Vuzix Corporation (VUZI) Earnings Call Transcript & Summary

Greetings, and welcome to the special meeting regarding Vuzix's special update regarding Vuzix's new collaboration with Atomistic SAS of France. [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.

Good afternoon, everyone, and welcome to the special meeting regarding Vuzix and Atomistic SAS. With us today are Vuzix' CEO, Paul Travers; our CFO, Grant Russell; and our COO, Pete Jameson. Before I turn this 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, May 18, 2022. Vuzix assumes no obligation to update these projections in the future as market conditions change. I will now turn the call over to Vuzix CEO, Paul Travers, who will give an overview of the Atomistic transaction, after which we will move on to a Q&A session. Paul?

Thank you, Ed. Hello, everyone, and welcome to this special update regarding Vuzix's new collaboration with Atomistic SAS of France. We are holding a call to discuss this development, which is expected to become one of the most significant in our company's history, and we would like to share in a bit more detail regarding both the rationale for it and the opportunity it creates for us. Vuzix announced this afternoon that it has signed a series of agreements with Atomistic, a France-based developer with a novel approach related to the development of next-generation micro light-emitting diodes and micro laser display solutions. I will refer to these both as micro LEDs going forward. These agreements involve the exclusive licensing of key micro LED technology, the design and tooling of a custom backplane and dependent upon achievement of various technical stages, the full acquisition of Atomistic. Atomistic has led to novel material science innovations with specific attributes that are key enablers to solving industry-wide challenges for microLED devices. The successful commercialization of Atomistic innovations will result in one of the smallest, highest performance and lowest power display solutions on the market, a core micro LED display technology that we believe could become the cornerstone electrooptical solution for the augmented reality in heads-up display markets, which are expected to ultimately see annual unit demand solar into the hundreds of millions of units. MicroLED displays are unlike any other type of micro display on the market. We have seen the numerous acquisitions made in the micro LED space over the past few years as major firms try to establish a foothold in this market. Many of these microLED acquisitions were for hundreds of millions of dollars and at least one recently was for more than $1 billion. There are good reasons why acquiring companies are assigning tremendous value for these early-stage companies. A microLED display is self illuminating, incredibly bright and as the name implies, its pixels are micron-sized. Because the pixels are so small, a completed high-definition, full-color microLED display can be built measuring less than 0.25 inches on the diagonal and 1 millimeter thin with pixels so small they cannot be discerned by the human eye. A tiny display like this built into a small projection engine literally the size of a pencil eraser is perfect to function with the waveguide designed for AR glasses because waveguides are built around the principle of tiny video inputs that get expanded into a large window or iBox that the user looks through. This is called Pupil expansion. As it happens, the thinner the wave guide gets, the smaller the input to the waveguide and the smaller the display can be. This opens up the door to something similar to Moore's Law, but for optical display systems that is waveguides and micro-LED display engines for AR glasses. The smaller the pixel, the smaller the display, the thinner the wave guide as well, at all scales towards ever smaller, ergonomically optimized solutions. The optical version of Moore's Law for microLED and waveguides runs counter to that for conventional displays and optics, where larger fields of view acquire larger optics and larger displays. Most AR glasses solutions today are using incumbent microdisplay technologies like LCOS and DLP for lack of a better choice. This path requires bulky large-sized LEDs designed into an illumination engine that is again bulky at best, not allowing for an acceptable form factor for the consumer. And self-emitting display options like OLED on silicon simply cannot deliver the required brightness by several orders of magnitude, in fact, for day-to-day live use cases. Other solutions have their own set of similar problems. Incumbent display and optics solutions simply do not have a path to the broader markets. Now let's look at a few bigger picture reasons as to why microLED solutions will outperform the incumbents. In terms of size, the incumbent display engine volume is approximately 4 centimeters square for a 720p engine versus the micro LED engines volume of as small as approximately 0.3 centimeter square. This is an order of magnitude smaller in size, over 10x and can easily disappear in the temple of a fashion forward paired Smart Glasses. The incumbents front-lit technology will just never get there. Power is another critical requirement for AR Smart Glasses and the incumbents display technologies have fundamental issues with reducing their power consumption. To start, every pixel is always like for the incumbent microdisplays. Even if all the display needs to do is turn on 20 pixels to make an arrow pointed to the right, every pixel is on and the light is thrown away, allowing just those 20 pixels to ultimately shine through. The microLED only likes the needed pixels at the time they are needed. For this reason and a pile of others, the incumbents consume as much as 100x the power of a micro LED solution especially as it relates to the content that might be being displayed. The incumbent display engines are complex and loaded with optical components to eliminate the display and hence, are inherently expensive versus the microLED, which has a minimal number of optical elements and a simple carrier making it much smaller and much less expensive. For these reasons and many others, it is the microLED working with waveguides that is going to be the display of choice for mass-market adoption of AR smart glasses and to bring the metaverse into the real world. That said, for microLED to be truly successful, improvements are needed in efficiency, light extraction, driving compensation, monolithic color design with RGB on a single backplane and so on. And most importantly, these devices need to be manufactured both very cost effectively at scale. Producing microLED displays to achieve these requirements is fraught with challenges, and no company currently has thus far come close. Solving and delivering solutions for these problems is what Atomistic is all about. We are confident that Atomistic's technology and capability are the industry's best chance to address all the current challenges. In addition, and while we continue to work closely with our current partners, we feel it's critical to ultimately control our own destiny in this important technology area. There are effectively 2 components to a microLED display. The microLEDs themselves and a back plan to drive the microLEDs and receive the video streams from industry standard interfaces. Again, Atomistic has developed a novel approach to solving the fundamental challenges associated with the micro LEDs. Their key enablers include emitters for red, blue and green spectral wavelengths based on a single epitaxial structure, transferred to a CMOS back plant, high brightness capabilities and industry-leading efficiency at small pixel pitches. Once fabricated, the microLEDs then need to be transferred onto a silicon back plane, and the Atomistic team are experts at delivering on the design and implementation of state-of-the-art back planes. The Atomistic team, along with system-level support from Vuzix will be commercializing a backplane on advanced node 300-millimeter wafers intended to support microLEDs based upon its innovative material science as well as alternative microLEDs from potential third-party suppliers. Atomistic's approach is optimally designed to solve the critical issues that challenge the microLED display industry today. For the wearable display AR glasses market specifically, Atomistic's micro LED displays, coupled with Vuzix see-through waveguides will be pivotal to developing fashion-forward ergonomic consumer-facing AR glasses that feature a consumer-friendly industrial design that any leading brand could put their name on. The combination of Atomistic displays and Vuzix 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 of the broader AR wearables market. Markets expected to ultimately become as large as the current smartphone market. As many of you may already know, numerous tech CEOs and market pundits anticipate that AR smart glasses will become the de facto mobile computing platform of the future. In the summer of 2007, Steve Jobs sent an e-mail to the CEO of Corning thanking him for Corning's efforts. He said, Wendell, we would not be where we are today without you and your team's amazing help. The smartphone industry needed Corning's Gorilla Glass because without it, there would not be a smartphone. Micro LEDs, coupled with waveguides look to be the analogous case for consumer-facing AR smart glasses. As most of you already know, Vuzix designs and manufacturers wave guides in-house. We have developed significant IP and know-how and are capable of state-of-the-art production, including high-volume production at broad market price points, which we are currently expanding on, high index materials for larger fields review and color performance, technology that enables unique designs solving for features like minimal forward light or eye glow, color uniformity, high efficiency and more. Any AR display for the broader market needs to work hand to glove with the waveguide and needs to have all of the following features plus high brightness, high efficiency, self emitting, high resolution, very small physical size, LEDs matched Aton Du with the waveguide, RGB wavelength color matching, monolithic and full color RGB built directly on to the back plane, all with low cost and high volume production. MicroLEDs are simply the best and only way to get there, we feel. And having the ability to supply a tightly coupled micro LED waveguide solution and high volume at a competitive price point will put Vuzix in a strong position to become one of the world's leading suppliers in this broader space. Atomistic was established for the sole purpose of delivering next-generation micro LEDs and micro lasers based on the novel material science innovations and the system-level integration of advanced node CMOS backplanes of its own design. Its principal founders, Jonathan Sachs and Jerry Woodall, both PhDs, our well-known experts in the field of material science, the compound semiconductor heterojunction, along with other compound semiconductor devices, LEDs, lasers and micro displays on silicon back planes using various modulating techniques. Both have successfully developed and patented significant and cornerstone advancements in this technology space. Dr. Sachs has a broad knowledge of semiconductor materials and their application to high temperature and high-speed electronics, optoelectronics, electrical and optical properties of materials, LEDs, lasers device physics and design of CMOS integrated circuits. Over the last 25 years, he founded and has driven numerous semiconductor and display-based technology companies whose technology today is used by leading companies in the field. Dr. Woodall has had a pioneering role on the research and development on compound semiconductor materials and devices over a career spanning for decades. In 2001, Dr. Woodall received the National Medal of Technology and Innovation, the nation's highest honor for technological achievement granted by the President of the United States. He has been cited for the invention and development of technologically and commercially important compound semiconductor, heterojunction materials, processes and related devices such as red and infrared LEDs, lasers, ultrafast transistors and solar cells. He was one of the pioneers of the liquid phase epitaxial growth of high-efficiency infrared LEDs, which led to his most important research contribution so far, the first working gallium aluminum arsenide, gallium arsenide heterojunction. The interface between 2 semiconductor materials which, among other devices, is the core technology and power amplifiers for mobile telephones. This remains one of the world's most important compound semiconductor heterojunctions. We have all witnessed the phenomenal technological progress of the mobile phone, and what today we call the smartphone, over the past 30 years, it was the compound semiconductor heterojunction that Dr. Woodall was a pioneer of that allowed the power amplifier in it to shrink massively in size and increase in performance. Thus very same heterojunction bipolar transistor that is in more than 1 billion devices sold into the market each year. This same technology was also the key enabler to high efficiency in high-powered LEDs and lasers that we all experience in our everyday lives for traffic lights, lighting for our homes, facial recognition on our smartphones and the list goes on. While LEDs for these applications have reached remarkable levels of performance, AR glasses for the metaverse place yet more demanding requirements on the miniaturized microLED devices that will drive this next generation of electronics. The industry at large expects over the coming years for AR Smart Glasses to offer increasing capabilities over today's smartphones, eventually replacing them to become the most important electronics device in the market. And given their track record, we expect the materials science technology of Atomistic to be cornerstone to enabling the continued growth of the AR glasses markets. I would like to now take just a few moments to summarize the transaction itself. For complete details on this transaction and its related agreements, interested parties can look at the 8-K the company filed today with the SEC and links from our IR website. Vuzix has entered into multiple agreements with Atomistic and its 2 founders. Vuzix is initially being granted an exclusive royalty-free license to all intellectual property wherever existing, of Atomistic along with the custom design and delivery, of a mask set and other elements required for production of a state-of-the-art backplane in exchange for committed payments totaling $30 million over the next 24 months. Vuzix also entered into a stock purchase agreement with Atomistic and its 2 founders, under which Vuzix will purchase shares of Atomistic Series B preferred shares based on the achievement of certain milestones by Atomistic. There are a total of 7 performance-based milestones expected to be achieved over the next 24 to 36 months. In total, for the 7 milestones that and if Vuzix's reasonable judgment has been achieved, Vuzix will issue 1,750,000 shares of Vuzix's common stock and $2.5 million in cash in exchange for 25,250 Atomistic Series B preferred stock. These share issuances by Vuzix are subject to a valuation floor and ceiling of $8 to $13 on per share of Vuzix's common stock on NASDAQ. At the time when the Atomistic preferred shares are purchased. This will result depending on Vuzix's share price at the time of the issuance of a minimum of 1,750,000 shares to a maximum of 2,843,750 common shares of Vuzix. These Series B preferred shares that Vuzix acquirers will automatically convert into shares of Series A convertible preferred shares upon their purchase by Vuzix. After all the purchases of Atomistic preferred shares upon achievement of the 7 performance-based milestones, Vuzix will automatically acquire by way of their conversion into common 99.87% ownership of Atomistic. Once Vuzix reaches this level of ownership, it has a call option on the remaining outstanding shares. We are thrilled to be partnering with these 2 revolutionary visionaries in their newly formed Atomistic entity, and we look forward to supporting their efforts to change the world with the holy grail of microdisplays that will ultimately be coupled with our industry-leading waveguides. As you can see, this deal has been structured primarily on the issuance of Vuzix equity. The developed solutions will be used in Vuzix's own products and these micro LED and back plane components will be offered globally to third-party OEMs for use in their glasses. 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 Matt Van Viet with BTIG.

Maybe, first, just curious in terms of has there been any sort of co-development of kind of market-ready products between the 2 companies prior to this deal? And if not, what are the expectations to have the microLEDs fully integrated with Vuzix's waveguides into a commercially ready device or any kind of projects that we can think about getting to market and what kind of timing might be around that?

So as you know, Matt, Vuzix already has some microLED technology that we integrate with our Vuzix field. And beyond doubt, microLEDs are amazing, how would they work with our waveguides, so that proof point is already there. I can tell you there, these guys have been working on this for a while. There's already proof points that the technology works effectively. It's pretty much put it together and build it kind of a thing. And that's what this project is all about primarily. It's just getting the backplane built, getting the LEDs put on it and bringing it to market. So proof points on microLEDs is amazing that actually you all may saw our Vuzix Shield. We talked about that on our last conference call. It is the best implementation, the clearest, crisps solution they've seen and the reason why is because of the microLEDs.

Okay. And then last week, you mentioned that you'd probably be providing an update in terms of some major OEM potential across the business relatively soon. I guess, one, is this a big part of that as you look forward to other use cases of both the Waveguide and now an integrated micro LED? Or do you have other potential updates for more of a waveguide exclusive type of deal that maybe is on the horizon as well?

Vuzix has significant amount of inbound OEM partner relationships that we're building now. You will hear about them, Matt, with names even, knock on wood, between now and potentially our annual shareholders' meeting even. And that inbound just keeps growing. As we mentioned on our last call, we put together a team now at Vuzix that are responsible for this platform for OEM support. The microLED piece of it is only going to strengthen that. Especially with things like on the defense side of our business at first, the defense is looking for desperately better solutions around how you package these things, how much power consumption they draw. There's no lack of enthusiasm in the U.S. defense markets for display technology and for waveguides with display. And the broader markets, this is -- it's going to be a no-brainer math. This is the first time the world knows that something like this could even potentially exist. And I am confident that Vuzix will be pretty busy answering phone calls and stuff, even over the next couple of weeks as some of these other partners that we're working with more.

All right. And then lastly, Grant, if you're available, just curious in terms of what any additional operating expenses we should expect to be associated maybe in the near term of just working on the integration and productization of the 2? Or over time as this is presumably an integrated part and full acquisition, how we should think about the cost structure going forward?

I mean, internally at Vuzix, our operating costs are certainly not going to go up in the short term, and we'll be paying investing in atomistic complete the commercialization of the tax. So -- the -- we do not -- we hope to account for -- the bulk of it is investment in technology and the company. So it shouldn't have a, we hope, a direct impact on our short-term P&L. But it's something we've agreed to funding. And Paul -- as Paul pointed out, the bulk or at least a sizable chunk of the value is going to shares to the principles of Atomistic. So all the funds are being directly invested in equipment and other elements. So we'll know a little more when we our next Q, we'll have our first financial integration of this investment.

Our next question comes from Jim McIlree with Dawson James.

So when they get to manufacturing, do you have financial obligations at that point? Or at that point, you would essentially be owners of the company and you would have to figure out manufacturing. So I have 2 questions then. So is there a financial obligation? And then secondly, if there isn't, where would manufacturing be done?

So yes, very good question, Jim. It's interesting to a point a fact. There is -- Vuzix is putting $30 million into the solution, the creation of this thing. And for that, we're getting the pieces and parts of Atomistic, which I could let Pete here just give in more detail that might be good to have him to do before this is all said and done. So the $30 million is going into what will be something in the end that should be something we can go into production with what got built. So we're out of the gates, once that's done, and maybe a bit more just to kind of clean things up in the end, it's -- we're in production. Now there's no doubt that to go into significant high volumes. There is more money that could get spent to crank it up, but we won't need to. We will be in production with pretty decent volume capabilities right when that is done. And there is -- the only other obligation -- I have to be careful how I say this, but these gentlemen are going to be getting stock for hitting certain milestones along the way as they build this thing. And that's the incentive that Vuzix is paying to make sure these guys are aligned with what we're doing. And it's the reason why they're doing it with Vuzix. I mean they have a choice, there's probably other places that could have gone, but at Vuzix, they can build an empire not just join one. So we're super excited about that upside. The value proposition, like I said, other companies that are in this industry, the microLED industry that don't have any black plans today that only have the potential to possibly put 3 colors on a single back plane that still has all kinds of other problems. $1.2 billion later in an acquisition. So this is worth a lot for Vuzix and well worth every piece of the relationship that we're building with Atomistic.

That's helpful. And so Paul, just to clarify, so the manufacturing would be done at outsourced facilities at Atomistic facilities, at the Vuzix facilities, at some combination of that?

Yes. It's actually a combination of a couple of things. There's -- and quite frankly, there's a few vendors that we haven't completely selected just yet. But you might imagine the backplane being done at some 300-millimeter advanced node processing manufacturing facility like a TSMC or some such. When the back plane is done, it needs to get integrated with this microLED stuff epitaxi. And that gets done at a facility that's part of what we're doing with Atomistic. So it's Atomistic facility.

Got it. That's great. And then my last one is, are you protected on additional capital raises that Atomistic might do? Do you have rights of participation on any future raises that they might need? Or do you have a blocker or can you just talk a little bit about that?

Yes, I'm going to let Pete answer that one for you.

Yes. So essentially, our -- there's 2 elements to the series of agreements. One is the license agreement, which gives us exclusivity in the space. that comes along with us being in the sole position, take access and utilize that technology. And then the second part of that has to do with the a series of milestones where we would purchase Series B stock, which ultimately, at the end of the milestones, converts into common and we would essentially own the majority of the common stock and on control over the company. So we're in a very good position as it relates to the control of the technology as long as we maintain our exclusive relationship.

And effectively, Jim, that gives us a blocker. They cannot go to outside funding sources without our permission.

Thank you. I'll now hand the floor back to Paul Travers for final remarks.

Well, everybody, thank you very much for taking the time. Kind of mid-stride here with Vuzix, we normally don't have the sort of impromptu events. I'll just repeat, this technology is going to be game-changing. It's coming from gentlemen who have more than once, completely influenced enterprise operations and in particular, around LEDs and the smartphone industry. It's state-of-the-art. And without a doubt, in Vuzix's mind, it's going to drive this industry into the future. We're very lucky and super excited to be doing this with Atomistic, and really look forward to bringing this home. Thanks, everybody, and have a great evening.

Thank you. This concludes today's conference. All parties may disconnect. Have a good evening.