VUZI - NASDAQ

Greetings, and welcome to the Vuzix Corporation Fourth Quarter and Full Year Ending December 31, 2024, financial results and business update conference call. A brief question and answer session will follow the formal presentation. Anyone should require operator assistance during the call. 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 Corporation. Mr. McGregor, you may begin.

Thank you, operator, and good afternoon, everyone. Welcome to the Vuzix Corporation fourth quarter and 2024 full year ending December 31, financial results and business update conference call. With us today are Vuzix Corporation 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. 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, March 13, 2025. Vuzix Corporation 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 2024 results and filed its 10-Ks 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, reconciliations to the most directly comparable financial measure calculated and presented in accordance with GAAP can be found in the company's Form 10-Ks annual filing at sec.gov, which is also available at www.vuzix.com. I'll now turn the call over to Vuzix Corporation 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 Corporation's CFO, who will provide an overview of the company's fourth quarter and full year financial results. After which, we'll move on to the question and answer session.

Thank you, Ed. Welcome to the Vuzix Corporation Q4 and Full Year 2024 Conference Call. In recent years, the wearable computer and AR industry have shown the role of these enterprise smart glasses in improving workplace efficiency. As the industry has developed, Vuzix Corporation has continued to invest and adjust its strategy to align with the future direction of the market. On the technology front, Vuzix Corporation has been discussing ours and the industry's progress on waveguides and the microdisplays that drive them for years. We are now approaching a pivotal moment which should increase adoption greatly. Innovation in these technologies has finally enabled the development of all-day wearable smart glasses with high-performance displays, an industry first. As we have long emphasized, our waveguide optics work seamlessly with a variety of third parties supporting enterprise, medical, and our OEM business, including military and defense sectors. And now with the broader consumer markets following on. Despite the noise and pace of change in the industry, Vuzix Corporation remains focused on its pursuit to develop the best mousetrap to solve and support the enterprise and other markets we address as they unfold. We continue to enhance the performance, the features that matter, and, of course, the cost competitiveness of our waveguides, arguably the most critical component of AI and AR smart glasses and other wearables. Our commitment to investing in and advancing our core waveguide technology has led to one of the most significant developments in Vuzix Corporation's recent history. The establishment of a strategic partnership with leading ODM supplier, Quantum Computer. This collaboration, besides highlighting the credibility of what Vuzix Corporation has created over the years, has facilitated the development of multiple smart glass reference designs based on our waveguide technology and is proving to help open up the markets in general for us. Our partnership with Quanta, reinforced by their $20 million multi-phase investment, underscores our shared vision of revolutionizing the AR and AI industry. Through this collaboration, Vuzix Corporation is poised to supply millions of cutting-edge and cost-competitive waveguides for AR and AI-driven smart glasses to Quanta's extensive OEM client base. The first $10 million tranche of this investment was received in September of 2024, and we remain on track to meet the milestones required to unlock the remaining two $5 million tranches as anticipated. At CES 2025, we introduced our UltraLight Pro AR Smart Glasses platform designed for specific enterprise verticals and market use cases. These binocular, full-color, see-through glasses powered by Qualcomm's AR1 processor fill a critical gap in the current market. The response has been overwhelmingly positive, and we are already receiving inbound interest from OEMs and white-label partners. The UltraLight Pro AR Smart Glasses platform was also awarded best in show by Wearable, the authority on wearable technology. Further, at CES 2025, we introduced the UltraLight Audio Smart Glasses platform, a new upgrade to the base UltraLight platform, which integrates dual speakers and a noise-canceling microphone for enhanced audio and voice interaction. And more recently, at Mobile World Congress in Barcelona, Micro OLED, a Grenoble-based maker of AR smart glasses, and their ActiveLook software platform, along with the semiconductor company, STMicroelectronics, announced a reference design platform from Vuzix Corporation, featuring Micro OLED's ActiveLook software. This reference design supporting the ActiveLook ecosystem will enable third-party eyewear manufacturers to create diverse smart glasses models for sports and outdoor applications that require mission-critical information in real-time and on the move. Our

Thank you, Paul. As Ed mentioned, the 10-Ks we filed this afternoon with the SEC offers a detailed explanation of our annual financials. So 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 three months ended December 31, 2024, we reported $1.3 million in total revenues as compared to $1.1 million in the prior year's comparable fourth quarter. Revenue increase was primarily due to higher unit sales of our M400 smart glasses. For the full year ended December 31, 2024, Vuzix Corporation reported $5.8 million in total revenues as compared to $12.1 million for the prior year. Product sales decreased by 58% year over year as unit sales of our M400 product declined compared to the previous year when two major distributors placed significant stocking orders in the first half of 2023 representing 54% of our total product sales in 2023. Sales of engineering services for the year ended December 31, 2024, were $1.3 million as compared to $1.4 million in 2023, a decrease of 7%. Please note as disclosed in our 10-Ks, we have $2.1 million of remaining performance obligations over revenues already recognized under a current waveguide development project. For the full year ended December 31, 2024, there was an overall gross loss of $5.6 million as compared to a loss of $2.6 million for 2023. Larger gross loss for 2024 was primarily driven by further inventory obsolescence reserves included in cost of sales and increased unapplied manufacturing overhead costs of $2.1 million due to reduced further builds of the M400 finished goods in the second half of 2024. The larger additional inventory reserve amounts were related to the collected surplus components and obsolescence provision in excess of currently planned existing future product builds in 2025 and early 2026. And all part of our planned transition to expected new smart glasses models now being developed. No finished goods have been included in these inventory reserves. And as the ultimate realizable value of these excess components, that may not be used in future products build is unknown at this time, a 100% obsolescence provision was accrued. Research and development expenses for 2024 fell 22% to $9.6 million as compared to $12.3 million for 2023. The decrease was primarily due to a $1.6 million reduction in salary and benefits, related expenses due to headcount decreases, and a $1 million drop in external development costs. For the fourth quarter of December 31, 2024, research and development expenses were $2.2 million as compared to $3.5 million in the 2023 fourth quarter. The decrease again was driven by headcount reduction. Sales and marketing costs for all of 2024 fell to $8.2 million from $12.7 million in 2023. A reduction of $4.5 million or 36%. The most significant factors for these expense reductions include a $1.6 million decrease in advertising and trade show expenses, and a $1.6 million reduction in salary and benefits expenses driven by headcount decrease. For the fourth quarter of December 31, 2024, sales and marketing expenses were $2 million as compared to $4.8 million in the 2023's fourth quarter. The decrease again was driven by reductions in headcount, and advertising expenses changes in bad debt provisions, and severance accruals booked in Q4 of 2023. General and administrative expenses for 2024 decreased 7% to $17.2 million as compared to $18.6 million for the 2023 period. Decrease was largely due to a $1.4 million decline in noncash stock-based compensation a $1.1 million decline in salary and benefits related expenses due to headcount reductions. Partially offset by a $1 million increase in investor relations. For the fourth quarter ending December 31, 2024, general and administrative expenses were $4.3 million as compared to $4.7 million in the 2023 fourth quarter. Decrease again was driven by headcount reductions. For the fourth quarter ended December 31, 2024, the net loss was $13.7 million or $0.16 per share as compared to a net loss of $19.9 million or $0.32 per share for the fourth quarter of 2023. For the full year ended December 31, 2024, the net loss was $73.5 million or $1.08 per share as compared to a net loss of $50.1 million or $0.79 for the full year of 2023. The increased net loss was mostly attributable to the write-off of our technology license and investment in Atomistic. We was recorded in the second quarter of 2024. Excluding this write-off, the net loss for 2024 was lights. Our cash position as of December 31, 2024, was $18.2 million a decrease of $8.4 million from December 31, 2023. We had a net working capital position of $24.6 million. Net cash flows used in operating activities was $23.7 million for the year ended December 31, 2024, as compared to $26.3 million for the 2023 year, a decrease of $2.6 million. For all of 2024, we raised $18.3 million through financing activities that consist of a $10 million investment by Quanta Computer in September and $8.2 million of net proceeds received from equity sales under our ATM offering in the fourth quarter of 2024. Cash used in investing activities in 2024 was $2.9 million, down significantly from $19.3 million in 2023. Primarily due to reductions in investment amounts and licensing fees paid to Atomistic. And manufacturing equipment and tooling investments for a new waveguide manufacturing facility in 2023. We are presently envisioning spending significantly less on CapEx investment is now adequate for expected demand in the near term. I'm pleased to report that after a year of expense reductions, when we look at our major operating expense groupings, R&D, sales and marketing, and G&A, in our Q4 2024 versus Q4 2023, we reduced our recurring cash operating costs and that's after adding back non-cash compensation, bad debt provisions, and the severance accruals we made at the end of 2023. We saw a $2.7 million reduction per quarter or 36% year over year. We expect to keep these expense savings in place and intend to look further at all our spending in 2025 as we move forward and expand our business. Looking forward in 2025, we are confident that management plans and the expected further funding of the second and third tranches from Quanta which will bring in another $10 million in new cash. Along with potential further equity sales under the ATM program. And of note, we raised $1.3 million to date in 2025, the company has more than adequate resources to move forward with its operating plan well into 2026. And with that, I would like to turn the call back over to the operator for Q&A.

Thank you. And at this time, we'll conduct our question and answer session. Our first question comes from Christian Schwab with Craig Hallum. Please state your question.

Great. Hey, guys. So just for clarity, we talked about the M400 clearing out the inventory that you have in 2025. Can you just let us know how much inventory you have of the 100 that you plan on selling?

There's as much as $9 million worth of cash, I think, sitting in that bucket right now, Christian. Yeah. That's the cost of inventory.

Right.

As we stated in our narrative, anything that was not finished goods got 100% provided for. So there's, you know, there's we have an ability to build more units if we so desire, but we are not going to invest further in M400 until we move this existing stock. But that could easily generate, as I said, $9 to $10 million plus any margin we make selling it. And we certainly still expect to make some margin. And, Christian, the interesting change in life these days for Vuzix Corporation is we have a nice list of companies in our pipeline that have gone past proof of concepts. These guys are now rolling out. We are starting to get orders for larger volumes. And some of these accounts could take many thousands of units. So as much as we are preparing for a next-generation product, which we talked about a little bit in the call, we very well could be needing to make more of and finishing inventories that we currently have around the M400 that are just partial work in process.

Great. Thank you for that clarity. And then, Paul, you mentioned a few different times that you believe that Quanta can drive, you know, millions of units for you. Can you give us an idea when a ramp like that is logically going to start? And what your ASP would be on that?

It's interesting because we have got several things that are going on with Quanta right now. Some of it are reference designs and they are tools that are being used to bring on third-party OEM companies that will want to put their name on the product. And in those cases, Vuzix Corporation will ultimately be selling waveguides into that process. And you sell a color waveguide, not to get into a whole lot of numbers because they are not really public, but you might imagine competitors selling them at in volume, let's say, 100,000 piece quantities of hundreds of dollars per, and yet Vuzix Corporation can do in those kinds of quantities. Sub fifty. Kind of numbers. So it's a significant price reduction in the higher volume markets that Vuzix Corporation can bring to the table. The size of this market opportunity as that broader market starts to move it's going to replace the phone ultimately. That's why

Okay. Fantastic. No other questions. Thank you.

You are welcome, Christian.

Thank you. That's all. I'll hand the floor back to Paul Travers. Thank you.

Thank you. So we actually got a handful of questions from other of our shareholders before the conference call, and I thought I could at least answer a few of these I cannot answer. There's a few of them that I cannot answer just because I cannot answer them as much as I would love to. They go to points that are not public. At this point in time. But let me start with a few. Number one here, you've expanded your waveguide manufacturing capabilities. What production capacity do you expect to achieve by the end of 2025? How will this support your goal of supplying millions of units to OEMs? So let me give you guys a feel for how this works. The Quanta investment is a $20 million investment. $10 million was upfront. And there are two tranches coming for another five and five. The bulk of that is all about production getting into high-volume capacity, and we are very close to meeting both tranche two and tranche three, which are the two $5 million gates, and those are like I said, related significantly to volume. And the volume is half a million plus, and then a million plus on an annual basis kinds of numbers. And so we will be there before half of this year is up. Knock on wood, we are practically there right now. So the volume capacity is right there for what the short-term need is for us to take the Rochester facility and crank that up to double, let's say, does not cost us everything that it cost us the first time. It's an incremental cost to be able to turn that production facility into something that would double those numbers. So that's not significant. The ultimate goal is not a million or two waveguides on an annual basis. This is going to be like the smartwatch. Smartwatches sell 300 million smartwatches a year. Quanta is not doing this for 20 to 50 to 100,000 pieces a year. Then their drive here is a multibillion-dollar industry. That's the kind of company they are. That's many of the companies that we are talking with today because of what we can make and the vice points we can hit, they are in that boat. They want to move the needle. And so you will see a phase two effort from where we are going that should help us get into the much higher volumes. In the outbound years here. So next question, with the $10 million received from Quanta, and two additional $5 million tranches, expected in 2025 how do you plan to allocate this capital? Towards R&D, production, or market expansion. And what impact do you foresee on the cash burn rates? First of all, let me say that the Quanta investment in Vuzix Corporation is lockstep with where we are taking our company. The synergy, what they want, is what Vuzix Corporation wants. And so if you think about the cash burns, they are 100% aligned for the most part, with what Vuzix Corporation wants and needs to do. So this is not all of a sudden we have to take these dollars and put them into something that feels like it's a sidetrack. Now there is a portion of the monies also here that are dedicated to product development efforts to generate business on the backside. That is also lockstep in Vuzix Corporation's interest. So these dollars are going into R&D, next-generation gizmos around waveguides that we build, and cranking up production. Which I think is what everybody on this call wants to hear about. The next question how do you assess the competitive threat from larger players entering the AR SmartGlass market? 2025 and beyond, and what differentiates Vuzix Corporation's offerings to maintain their edge. First of all, the competitive threat. There will be more than one company that brings smart glasses to market. Everybody in this room should realize that. If there's another company that comes out with a product, it's not a need to panic. There's BMW. There's Ford. There's Tesla. This is going to be a multi-multi-billion dollar industry. So there will be other players. I said, we bring a lot of competitive advantages. Yes. One is price. It's great to know that we have a good price we compete with, but we also bring great performance. We've been at this longer than any other company out there. So when you lean towards the enterprise side of this business, which is also going to be in the billions we bring stuff to the table that nobody else can bring. It comes to the high-volume waveguide side of the business, our price points are nobody else can do what we can do today in this regard. So we are in front there. So yes, there are going to be competitors. We welcome that. Rising tide floats all boats. But we believe we, with the partnerships that we are building with companies like Quanta and others, have a great chance to get a very nice and sizable part of this market opportunity. Like I said, there were some other questions in here. That dealt with closer to tier-one companies, and when and rolls out. And I just cannot talk about those companies and where they are in their processes. I can tell you this though. Generally speaking, you will see more and more design wins and partner wins and starting rollouts happen throughout this year. Back in the World War II days when the airplanes would fly and they would take another kill and they would put a marker on the front of their airplane as another notch on the pistol handle. You are going to see a lot of that start to unroll at Vuzix Corporation this year. That will roll into, knock on wood, significant volumes through 2026. So and some of those be tier ones? I certainly believe we have tier-one partners 100% that are working with Vuzix Corporation right now. Their timing for when they roll out their requirements for market acceptance, mean, if you think about companies like Luxottica, do not want to put their name on something that does not look fashion-forward and 100% in line with what their brand looks like. So everybody's striving for that same answer. And Vuzix Corporation is the company that can help bring that to them. So in broad strokes, I hope that answered the bulk of everybody's questions. I want to thank everybody for spending the time again with us this afternoon. I really do look forward to seeing the rest of this year unfold and us having our future conference calls with a whole lot more to talk about with significant real programs in companies and partnerships that we have been able to announce along the way. Thank you, everybody. Have a wonderful evening.