VUZI - NASDAQ

Greetings and welcome to the Vuzix Second Quarter for the Period Ending September 30th, 2024 Financial Results and Business Update Call. At this time, all participants are in a listen-only mode. A question-and-answer session will follow the presentation. [Operator Instructions] As a reminder, this call 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 third quarter 2024 ending September 30th 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 legal and regulatory requirements. In addition, any projections as to the company's future performance represent management's estimates as of today, November 14, 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 Q3 2024 financial results and filed its 10-Q 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 only 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 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's CFO, who will provide an overview of the company's second quarter financial results. Paul will return to make some closing comments, after which we will move on to the Q&A session. Paul?

Good afternoon, everyone, and welcome to Vuzix Q3 earnings call. Thank you all for joining us today. The AR and AI landscape is evolving rapidly with industry driving attention to AI-enabled smart glasses. This increasing interest validates our vision of becoming the premier supplier of waveguide optics and advanced AR products for the global market. Today, I am pleased to share updates on how we are capitalizing on these trends, our strategic transition to OEM markets and the opportunities ahead for Vuzix, all of which should drive sustainable and profitable future for the company and its shareholders. Our waveguide manufacturing capabilities, a cornerstone of our competitive advantage, continues to demonstrate to potential partners and customers our ability to produce in volume with industry leading cost efficiency. With one of the lowest production costs globally and a scalable capacity to millions of units per year, we are well positioned to be a key supplier to major OEMs, providing them with waveguides tailored to their AI-driven smart glasses products and system level designs. As an example, one of the most impactful developments in Q3 is our strategic partnership with Quanta Computer. Quanta's $20 million multi-phase investment underscores our mutual commitment to revolutionizing the AR industry. The first $10 million tranche of this investment has been received and the remaining two $5 million tranches are tied to specific milestones that we are on track to achieve early in the first half 2025. This collaboration will enable Vuzix to supply millions of cutting-edge waveguides for AR and AI-driven smart glasses to Quanta's extensive OEM client base. We've strengthened our presence in the defense and industrial sectors, where our differentiated solutions are meeting demands for mission-critical applications. The latest example of this being our just disclosed relationship with Thales. These markets offer high margin opportunities that align well with our growth strategy. We've also made significant strides in broadening the scope of the Vuzix

Thank you, Paul. As Ed mentioned, the 10-Q we filed this afternoon with the SECs 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. For the three months ended September 30th, 2024, total revenues decreased by 36% to $1.4 million versus $2.2 million for the comparable period in 2023. The decrease was a result of a 28% decrease in smart glass product sales and a 51% decrease in Engineering Services revenues as compared to the prior year's quarter. As of September 30th, 2024, the company had $2.2 million of remaining performance obligations under a waveguide development project, including an initial production run. There was an overall gross loss of $0.26 million for the three months ended September 30th, 2024 as compared to a gross loss of $0.24 million for the same period in 2023. The 9% increase gross loss was the result of lower product revenues and our lower production rates of further smart glasses for the interim to observe many of our relatively fixed manufacturing and planned overhead costs. As a result manufacturing overhead costs as a percentage of total product sales increased to 40% of total sales from 15% for the same period in 2023. Research and development expenses were $2.3 million for the three months ended September 30th, 2024, compared to $2.9 million for the comparable 2023 period, a decrease of approximately 20%. The reduction in R&D expense was largely due to a $0.4 million decrease in external development costs and a $0.2 million drop in salary and benefits related expenses. Sales and marketing expense was $1.8 million for the three months ended September 30th, 2024, as compared to $2.8 million in the same period of 2023, a decrease of approximately 38%. The reduction in sales and marketing expense was largely due to a $0.5 million decrease in advertising and trade show expenses, a $0.2 million drop in travel-related expenses and a $0.6 million drop in consulting and wage costs from headcount reductions, partially offset by a $0.3 million increase in allowances for credit losses. General and administrative expense for the three months ended September 30th, 2024, was $4.3 million versus $4.5 million for the comparable 2023 period, a decrease of approximately 3%. The net loss for the three months ended September 30th, 2024, was $9.2 million or $0.14 per share versus a net loss of $11 million or $0.17 per share for the same period in 2023. Now for some balance sheet and cash flow highlights. Our cash and cash equivalents position as of September 30th, 2024, was $14.3 million and our net working capital was $26.5 million. As of September 30th, 2024, the company continues to have no current or long-term debt obligations outstanding. For the third quarter of 2024, total cash operating expenses, a non-GAAP measure consisting of the sum of our total operating expenses and our statement of operations less non-cash stock-based compensation, depreciation, amortization and impairment charges was $4.8 million versus $6.7 million for the comparable 2023 period, a reduction of 28%. Near the end of the third quarter of 2024, we received $10 million in cash via the previously announced Quanta Computer investment in Vuzix common stock. There are two other further performance-based investment tranches totaling a further $10 million for which we expect to be achieved in 2025. The net cash flows used in operating activities was $5.3 million in the third quarter of 2024 as compared to a net use of $8 million for the third quarter of 2023. Cash used for investing activities for the third quarter of 2024 was $0.3 million versus $2.5 million in the prior year's period, as we spent much less on fixed asset investments related to our waveguide production facility and for technology license investments. We will continue to look at further trimming our operating expenses as needed while still proceeding forward with our operating plan and our continued transition to an OEM supplier. Of course, we can improve our cash position through further potential strategic investments, government engineering service grants and under the right circumstances, other equity-based liquidity options available to the company. I would now like to turn the call back to Paul for some closing remarks. Paul?

Thanks, Grant. As we look ahead, the opportunities in the AR and AI-driven smart glasses market are vast. Aforementioned industry leaders continue to bring AR wearables into the spotlight driving awareness and adoption. This increased visibility directly benefits Vuzix as we continue to differentiate ourselves with advanced waveguide technology and high volume manufacturing capabilities for markets across the board. Our immediate priorities include scaling waveguide production to meet demand from defense and commercial OEM clients, securing additional partnerships with Fortune 500 companies and expanding our product portfolio to include additional lightweight, high performance solutions as reference platforms to white label. The defense OEM markets represent a significant growth area for Vuzix as we continue to deliver solutions that align with the unique demands of military and government applications. These efforts will be supported by our competitive manufacturing capabilities and strong industry partnerships positioning Vuzix to be a leader in this exciting market. In conclusion, Q3 has been a transformative quarter for Vuzix, marked by strategic advancements, disciplined financial management and operational achievements. We are well positioned to capitalize on the upcoming growing demand for smart glasses and remain committed to delivering value to our customers and shareholders. With that, I would like to turn the call over to the operator for Q&A.

Thank you. And ladies and gentlemen at this time we'll conduct our question-and-answer session. [Operator Instructions] Thank you. And there are no telephone questions at this time. I'll hand it back to Mr. Paul Travers. Thank you.

Previous to the call. So we thought maybe we'd go over a few of those. Ed?

Sure. We have several, Paul. First question, what are the next steps in your waveguide supply relationship with Quanta once you meet the milestones? And what are your ultimate production and supply goals with them?

Yes. So first of all, the current goals are to reach a certain level of manufacturing capacity. And let me explain the most difficult part of that you just can already do with where we stand on the plant floor. There are some things that we have to do around prepping the finished parts to actually put them in devices that is taking a little bit of time. But as we said, that should happen in the first quarter or early in the year. And that's to get to 1 million plus waveguides on an annual basis. If you think about the market for a minute, right, 300 million smartwatches on an annual basis. That's the first stop for smart glasses. So stopping at 1 million, 1.5 million waveguides on an annual basis is just not the goal here. The goal was actually order of magnitude plus over that at. So you'll see the relationship between us Quanta and quite frankly other companies that we're involved with right now that need are going to need significantly higher volumes than that. So step one is the million-plus step two is going to be a significant jump.

The next question. Can you size the market opportunity around your mention of the Thales head-mounted display product?

We've talked about the defense space in the past. These are devices that they really push the envelope on the capabilities of what a waveguide can do as such. The price per waveguide system can be anywhere from $4,000 to $7,000 a system, monocular, binocular field of view, et cetera, based on that. We have partnerships with companies that range in the 2,000 per year that ultimately could become five-year kinds of programs that could jump into the 5,000, 10,000 piece quantity. So it's a significant piece of business in defense. The Thales, I cannot speak directly to right now. I can't speak directly to Thales right now. Obviously, these are confidential kinds of relationships at this point in time. There'll be a lot more happening in the new year as the specific program gets -- that specific program gets announced.

Okay. And we have one more. Are there other players trying to make waveguides? And who do you think stands to be your biggest competitors in this space over the next year or two?

There's a handful of companies that make waveguides. Many of them and they probably fall in three categories, at least it's an easy three category thing, let me start with. Many of them are using semiconductor-based process equipment, which has a limited run rate capacity. You got a 300-millimeter wafer, you get 12 waveguides and maybe it takes two to four hours to produce. You got to make like every six seconds of waveguide just to do the 1 million a year kinds of number. So that's really not competitive and it's expensive. And you probably could spend a ton of money to parallel all that equipment, but this is equipment that's really expensive. And normally, in the semiconductor industry, the reason why prices come down on silicon is because instead of meeting a 1 inch piece of surface area on the piece of silicon, you shrink stuff down to like 5 millimeters by 5 millimeters. So on a single 300-millimeter wafer, you're getting 5,000 parts. You just can't scale that with waveguides. They're 50 millimeters by 50 millimeters is a size of a regular pair of glasses. You don't get that economies of shrinkage that you do with Moore's Law in the semiconductor space. There's a couple of other methods. One of them uses prisms and blast and many, many, many steps to make it happen. And if you look at practically every one of these other options, the cost per waveguide is very, very significant in a comparison to what Vuzix can do it. So there's not really a lot of competition. I will say there's probably some companies in China that are working on trying to race to this business that's coming. They have their challenges also because many of those folks are doing it the same way with semiconductor process equipment. It's part of the reason why Quanta pick Vuzix quite frankly. I mean I can't get into all of the details around that, but they spent a fair amount of time on our plant floor, they looked at our processes, they looked at our capabilities, and they seem obviously quite convinced that Vuzix is going to be able to get the volumes that they're going to need for the higher and broader markets. And most critically at the price points, if that cost you $500 for a waveguide and you need to or look at Orion's stuff from Meta or it's like $4,000 a waveguide and very, very poor yields. That just doesn't make a business. You've got to be able to produce these things like chiplets and that's what Vuzix is plant floor and capabilities can do. And I think that's the questions for now. I'd like to just end really quickly to thank everybody for your interest and participation on today's call. Again if you plan to attend CES this coming year, please stop by our booth to get an in-person look at the future of consumer smart glasses. It should be a very exciting show, Vuzix will have a lot to share this year. Thank you very much everybody.