Vuzix Corporation

Greetings and welcome to the VU6 second quarter ending June 30th, 2022 financial results and business update conference call. At this time, all participants are on a listen-only mode. A brief question and answer session will follow the formal presentation. If anyone should require operator assistance during the call, please press star zero on your telephone keypad. As a reminder, this conference is being recorded. I would now like to turn the call over to Ed McGregor, Director of Investor Relations at VU6. Mr. McGregor, you may begin.

Good afternoon, everyone, and welcome to the Vuzic second quarter 2022 ending June 30th financial results and business update conference call. With us today are Vuzic CEO Paul Travers and CFO Grant Russell. Before I turn the call over to Paul, I'd 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 the 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, August 9th, 2022. USICS assumes no obligation to update these projections in the future as market conditions change. Today's call may include certain non-GAAP financial measures. When required, reconciliation to the most direct comparable financial measure calculated and presented in accordance with GAAP can be found on the company's Form 10Q 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 second quarter financial results. Paul will turn to provide some closing remarks, after which we will move on to the Q&A session. Paul? Thank you, Ed.

Hello everyone and welcome to the Vuzix Q2 2022 conference call. On this call, we're going to review our results and recent developments and then give you some perspective on where we see things headed. The overall business environment in the second quarter of 2022 remained challenging for most companies due to macroeconomic headwinds causing delayed decision-making and a resurgence of COVID, particularly in parts of Asia. Despite these issues, Our Q2 revenue of $3 million, which exceeded the consensus expectation, represented a 20% increase versus Q1 2022 and a 3% gain year over year. From a customer engagement perspective, the second quarter was very encouraging across our core smart glasses business. Most notably, we expanded our international sales channel with the addition of westbase.io to support our business in Northern Europe. a firm with a 30-year pedigree and one of the most experienced connected worker device distributors in Europe with solutions from cellular to XR technology and connecting tens of thousands of frontline workers and businesses. We're bolstering our local sales and support team in Europe with additional boots on the ground that came online in early Q3 to support our key accounts and drive additional sales growth in the EMEA region. Also in Europe, we will be opening a Vuzic sales office in Germany later this quarter, which will provide a new central operational and support hub for our European business. As always, we continue to work closely with our key independent software vendors to support the needs of our collective customers as they roll out their solutions and work through any further optimizations ahead of expected enterprise-wide rollouts. On the OEM side of the business, upon which I will expand shortly, there is a growing momentum with both existing and new customers, and we expect our OEM business activities and revenue to accelerate in the back half of 2022. We continue to invest in our core technologies, including waveguides and display engines, along with our significant investment and commitment in Q2 regarding our micro-LED and backplane announcement with Atomistic. Additionally, we are also investing in the expansion of our high-volume, cost-effective waveguide manufacturing capacity. Our smart glasses core customer base continues to expand, and our customers' commitments to scaling up is also increasing. One market vertical that has continued to expand over the last 12 months is warehousing and logistics. After a period of starts, pauses, and stops, primarily due to COVID and other headwinds we discussed earlier, we're now starting to see volume multi-year rollouts for smart glasses being actively planned by some of the largest companies in the world. One Fortune 100 customer that we referenced in the July press release has already placed multiple orders for initial rollouts and is well into scheduling a multi-year rollout of our smart glasses. The smart glasses project at this retailer, as it currently is slated, will represent one of the largest deployments of smart glasses in the world to date, and it's great to see that Vuzic smart glasses were selected to support this customer. The benefits afforded by this smart glasses and software solution will help deliver critical efficiencies and powerful ROIs to the logistics arm of this customer without any material implementation disruptions to their operations. They are just one of four Fortune 100 retailers that are preparing to actively deploy much larger numbers of our products. Feedback from our other large customers regarding warehousing and logistics, including Amazon, remains very positive. As per their own social media, Vuzix smart glasses have been deployed across various Amazon warehouses, and we expect this project's rollout should continue to expand over the second half of 2022 and beyond. Amazon even has their own custom M400 smart glasses skew from Vuzix. At other large customers in this space, our smart glasses are being deployed within their distribution centers, and the integrated software solution in some instances is still being fine-tuned in preparation for wider rollouts, which we anticipate should begin during the second half of 2022. In healthcare, our major ISVs continue to expand the availability of their Vuzix-powered surgical solutions, Medacta, continues to expand its next AR surgical platform solution, which now has hundreds of units and performed over 1,000 surgeries to date. They had a full market release of their shoulder surgery solution in May, and in June received their solution's approval in Japan for knee, shoulder, and spine surgeries. In late July, Pixie Medical received FDA 510K clearance for its FX-SPS a total shoulder arthroplasty online 3D planning software, which will create even more sales opportunity in North America for their smart glasses-based surgical solutions for both knee and now shoulder replacements. Rod's and Cone's business also continued to expand, and they're now active in more than 600 hospitals and have supported well over 25,000 surgeries in 75 countries worldwide. That's a current run rate of as many as 60 surgeries a day. Around the world, we are seeing more and more healthcare-related white papers being written and POCs taking place, as well as a steady stream of incoming inquiries from doctors and medical facilities. Overall, our core smart glasses outlook and expected sales pipeline for the remainder of 2022 remains healthy. However, One of our biggest challenges in our forecasting continues to be managing and understanding customers' needs and expectations around the timing of deployments from these key accounts, which can have a material impact on our quarterly sales. Regardless, we expect our core smart glasses revenue over the second half of 2022 to grow compared to the second half of 2021. As announced in mid-May, Vuzic signed a series of agreements with Atomistic a France-based technologies firm with a novel material science approach related to the development of next-generation micro-light-emitting diodes, or micro-LEDs. The combination of atomistics displays and Vuzik see-through waveguides will deliver full-color, high-resolution HD solutions, a level of form and functionality that represents what we believe to be the holy grail for the broader AR wearable markets. Markets expected to ultimately become as large as the current smartphone market itself. We're making great progress, and if you would like to learn more about Vuzix's microality efforts and this transaction, please review the conference call that Vuzix hosted on May 18th of this year. You can find it on our website. Elsewhere on the M&A front, Vuzix continues to engage in due diligence and hold discussions with multiple vertical market solution companies that could broaden our SaaS-based service offerings across key market segments. We look forward to bringing you news about these developments if and when they are successfully completed. As promising as the smart glasses market opportunity looks to us going forward, we are equally excited about what we are seeing on the OEM side of our business. Our standardized OEM platform that was announced during the second quarter is now being proactively offered to third parties. This new platform will offer customers one stop shopping for their advanced and customized waveguide and display engine solution needs from design to high volume cost effective production capabilities. A mix that is currently almost impossible to find with the competition. Since this announcement of our expanded OEM initiatives, we have been fielding many RFIs, requests for inputs, and formal RFQs, requests for quotes, for our waveguide-based solutions and in most cases display engines to go with them. Our IP portfolio continues to strengthen and now consists of 247 patents and patents pending. Our ability to deliver the world's best performing waveguides and display engines in volume with a very cost-competitive solution is just one of several critical technologies needed for the AR products of the future. We are well on our way to expanding our waveguide production facilities to support high-volume, low-cost offerings. We have also made significant waveguide technology strides that include 80% reduced eye glow, a tripling of waveguide efficiency for higher brightness and more efficient battery usage, and the use of higher index substrates and polymers, supporting single-layer color designs and much larger fields of view, to name a few of our advances. To deliver against expected OEM needs and Vuzic's own future demand, we are preparing for an expansion of our waveguide fabrication equipment to address the millions of units of waveguides associated with the potential business we see coming long term. and our goal is to do the same for full-color, high-resolution micro LEDs in due course via the atomistic investment. We feel the OEM revenue opportunities for Vuzix are very significant as the waveguides and engines will be an integral part of the computing platform of the future, from defense all the way to literally replacing the smartphone. On the defense side, where our non-compete agreement expired in June, allowing us to directly engage with any U.S. and allied defense organizations around the world, we are well positioned as the only U.S.-based manufacturer of waveguides. We are actively addressing the defense market with plans to attend key defense-related trade show events and outreach to direct government programs. We are also in the process of evaluating new talent and business development that could assist our efforts with bringing on additional defense business. Our goal is qualification and selection of our OEM components into volume programs where production runs can span five years or more and result in four, five, and even six-figure unit volumes. On the consumer side, we are well positioned to be a flexible, high-volume, cost-competitive provider of waveguides and related solutions. Most notably, many leading consumer products companies have publicized their intention to offer smart AR glasses for the masses, but are discovering just how challenging it is to build a pair of highly functional, cost-effective, and fashionable consumer AR smart glasses in volume. The optics and display engines for AR glasses represent integral pieces of any solution and have to be designed from the ground up to work together for their application. So many are now turning to Vuzix as a partner for our wave guides and display engines for this exact reason. On the enterprise side, customers in varied industry verticals are driving a variety of use cases that represent greenfield applications and or upgrades to older solutions that are already being deployed. I would like to give you some specific customer color on what's going on for us in the OEM space. And as you can see on slide eight, it's a lot. We are actively engaged with many leaders in their respective spaces, and we are in discussions with many more. Starting with defense, we are currently engaged with seven firms with multiple projects underway with some of them. Most notably, we recently announced an agreement with L3Harris Technologies, a leading defense contractor, to develop a new customized waveguide-based head-mounted display engine for use within existing L3Harris programs and new ones in the works. It's exciting that our technology can be used on multiple projects that they may pursue, and the multi-year unit potential for us could be quite large given the size of L3Harris' existing product lines and the use cases they target. Projects with other defense firms remain in various stages of development. For instance, the long-term supply agreement we have discussed in the past with another defense partner is still in process. with pre-production modules continuing to be delivered. We expect to offer more specifics about some of these over the balance of this year as well as see some move closer to production. On the consumer side, we announced an equally significant development last month when we received a purchase order for custom-designed wave guides from a Fortune 50 software and hardware technology company. The work for this customer, which is consistent with the consumer-related marks I made previously, is well underway and the waveguides are being built by Vuzix to specifically match this customer's needs and specifications. We are also engaged with other firms of equal caliber and anticipate that additional programs will be announced as we continue to receive growing customer interest for cost-effective and fashion-forward see-through waveguide designs to support the broader markets. Overall, we expect our OEM-related revenue growth to accelerate in the second half of this year as more development projects reach the contract stage. In most cases, these will be engineering service sales, and as such, represent just the very beginning in terms of future revenue potential. Fusex remains on track to release three new AR smart glasses products over the next several months. Our development and production teams should get high marks for successfully managing our delivery and project schedules with the challenging supply chain issues during shutdowns in China due to COVID. We are nearing completion of a new waveguide-based successor to our Blade smart glasses that will feature our latest advanced waveguide optics, a new microprocessor, and Android 11 out of the box. We believe this new product will answer the call from many of our enterprise customers that love the Blade's form factor but required an upgraded Android OS and broader Wi-Fi capabilities to support their applications, architecture, among other things. We expect to formally announce and commence volume production of this follow-on product within weeks. The Vuzix M400C, our second generation USB-C based Windows PC and phone compatible smart glasses, takes full advantage of the robust design and camera afforded by the Vuzix M400, including IP67. We have shipped a limited number of initial production units of the M400C, and we expect to introduce the M400C to our standard channels during the third quarter. Finally, the Vuzix Shield, our next-generation smart glasses, is far advanced compared to the competition, and its form and functionality have garnered significant early interest from enterprise customers that require a more traditional eyeglass form factor in the capabilities afforded to them by the Shield to solve operational challenges. The shield is on track for introduction well before the end of the second half of this year. I'd like to now pass the call over to Grant for his financial review.