Greetings and welcome to the Vuzix Third Quarter Ending September 30th, 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. I would now 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's second quarter and 2023 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 the legal and regulatory requirements. In addition, any projections as to the company's future performance represent management's estimates as of today, November 9th, 2023. 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 2023 financial results and filed its 10-Q 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 third quarter 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 Q3 2023 conference call. On this call, we're going to review our operating results and recent developments and then give you some perspective on where we see things headed in the fourth quarter and into the first half of 2024. Grant will cover our financials in detail a bit later in the call, but I want to start by providing some additional color regarding our third quarter financial results. During the quarter, we saw lower than planned smart glasses sales, primarily due to the order placement timing associated with several larger channel partner deals. Most of them, we fully expect, will close in the coming months. As previously stated, we are focused on the growth and expansion of our strategic channel partner program at Vuzix. This program allows us to expand the size of the qualified expert sales team that Vuzix has in the market without the cost and efforts of having to grow an internal sales team. We now believe this longer-term strategy is the most cost-efficient path while allowing Vuzix to best address the growth we are confident is coming in the overall smart glasses enterprise space. Expected third quarter revenue related to our OEM business was also negatively impacted by macroeconomic business conditions, specifically with a few large corporations having delayed their investments in new technology in favor of maximizing their current earnings and cash flows. Again, we believe this represents a shift in their timing, and we fully expect over the next several quarters that we will close on the bulk of these transactions. Despite the soft third quarter revenue, I am pleased to report that we have our largest pipeline of smart glasses sales opportunities in the company's history. Therefore, the outlook over the next…

Thank you, Paul. As Ed mentioned, the 10-Q we filed this afternoon with the SEC 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. Our third quarter total revenues for the three months ended September 30th, 2023, was $2.2 million as compared to $3.4 million for the prior period in 2022, an overall decrease of 36%. The revenue decline was primarily the result of lower smart glass product sales, which fell 46% year-over-year. At this time, we feel that several anticipated product orders from direct and channel partner customers were delayed a quarter or two as opposed to being cancelled. Sales of engineering services for the three months ended September 30th, 2023 was 0.8 million as compared to 0.9 million in the comparable 2022 period. Please note that as of September 30th we had approximately 3 million of remaining performance obligations under four current waveguide and projector development projects which represents the remainder of transaction prices totaling approximately 4.4 million under these active development agreements. The company expects to complete and recognize revenues from these projects over the next 3 to 18 months. There was an overall gross loss of 0.2 million for the three month end of September 30th, 2023, as compared to a gross profit of 0.9 million for the same period in 2022. The decline was due to lower sales volumes, resulting in higher overall cost of sales as a percentage of revenues due to lower absorption of fixed manufacturing overhead costs over a reduced sales base. Research and development expense was $2. 9 million for the three month ended September 30, 2023 versus $3.4 million for the comparable 2022 period, a decrease of approximately 15%. The decrease was largely…

Thanks, Grant. As our business continues to grow on multiple fronts, our line of sight to achieving profitable operations gets clearer. We expect the pace of our growth in the coming quarters will continue, and with our shift more to third-party channel partners and resellers in our enterprise smart glasses segment, this should allow us to more effectively manage our sales and marketing costs. And of course, we will be looking at further ways across the company to reduce costs and improve productivity so we can bring as much of our revenues as possible as income to our bottom line. It is a focused effort for Vuzix and as Grant just said, we have the resources we need to execute on our plans going forward. With that said, I would like to now turn the call back over to the operator for Q&A.

Thank you. [Operator Instructions] And our first question comes from the line of Matt VanVliet with BTIG. Please proceed.

Good afternoon. Thanks for taking the question. I guess first, what gives you confidence that some of the larger orders that you were anticipating that sort of failed to come through this quarter will be coming through in the next one to two quarters, as you mentioned, and maybe not even longer beyond that or outright making a cancellation or decision to move away from the technology?

Yeah, there were two categories, Matt, of orders that got delayed. Let's talk about the product side of the business first, because there's really three categories of order books get filled at Vuzix. We've got the channel business that we're building right now. And building that business, it's not just as simple as, you know, you got a new guy and you bring them on board. It takes work to vet and make sure that you've got folks that are compatible with the music, that understand the markets that we're trying to sell into and can support them well. And between doing that vetting and getting the negotiations done on bringing those folks on board, it just slipped into the next quarter. We have other folks that we're bringing on here in the fourth quarter and that has not been impacted. It's just taken a little bit longer for those channel partners to come on board for us. And then there's the direct sales. And the one category that is really the front end of seeing a lot of growth, which was in our expectations for Q3, revolves around the whole supply chain marketplace. There are more than a handful of companies that are in that box that just like they've been doing for some time now sliding sideways a bit that said there's three or four of them which represent significant business opportunity for Vuzix. Literally, it just was a function of this excuse or that excuse revolving around things like new systems that got installed, or they took a smaller order because they're not going to roll out quite as fast because part of what's going on in the world right now is they want to make sure that they're not screwing up their revenue streams. But there…

All right, helpful. And then Grant, when you look at the cost reduction steps that you've taken, how much of those are headcount reduction versus just pulling back on discretionary spend and maybe any level of magnitude, at least on the structural cost reduction that you're going through?

Well, our goal, as Paul said, was to overall achieve about a 20% reduction. So if you look at our op-ex and we'd expect to see a 20% reduction that could be implemented by the middle of next year. As far as, you know, discretionary versus people, I mean, I think there's probably going to be more discretionary stuff. We're going to adjust and tweak rather than, you know, necessarily headcount. We've got a good team here and we want to keep some of the great people we have. I mean, we're going to look at, you know, as I said, none stuff we do that's not differentiating or not necessarily proprietary and push it up to some other third parties. So we can still keep active moving ahead without having to make the commitments of hiring more people. As we said, we do have an absolute headcount freeze going on right now. The only exceptions might be in production to respond to a needed demand. But, you know, we think we got good opportunities to reduce costs and our future products are spending even more time to improve the gross margins going forward on future generations. And competitive business, we're all in, so we're going to do our best to win.

Okay. Thanks for taking the questions.

No problem, Matt. Thanks for asking.

Thank you. Ladies and gentlemen, there are no further questions at this time. Actually -- our next question actually comes from the line of Christian Schwab with Craig-Hallum. Please proceed.

Hey, guys. So Just on the decision to make the OpEx reduction at this time, listening to the prepared comments, it seems like there's a tremendous amount of opportunity in front of you between different customers and many different applications. I mean how are you going to satisfy those markets with a reduced workforce?

There's a balance there, Christian, on where those cost savings are coming from. And I will admit, there will be changes in some of the workforce, but as Grant mentioned, it's related to things like where you might get work done, et cetera. We've got what we need to be able to deliver. Quite frankly, Vuzix has got a great infrastructure to deliver way beyond even what the current run rates are. So our production capacities, our sales teams, as you can see, there's a shift in how our sales are starting to operate with bringing the channel partners on board the way that we are. So yeah we've got the right infrastructure right now. And in fact, we could even lower some of the infrastructure that we have right now, bring it more aligned and still deliver very, very well for the customer base.

And part of it will also have an increased focus. We might try to do a few less things simultaneously than we might have had in the past. We know what's working and we're going to focus and we're not going to frankly just chase every opportunity if we feel that market isn't ready to mature as fast as some of the other markets we see as opportunities.

And Christian, there's some natural things that are happening. Our investments in things like the new waveguide facility, it's just not goning be anywhere near the amount of money in 24 that went in in 23, because that facility's up and it's operational. We don't need to spend further in that regard. In 2024, the amount of dollars that needs to go into the micro LED development efforts is a fraction of where we have been in the past. So there's a lot of reductions that are coming just out of those kinds of things also.

Okay, I guess, you know, following up on the answer there, I guess it wasn't clear to me, given the broad set of opportunities then. So if we're narrowing our focus and not trying to be all things to all people, what should investors focus on? What is the one or two applications or one or two customer segments that you anticipate to drive revenue growth in calendar '24. I understand the OEM push-outs. I'm not talking about that. I'm talking about, you know, where the smart glasses are going to be used to drive revenue growth?

In healthcare, yep, in healthcare. In healthcare, in remote support applications, in warehousing, and finally there's a new category that's coming on board that is part of this AI world, where there's a handful of companies that are using our glasses to help with hearing impaired. And so it's a medical device that's a replacement for hearing aids and the like, and for people who need sign language kinds of support. And it's a big marketplace. Just in the veterans of the world in America, there are 3.5 half million folks that have hearing impairment problems. And these glasses work way better than hearing aids for people that have bad enough, severe enough hearing impairments. So the medical side of our business is happening all over the place with the companies like [Pixie] (ph)and Proximie and Roger Cones and the likes the business is it just keeps going and it's exciting and then the warehouse inside of the business we have a large number of companies that are going beyond pilots now. They are deploying. It's just, you know, it's taking a little bit longer as usual, which is frustrating in that side of the space. But you'll see it there. So those are the three or four areas that we're focused on right now to make it happen.

Great. Thank you for that. No other questions.

I will add, Christian, just because you asked, on the side of the OEM business, defense, aviation, wireless carriers, glasses companies, and then finally the broader markets. And this one is so much easier to address for Vuzix because it's lots of inbound. You know, very few trade shows are needed. People know that we're doing this now. It's outreach that can be done direct. So it's a very inexpensive marketing and sales side of the business to address those markets.

Great, thanks.

You bet.

Thank you. Ladies and gentlemen, there are no further questions. I'd like to turn the call back to Paul Travers for closing remarks.

I would like to thank everyone for your interest and participation on today's calls. There's going to be a lot of exciting developments and news in the coming months. Between now and the first quarter of next year, there's often lots of things. There's a pile, a slew more that are going on around things like our OEM business and some of our select partners that we're going to be able to share much more with. So please stay tuned. It should be an exciting month and a half to let's say three or four months. Thank you. Have a good evening everybody.

This concludes today's conference. You may disconnect your lines at this time. Thank you for your participation.