Paul Travers
Thank you, Ed, and thank you to everyone joining us today. It has just been a couple of short months since our last formal update, but a lot continues to be happening at Vuzix and the smart glasses markets overall. Vuzix and the entire industry are gaining further commercial momentum as it begins to enter a new phase, driven by further OEM and enterprise smart glasses engagements.
Our vision and investments are translating into further commercial traction, and at the same time, the broader tech industry is amplifying its focus on developing and delivering AI-powered smart glasses, signaling that the race to bring these products at scale to the larger markets is very much underway.
In our OEM business, we are actively engaged with a growing number of OEM and OEM partners, spanning enterprise, defense, and consumer-oriented segments. Indeed, 2025 has thus far been marked by important developments for Vuzix that span relationships, technologies and solutions, each of which I will touch upon. Collectively, we feel these developments and the large market opportunities they represent are putting the company on a path to significant and sustained revenue growth.
From a broader industry perspective, we are witnessing announcements of large-scale strategic investments being made by leading OEMs and semiconductor firms in our country, which underscore a concerted effort to deepen economic ties with the United States, enhance supply chain resilience, and navigate the evolving global trade landscape.
With Vuzix being a US based manufacturer, we believe this shift within the supply chain may provide strategic opportunities for Vuzix to further bolster and expand our brand and global presence within the waveguide and AI-driven smart glasses market. On that note, our collaboration with Quanta continues to expand, with ongoing development around previously announced smart glasses, OEM, and OEM reference platforms, along with several additional new programs that are also in motion.
These joint efforts will combine Quanta's world-class manufacturing and global OEM reach with Vuzix's advanced waveguides, display engines, and smart glasses architecture. Together, we are building a strong foundation to enable and participate with our waveguides in the mass production of AR-enabled wearables at scale and at reasonable price points needed for mass adoption.
Over the last eight months, the Vuzix team has been in lockstep with Quanta to drive strategic initiatives together, and we are aligned towards unlocking the much larger opportunities to support the broader markets. Vuzix has made tremendous progress towards achieving the milestones required to receive the remaining two investment tranches from Quanta, which would provide a further $10 million in growth capital.
Not surprisingly, our smart glasses market presence, design experience, and most importantly, our proprietary, low-cost, scalable waveguide manufacturing ability are being recognized by a growing number of leading ODMs. A major development late in Q1 was our acquisition of a state-of-the-art waveguide R&D and tooling facility in Milpitas, California.
Previously operated by one of the largest global tech firms, this facility will serve as a new hub for waveguide and tool development and rapid prototyping. It can also handle highly custom small batch manufacturing needs if required by our customers.
This acquisition was highly strategic for its location, technological advancement, and financial efficiency. The facility is already in operation, which resulted in practically zero startup costs. The total cost of acquisition and expected incremental operational costs for the first year is in the low seven figures, a remarkable value given the equipment and capabilities we acquired.
The facility anchors our presence in Silicon Valley and strengthens our ability to support customers there that need rapid, secure, high-quality waveguide solutions to bring their smart glasses offerings into commercial production. A recent collaboration with Fraunhofer IPMS on a high-performance CMOS micro-LED backplane was engineered to meet the specialized needs of select Vuzix customers. Early working samples have confirmed the design's promise for next-generation display applications.
Supporting 1080p-plus resolution, the backplane accommodates both monochrome and full-color micron-sized micro-LED arrays. This effort has been co-developed by Vuzix, Fraunhofer, and a third party with specific use cases in mind. As a result, this cutting-edge backplane is tailored for high-end enterprise and defense applications where performance, precision, and customization are essential.
It is also capable of driving our new large-format waveguides, which can be used for a variety of specialized see-through display systems. Vuzix offers an expanding family of smart glasses reference designs, including the Ultralite Pro and Ultralite Audio, introduced at CES 2025. And also, of course, our industry-leading Ultralite, weighing less than 38 grams and having over two days of runtime on a single charge.
These new AI-driven smart glass designs offer a range of features, from the lightest weight, lowest power smart glasses ever built, to advanced functionalities such as voice-activated commands, real-time photo and video capture, and the immersive AR experiences. And at the core of each is Vuzix's state-of-the-art waveguide technology. And behind closed doors, Vuzix remains methodical in our current spending and investment in the future with several new unannounced products slated for later release this year in 2025, each designed to meet the evolving needs of select enterprise, defense, and OEM customers.
These new offerings build on our core strengths in waveguide optics and AI-enhanced wearable computing while integrating customer feedback, performance breakthroughs, and platform flexibility. We are seeing continuing OEM interest and engagement from waveguide supply to full white-labeled solutions, notably, we just announced a design win with a six-figure initial order for waveguides related to smart thermal AR glasses being developed by a European OEM customer. This product merges visible and infrared light through a see-through head-up display, offering transformative capabilities for firefighters, inspection, and search and rescue use cases.
Vuzix is actively building our part of the deliverables and the customer expects volume production of their smart glasses to begin in the fall of 2025, led by one of the world's largest contract ODM electronics manufacturers. To reiterate, we have been selling into this customer product for production. This is a design win for the company that is going into production.
As a reminder, on the DOD front, we have multiple major programs in the works with prime contractors. The waveguide-based solutions we have developed have gone through multiple iterations beyond proof of concept and are being actively shown to the select final defense customers they were intended for. To reiterate, we fully expect at least a couple of these programs to start production rollouts in 2025.
We received our largest reorder to date from XanderGlasses, a private label product for captioning the spoken word in real time to assist the hearing-impaired. Unlike other such wearables, XanderGlasses are 100% self-contained, designed for ease of use, operate with a simple on and off function, and do not require a smartphone or cloud connectivity. Our Z100 smart glasses platform is also actively supporting the hearing-impaired space.
TranscribeGlass, who is reselling our Z100 Smart Glasses, has been placing a monthly cadence of reorders with their transcription software and under their own brand name. Another white label partner, Mentra Labs, is supporting seeding Z100 to support developers and end users. Mentra's AugmentOS Smart Glasses operating system brings a suite of critical smart glasses AI agents and apps to Vuzix's Ultralite platform.
Using AugmentOS's SDK, developers can make apps like an AI tour guide, super memory tools, Chessmaster helper, face recognition, name memory, Shazam, speech coach, live captioning, translation, and much more easily come to life. These are all tangible examples of how Vuzix smart glasses are beginning to deliver life-changing solutions to smart glasses adopters on a daily basis, solutions that are game-changing because of their non-invasive delivery of information and assistance through the use of Vuzix smart glasses, information that is practically impossible to deliver through most any other wearable or handheld device.
Turning to the enterprise market. In Mexico, Nadro, one of the country's largest pharmaceutical distributors, continues to scale and now has over 500 Vuzix M400 Smart Glasses deployed across 14 of its warehouses of air.
Through our partner, Acuraflow, and TeamViewer's frontline software, Nadro is realizing over 30% improvements in order picking efficiency and dramatic reductions in training time. These are real numbers that translate into bottom-line savings and faster workflows. Our enterprise customers are increasingly seeking smart glasses solutions help, and that's where Moviynt's Mobilium software platform comes in.
Moviynt has accelerated the expansion of our enterprise solutions beyond traditional logistics by enhancing its Moviynt software to deliver comprehensive workflow efficiencies. Initial implementations are already showing remarkable operational gains with productivity improvements of up to 250% in certain warehouse applications, highlighting our leadership position in AI-enhanced enterprise solutions.
One such Moviynt win recently announced was with Airbus Helicopters, who has committed to a broad rollout of their platform along with the Vuzix's M400 Smart Glasses across its North American operations after a successful pilot over the last years, using our devices hands-free on the assembly line and in logistics.
We are also progressing with other notable Moviynt -driven engagements, which we look forward to announcing in due course, as well as working with software solution providers that can address specific customers' needs.
Augmex, a one-stop-shop solutions provider for increasing productivity with smart glasses, recently placed a follow-on $500,000 reorder for M400s. Augmex bundles their robust software solutions with Vuzix smart glasses products for key supply chain customers in the United Kingdom and across Europe and expects its demand for our smart glasses to grow by an order of magnitude over the next several years.
Indicative of our growing pipeline of opportunities, we expect our enterprise business will be more characterized by hardware and software solution bundles that are based on customer feedback and more tailored to meet specific cost, performance, and functionality needs.
To wrap up, our OEM waveguide business is scaling. Our enterprise deployments are delivering results. Our strategic footprint is expanding. Our strategic relationship with Quanta is in great shape and growing. The AR smart glasses industry is realigning around practical AI-driven use cases, and as mentioned earlier, we have several new unannounced products slated for release later in 2025, each designed to meet the evolving needs of select enterprise defense and OEM customers.
And with that, I'll turn the call over to Grant for the financial overview. Grant?
Grant Russell
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 quarterly numbers. Our first quarter 2025 total revenue was $1.6 million, down 21% year-over-year due to decreased sales of smart glasses, particularly our M400, but up 24% sequentially from the prior quarter. Engineering services were $0.3 million for the three-month end of March 31, 2025, versus $0.2 million in the prior year's period, an increase of 47%.
And we are continuing to see increased interest and activity in our custom waveguide development capabilities. There was an overall gross loss of $0.3 million for the three-month end of March 31, 2025, as compared to a gross loss of $0.1 million for the same period in 2024. While our direct product costs of sales only remain flat year-over-year, manufacturing overhead costs unapplied increased both as a percentage of total product sales and in absolute dollar terms.
The increase in the net dollar amount of these unapplied overhead costs was primarily driven by a planned further decrease in actual production levels during the first quarter 2025 compared to the same period in 2024, as we feel we have sufficient finished goods on hand to meet currently expected demand. Of course, we anticipate we can successfully turn the bulk of our current finished goods inventory into cash before those new model introductions occur, as well as supporting existing M400 deployment programs with our customers beyond that date.
And while our gross margins are expected to improve incrementally as we work through the remaining inventory and prior obsolescent provisions, continuing tariff policy changes may make that difficult in the short and long term as we adjust our supply and manufacturing chain. Research and development expense of $2.6 million for the three-month end of March 31, 2025, compared to $2.7 million for the comparable 2024 period, a decrease of approximately 5%.
Reduction in R&D expense was largely due to a $0.5 million decrease in salary and benefits-related expenses, partially offset by a $0.3 million increase in external development costs on new products. Sales and marketing expense was $1.5 million for the three-month end of March 31, 2025, as compared to $2.2 million in the same 2024 quarterly period, a decrease of approximately 31%. The reduction in sales and marketing expense was largely due to a $0.4 million decrease in salary and benefits-related expenses, driven by a headcount and cash salary decreases in exchange for equity compensation, a decrease of $0.2 million in advertising and trade show expenses, and a $0.1 million decrease in external contractor expenses.
General and administrative expenses for the three-month end of March 31, 2025, was $4 million versus $4.1 million for the comparable period in 2024, a decrease of approximately 3%. The net loss for the three-month end of March 31, 2025, was $8.6 million, or $0.11 per share, versus a net loss of $10 million, or $0.16 per share, for the same period in 2024. Now for some balance sheet and cash flow highlights. Our cash and cash equivalence position as of March 31, 2025, was $15.2 million, and our networking capital position was $19.5 million. When the quarter ended March 31, 2025, the net cash flows used for operating activities was just $3.5 million, as compared to $8.8 million in the prior year's period.
This is a material improvement post our many cost reductions implemented in 2024. Cash used for investing activities for the first quarter of 2025 was $8.8 million versus $1.2 million in the prior year's period. This investing level will continue for the balance of 2025. As Paul mentioned, we believe we are also on track to meet the performance milestones required for the second and third Quanta investment tranches, which should bring in an additional $10 million of capital. Once that funding is received by Vuzix a portion of those investment proceeds are expected to be allocated to further expanding our waveguide manufacturing capabilities to meet expected demand growth and as a result overall investment activity rates would increase.
As of March 31, 2025, the company continues to have no current or long-term debt obligations outstanding. Let me close by reiterating that we believe our overall cash position, along with maintaining a disciplined cost structure, further conversions of our finished goods into cash and general business expansion, particularly on the ODM OEM side and the achievement of any expected funding by Quanta of tranches two and three, gives us sufficient runway to execute on our current operating plan well into 2026.
With that, I would like to turn the call over to the operator for Q&A.
Operator
(Operator Instructions) Christian Schwab with Craig-Hallum. Please proceed with your question.
Great. Thanks for taking my question. I'm sorry I missed it. How much of the $9 million M400 inventory do you still have on hand?
Grant Russell
It's the bulk of our inventory at the end of the quarter, which was a little over $4 million. But we've written off, there's probably provisions against that of close to $5 million. So in actual fact, we've got about $9 million of product, $5 million we've fully provided for. But right now we're selling our finished goods and that's down to $4.2 million approximately at the end of March.
Great. Thank you for that clarity. And then on the last conference call, you talked quite a bit about optimism regarding multiple product design partnerships with Quanta that could begin to pick up in the second half of 2025 and ship more materially in '26, a couple months ago. So is there any update on your comfort and enthusiasm regarding that?
Paul Travers
It's not less. It's every bit as enthusiastic, Christian. It has only been a couple of months, but things are moving forward great guns right now. The relationship with Quanta and Vuzix is very good, first of all, and it helps. And they have an amazing team of people over there. And there's like we said before, there's multiple programs, at least two of which should be rolling before the end of this year.
Great. And then regarding the two tranches that are left with Quanta and certain performance milestones, is that something that you would expect both tranches by the end of this calendar year '25 or how do you see that playing out currently?
Paul Travers
Yes. It should not be until the end of 2025. We are ahead of schedule by all rights. In fact, our friends were here just this last week for multiple days, crossing T's and I's around it. It feels really good, Christian. We're in a good spot and we can hit yield rates and run rates right in the zone. In fact, better than what the requirements are.
Great. No other questions. Thanks, guys.
Paul Travers
You're welcome, Christian.
Operator
Thank you. And with that, I would like to turn the call back to Paul Travers for further remarks.
Paul Travers
We did get a few other questions and I thought a bunch of them actually were answered, I think, through the conference call today. But I thought a few of these would be good to elaborate on just a bit. And one of them was the competitiveness of our waveguides in the competitive environment.
And yes, there's lots of people talking waveguides out there these days. So to answer that, 100% correct. There are a bunch of companies out there that make waveguides. Well, a handful. Most of them, in fact, all of them, for the most part, are incredibly expensive. And, or, if you asked for 1,000 or 2,000 waveguides for your production runs next week, you wouldn't get them for months. Because they don't have processes yet that can run the volumes and that have scaled.
Literally, in the last week, Vuzix has run thousands of waveguides through our plant floor. And they're all yielding amazingly high. So today, you can come to Vuzix and say, I want 5,000 waveguides. And in short order, Vuzix could manufacture those waveguides for you. One. Number two, because of the way we scale and the processes that we develop, it's quite inexpensive for us to manufacture these waveguides. Now, that doesn't mean we're giving them away. It means we can sell them for some decent margin.
Competitors are companies that do things like they stack prisms together. And it can be as much as 400 steps. And maybe you can make that yield. But all those steps cost money. And there is material loss along the way. And so, in the end, besides being very difficult to change that waveguide design into an industrial design, it's very, very expensive to manufacture the parts. We're talking hundreds of dollars of cost. But you need two, if you think about it, for a waveguide. So that's like $400 just for waveguides to go into a pair of smart glasses.
It is cost-prohibitive for the volume markets. There are other companies that use semiconductor process equipment to do this. And the way they do that is they start with a wafer, just like a semiconductor, excuse me, silicon wafer, 300-millimeter circle, typically. And you process this thing, and you can get 12 waveguides out. And it takes hours to get those 12 waveguides out. If you came to our plant floor, you'd see it's kind of like the chocolate factory where we just pound them out.
It's quite amazing. And that story goes on with a couple of other companies that manufacture and are trying to manufacture waveguides and or get partners to do it in volume. But let me add to that. We have feature capabilities in our glasses which stand apart from the competition. We enable this thing called incognito, where there's very little, if any, forward light when you're wearing the glasses. One of the problems with glasses today, if you look at HoloLens, I recommend everybody go and do a search for HoloLens images on the web, and you will see every single person you look at looks like a zombie.
Because where you normally would see people's eyes, you see a glow coming out the front of the glasses. We can get rid of that glow. Another incredibly important feature for the capability of waveguides in order to be accepted in the mass market. If you walk into a nice evening having fun at the bar, and you put your glasses on, and you look like you're wearing these glasses that glow like you just stepped off the Starship Enterprise, you might not get out of there alive even, let alone you'll get picked on quite a bit.
So it's not socially acceptable. Features like that, features like integrated prescriptions, these are things that we offer along with fast turn design. We are a one-stop shop that can deliver some of the best waveguides at the best price on the planet today. So there's a lot of things that allow us to stand apart. It's why people like Quanta and other ODMs are starting to come to us. And so we do have a lot of advantages compared to many of the competitors today.
Another question was regarding the facilities, the new facilities that we have. These facilities were designed to make state-of-the-art nano-features in quartz materials. And I'm sorry it's going to sound all techie and everything, but in order to make decent waveguides, you need to make tools to produce those waveguides on. And the better you can make those tools, the sharper you can make the cuts in the quartz, the more controlled you can control the depths with, etcetera., the better the tools perform and the more precise the feature sets can be.
And this equipment is state-of-the-art. It's brand new. It's probably been run for a grand total of six months. It took 18 months just to get installed. The other cool thing is this stuff is installed and operational. It's not like Vuzix has to go and then move this equipment and somehow get it installed and run all these extra gases because these are etching tools that are reactive etching tools that require special gases. And all that stuff is done. It's a beautiful facility. It's available for our customers around the world today, including ODMs like Quanta that we work with. And it will allow us to build some of the best performing tool sets to run on our custom manufacturing equipment here in Rochester, New York. So there's a lot of great big advantages that we're getting out of this. And it was a very inexpensive acquisition, as I had said earlier on the call.
Yeah, I think there was another question related to our products in general and how they compete and how AI is changing the game there. We did talk about AugmentOS. That's one example. The reality of it is smart glasses, when they first started, people thought this is going to be a better way to have Excel spreadsheets and Word documents. And they were going to put them up around their monitor and stuff. That's not what these glasses are about. They're about connecting digital information to the real world.
And when you can enable AI to help you do that, it's contextual aware because of the intelligence of the vision systems in the glasses and what AI can see and connect you to. So imagine you're a Boeing technician and you're putting doors on and you forgot to put the bolts on the doors. The glasses know that. The AI engine that's running, and you'll see some press releases coming with some other companies that we're working with that show this. You have the glasses on. It watches every single thing that you're doing.
It helps you write the reports just with a voice. Can you please start building the reports for the assemblies that we went through today? And by the way, can you record this so we can use it to train others in the process? All of that's AI-driven, and it makes the glasses absolutely game changing. There is no other way to do this. You can't hold up a phone and do it. This whole sorting in facilities 250% faster is because AI engines supporting the use of the glasses to make that all come together.
It's taken a long time, but when you put all that stuff together, it starts to make applications that are so compelling, it's really hard to turn your back on them. And that's why we feel so confident in our enterprise side of our business, but also in the core OEM side of our business, because it's those applications and that kind of capability that's really going to drive the performance and the need for these glasses.
With that, I want to thank everybody once again for joining us today. We look forward to speaking with you again in August for our Q2 update. There should be a lot that we share between now and the end of this year. It's going to be an exciting 2025. And again, thank you very much for the continued support of users. Have a nice evening, everybody.
Operator
Thank you. And with that, this does conclude today's teleconference. We thank you for your participation. You may disconnect your lines at this time.
