 2022 period. The decrease was largely due to a $2.5 million decrease in non-cash, stock-based compensation, primarily related to the company's 2021 long-term incentive plan. For the full year ended December 31st, 2023, the net loss was $50.1 million or $0.79 per share as compared to a loss of $40.8 million or $0.64 per share for the full year of 2022. Now for some balance sheet highlights. Our cash position as of December 31st, 2023 was $26.6 million and we had a net working capital position of $36.3 million. Net cash flows used in operating activities was $26.3 million for the year ended December 31st, 2023, as compared to $24.5 million for the 2022 year, an increase of $1.8 million. Cash used for investing activities in 2023 was $19.3 million down from $21.2 million in 2022. Both of these amounts are well above our historical average for investments. The most significant components of this total investment were $10.5 million in cash payments on further technology development payments pursuant to our exclusive microLED technology license agreement with Atomistic and a $2.5 million investment in the preferred shares of Atomistic purchased from its founders and $5.3 million for purchases of manufacturing equipment and leasehold improvements expenditures, primarily related to our waveguide plant expansion project. We are presently envisioning spending significantly less on investments in 2024 as our new and expanded waveguide manufacturing facility was completed in late 2023. Looking forward to the balance of 2024. We are addressing certain operational challenges highlighted as follows: reducing our operating costs by further operating cost reductions and headcount phrases to better right size our costs in relation to our planned revenues, delay or curtail discretionary and non-essential capital expenditures not related to near-term new products and R&D. As mentioned in our 10-K filing, the probable implementation of a voluntary cash, salary reduction program in exchange for equity instruments offered to all salaried employees and management. We are also actively pursuing licensing and strategic opportunities around waveguide technologies with potential OEMs, which include the receipt of upfront licensing fees and ongoing supply agreements. As Paul mentioned, some potential strategic investments. As most of you are aware, we are in the process of going effective with our new S-3 shelf registration statement with the SEC as Vuzix has found it prudent to have one in place over the past many years. The new SR includes a provision for an ATM or at-the-market offering with an investment banking firm to raise capital on the best terms if favorable market conditions develop. And as pointed out in our recent 10-K, there is a cautionary going concern note to our financial statements that projecting our cash needs out over the next 12 months, there is possible financial uncertainty related to the full alleviation of all our current going concern risk. Vuzix's management is confident based on its plan and history of managing his operations and successful capital raises over the past 2 decades that it can fully alleviate those financial risks over the next 12 months. As a result, our financial statements have been prepared on a going concern basis. This presentation assumes that the company will continue normal business operations into the future. However, as noted in our 10-K, the company's external auditors do not share the opinion that such financial risks are yet fully alleviated and have included a cautionary note in that regard in their audit report. This is an opinion that management does not agree with. And before concluding, we would like to apologize to our stockholders for having to take advantage of the 15-day grace period for the filing of our 10-K for 2023 with the SEC. As it should be evident to most, there were a variety of issues, assumptions and extra efforts required to properly prepare our financial statements and complete our external audit to the satisfaction of all relevant parties. We expect this delay will not be repeated again in the near future. With that, I would like to turn the call back over to Paul.

Thank you, Grant. With that, I would like to now turn the call back over to the operator for Q&A.

[Operator Instructions] Our first question comes from the line of Christian Schwab with Craig-Hallum Capital.

This is Tyler Burmeister on behalf of Christian. So I guess, first, I guess, maybe just to kind of get to it. We're into April now Q1, it's closed just a couple of weeks ago. I'm sure books aren't finalized, but any color you can give us so far and kind of how Q1 shakes out, maybe directionally what revenue looks like as well as a cash balance early view for Q1?

I don't know if Grant wants to get into cash balances and stuff. I can tell you that it will be an uptick from our Q4 numbers, we believe.

And on the cash side, it would generally sort of follow the last couple of quarters as far as net changes in cash balances minus the funds that were flowing out to domestic for the license support. So it's down a little, but should not be an unexpected amount.

Sorry. No, fair enough. And then I guess maybe another Grant, could you help maybe just level set us these cost-cutting efforts that you're making maybe you called out $8 million on an annual level you're looking to reduce previously. Maybe how far along are you into that? Or what's the baseline level you're thinking that $8 million has come off of, just given some of these more onetime in nature expenses to a couple of moving pieces there, maybe help a little understand everyone.

I mean, we still stand by the $8 million sort of annualized target. I mean I am not saying Q1, some of the costs came in a little higher than we'd hoped because it takes time to slow down the tanker, but we're honestly looking at more cuts and we feel we can get our operating expenses under $20 million on an annual basis, and we'd love to get it closer to 15%. So we're looking at potentially another 30% of cuts to operating expenses. We'd like to try to implement in the next quarter while we wait for our business to accelerate as fast as we're all expecting.

Okay. That's very helpful. I guess maybe last one here, Paul, you said at least 1, potentially 2 or another 1 closely behind aerodefense firms for their OEM opportunities they've been working for a while that you expect to ramp this year. Any framework you can give us for what the potential financial terms that might look like? Or what numbers might look like around that, it all would be helpful.

Yes, I can help you there. There's actually 4 plus programs right now that are really active. There are 2 of them that are literally we're on the front end of delivering their very first production devices. The kinds of unit prices. It's in the -- anywhere from $2,500 to $5,000 system and the kinds of volumes that we're talking about are somewhere 2,500 to upwards of 10,000 pieces. That won't all be at once, of course, but we should knock on would see one, if not 2 of those programs start to roll this year. it's to the point where they're out showing customers and the likes. We're getting very positive feedback. So it's right on the cusp of kicking off.

Our next question comes from the line of Aaron Martin with AIGH Investment Partners.

I apologize. The [indiscernible] earlier on the call when we had the technical difficulties, but can you guys talk a little more on the waveguide the big facility in terms of -- at what level does it have -- you talked about being able to produce hundreds of thousands. At what level does it have to get to, to be at scale from a cost perspective?

Well, let me say, Aaron, that the facility right now is at the hundreds of thousands of level for production. And there's very little new investments that we need to make to graduate that up to 1 million plus in it's handling. I would also suggest that to get beyond that, it's not a big investment, and we don't need to expand the facility in the process to do it. We could probably out of the facility that we're in right now, run 3x those kinds of numbers. So we're set, we're in a good spot to crank up production and the investments we think were well worth it.

We talked about this facility getting the waveguides out at a cost point [indiscernible] lower than anyone else. My question is, at what level of build do you have to be out with your existing capacity to get the cost -- the per waveguide production cost down to the target levels.

Yes. So first of all, let me say that. I don't care who's out there trying to produce these right now. If they're making them in the 10,000-piece quantities, the prices are not going to be better than Vuzix. If they're making them out 100,000 and we're making them out 100,000, they're not going to be better than Vuzix. So wherever we are on the scale path that we're on. These other folks, for the most part, are so expensive, but honestly, I don't even know how products are going to be able to go into the marketplace with $200 to $500 kind of price points on waveguides. So even now, when we're only making small unit volumes, we're highly competitive. That said, even making 20,000 pieces, we can be in the really nicely scaled kinds of volume prices. We don't give -- I want to be careful how I say that because we're not sharing with everybody what those numbers are and how that all adds up because, of course, our margins aren't a lot of people's business. But it scales pretty easily, Aaron, to get to good price points.

Okay. And then on the cost-cutting measures, you talked about getting the operating expenses down to, say, $20 million, is there a time frame for that rough...

Our goal would be to accomplish an exon of cuts in the next quarter. And I should stress that, that these are on a cash basis. So we do carry a pretty good burden of non-stock -- noncash stock compensation related to the LTIP. But I mean, on an annual basis, I think by July 1, we'll be there. And the team is going to work hard to make some difficult decisions to do that without sacrificing our future in doing so.

Thank you. There are no further questions at this time. I'd like to turn the floor back over to Paul for closing comments.

Thank you, operator. I would like to thank everyone for your interest and participation on today's call. We will look forward to speaking with you again in May when we report our Q1 2024 quarterly results. Again, have a nice evening, everybody.