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spk04: Greetings and welcome to the BUSICS first quarter ending March 31st, 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. If anyone wants to require operator assistance during the call, please press star zero on your telephone keypad. As a reminder, this call is being recorded. Now, I would like to turn the call over to Ed McGregor, Director of Investment Relations at BUSICS Mr. McGregor, you may begin.
spk00: Welcome to the VUSIC's first quarter and 2023 ending March 31st financial results and business update conference call. With us today are VUSIC 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 legal and regulatory requirements. In addition, any projections as to the company's future performance represent management's estimates as of today, May 10, 2023. EZICS 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 directly 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 will 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 first quarter financial results. Paul will then return to make some closing remarks, after which we'll move on to the Q&A session. Thank you, Ed.
spk01: Hello everyone. And welcome to the Vuzix Q1 2023 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. 2023 is off to a strong start. Our Q1 revenue driven entirely by record product sales and specifically sales of our smart glasses was $4.2 million, an increase of 67% compared to the previous year and up 44% sequentially. We had record unit sales of our flagship M400 smart glasses, mainly to support our independent software vendors and the expansion of global sales channels. Our customer channel, which I will expand upon shortly, is focused on widening our distribution network with integrators and partners that are adept at solution selling. We did not realize any engineering services sales in Q1, which was solely a function of project milestones and timing. and not a sign of demand for our OEM components and products as we move from the sales process of responding to quotes, requests, and ultimately receiving purchase orders from our customers. This is an exciting new business for Vuzix in very large markets that generate billions of dollars in revenues annually. I'll explain more on this shortly. The investments we've made to streamline our operational and sales structure, expand our product breadth and competitiveness, and advance our IP and technology over the last several years are beginning to pay dividends and will increasingly continue to do so into the future as we have invested in a strong foundation for Vuzix to build upon. As a result, we remain bullish on our full year prospects for 2023 and believe we are well positioned and should continue to achieve overall record revenues for the full year. As our business expands, our revenue generating opportunities are continuing to grow with it. Never before in our history has Vuzix had so many paths before it to drive stronger top line growth. What we are now seeing, upon which I'll expand shortly, includes significant smart glasses deployments in warehousing and logistics, expanding opportunities in healthcare from existing ISVs and multiple new customers, further engagements with blue chip customers early in their deployment cycles, further expansion of our sales channels in specific regions, increased SAS revenue from our movient acquisition, additional and larger engineering engagements from defense firms, short-term paths to production with multiple defense and enterprise firms, expectations of signing multiple new non-defense agreements by OEM and white label firms, and development of contracts and initial deployments of ultralight platform-based products. Our focus going forward will be to successfully monetize all of these opportunities and leverage our relationships to generate long-term sales and recurring programs related to smart glasses, SAS solutions, and OEM components and products. Now I'd like to get into some detail on what we are seeing on the product side, then move on to our OEM efforts and finish with a discussion of the technologies and developments that will drive our future success and growth in both. Achieving record smart glasses sales this quarter post the COVID pandemic is significant. Two years ago, we saw an influx of new business coming from companies that were desperate for remote video and collaboration-based solutions, primarily driven by COVID. If you fast forward to today in the current environment, we're witnessing the underlying smart glasses industry grow as companies get more and more engaged and focused on solving long-term operational challenges with smart glasses-based solutions to get them there. The use of augmented reality in business, medical, defense organizations, and ultimately by consumers represents the wave of the future as entities around the world are realigning their future strategies around AI, AR glasses, and the combination of both. The expected ubiquitous use of AI across applications in areas such as education, e-commerce, healthcare, communications, defense, security, and more. It's just amazing. but it fits hand to glove with AR smart glasses. Some simple examples include visual search, language translation, voice control, the list goes on and on. And this marriage of technologies will accelerate the need for use cases for lightweight wearable displays. Logistics, healthcare, and manufacturing are three market verticals that continue to expand and represent significant potential business for Vuzix, our ISVs, and our ecosystem partners. Google's recent decision to step away from the enterprise smart glasses market presents an opportunity for Vuzix to capture additional market share. We are already in discussions with a number of prior Google Glass Enterprise adopters to convert them over to Vuzix smart glasses as they continue their transformation journey. The underlying trend towards enterprise-wide rollouts from numerous key Fortune 100 accounts is a very exciting development for Vuzix and the enterprise smart glasses industry in general. industry awareness of smart glasses and enterprise continues to grow. And although the move to smart glasses is slower than we would like, there is no doubt that customers are now committing to deploying smart glasses based solutions across their company. And as a result, we are bullish about the growth of our enterprise business in 2023. Working with our leading ISVs like TeamViewer, LogistaView and Ox in the logistics and warehousing spaces, Vuzix has significant accounts that have indicated that they will be rolling out our smart glasses in a major way this year. And in fact, in many cases have already started. We're seeing sizable deals across all regions, including the US, Latin America, Japan, Europe, and Asia. Vuzix smart glasses are being used to enhance productivity across enterprise in a multitude of environments and configurations. Whether it's healthcare, where we have customers deploying with the Vuzix Blade, M400, and M4000 as their go-to devices of choice, to warehousing and logistics in Industry 4.0. Our newest announced win in the healthcare space was with Proximi. Their PX lens product, based on the Vuzix M4000, allows users to collaborate live on procedures and share surgical content from anywhere. as well as securely record and store procedural videos to let surgeons build a library of their own content to review and share, as well as analyze operating room practices to improve on patient safety and productivity. Our smart glasses product family now offers a standardized Android 11 operating system for the Vuzix Blade, M400, and M4000, and the Vuzix Shields. The advancement to Android 11 enables a variety of key benefits, including increased security, improved user experience, easier integration with a variety of third-party mobile device management software packages, and enablement of advanced Android features within third-party apps. On the software side, Moviance SaaS solution, which was developed in a close collaboration with a very large aerospace and defense customer, is currently deployed in numerous warehousing locations across the US, Europe, and Canada. Feedback from this customer remains very positive, and we expect additional sites to be converted to the Moviant solution beginning as early as Q2. We see this as a significant market opportunity to support traditional warehousing hardware, and our plan is to introduce Music Smart Glasses as an upgrade for hands-free picking into these environments. Moviant's solution has already proven to be very sticky for end customers, and we're focused on expanding our existing customer footprint and bringing on additional customers in select markets and niches. We're also continuing to advance the underlying software platform, which will enable Vuzix over time to broaden our go-to-market strategy for customers and ISVs within the warehousing and logistics market verticals. We continue to expand our global sales channel with a focus on solution selling to best service and support the end customers. Expanding our global channel is important for our long-term growth as it allows Vuzix as a company to effectively multiply our sales team with minimal investment in core regions across the globe. We're targeting mature companies that have an established ecosystem and integrators, ISVs, and end customers. Recent engagements with value-added distributors have included MACE Virtual Labs, which services the US, and Tabara Electronics, which services the Middle East and Northern Africa. Over the last 12 months, Vuzix developed and implemented a sales channel portal that brings us closer to our channel partners to share product information, marketing materials, and more. The implementation of our sales channel portal alongside our efforts to streamline our operations with the recent opening and establishment of new offices and corporate entities in Germany and Japan are helping improve sales and customer support in these areas and also help to reduce overall costs. Germany and Japan are two examples of country that are geographically situated to address significant local and regional market opportunities, which not only increase Muzik's ability to better serve our customers and partners, but also show our commitment to these strategic growing markets. We believe these structural enhancements will allow us to provide local staffing, a stronger regional presence, enhance our localized knowledge, and result in higher customer confidence and sell-through into these and other regional markets. The formalization of our OEM design and manufacturing group in 2022 helped streamline our OEM efforts to respond to requests for inputs and formal requests for quotes. For our waveguide-based solutions, and in most cases, display engines to go with them. It is interesting to note that it takes very specialized skills to design and manufacture waveguide optics and the display engines that go with them, and there are very few companies that have in-house staff with the knowledge to do it. There are very few giant companies that are investing billions of dollars to try to bring this capability in-house, but most companies are not able nor willing to bring it in-house. This is why our OEM business is being received with such open arms. Vuzix can spin a new design in three to four months, while the few competitors out there take 18 months for a new design, if they would even entertain trying to meet the customer's requirements at all. We have done hundreds of designs, while the competitors can only support the one or two that they are currently trying to ship. The fact is, in this business, one size does not fit all. And our fast turn and years of experience is unrivaled in the industry. And it is opening doors for Vuzix in many very large industries. The total addressable market for Vuzix OEM group is extensive and currently consists of multiple very large market segments. Vuzix is primarily focused on solutions for the defense, commercial aviation, enterprise, and the broader AR consumer markets. The defense head-mounted display markets today consists mainly of night vision devices and head-mounted information displays. The night vision device market alone is estimated to reach a value of 8.1 billion in 2027, according to Strataview research. According to markets and markets, the head-mounted display market is expected to reach 6.4 billion by 2027, not including the potential success of the US Army's IVAS program, which has a $22 billion IDIQ contract that is on hold for its potential deployment. Specifically for Vuzix, we now have over 10 major customers in defense that have been or are developing our waveguides into their head-mounted display programs. Some are full custom waveguides and engines, while others will employ our standard waveguide and display engine offerings. We anticipate several of these defense accounts to begin full-scale production by the end of this year and going into the first half of 2024. The potential revenue from these companies for Vuzix could amount to hundreds of millions of dollars for several specific programs and tens of millions for other smaller opportunities. We clearly have to go win the business, but the business looks like it will be fantastic for Vuzix when we do. And these represent a fraction of the overall multibillion-dollar market potential. Waveguides and display engines are needed for all kinds of applications around information access in the field and are becoming critical whether it is in the form of AR computing or night vision systems. Access to the right information at the right time wins the day. Key to the success for these defense OEM programs is our ability to produce waveguides in volume out of our U.S. manufacturing facility here in the greater Rochester, New York area. These new facilities have the ability to produce both small and large format waveguides, waveguides that are 10 times larger than that needed for AR glasses, meaning we can now manufacture waveguides to support not only head-mounted displays, but also large format head-up displays for use in ground vehicles to aircraft cockpits, just like the heads-up display in the windshield of a luxury car. According to a Markets and Markets Industry Report, the market size for commercial head-up displays, including aviation, is anticipated to grow to $6.4 billion by 2027, up from a current $2.4 billion in 2022, growing at a compounded annual growth rate of 21%. Major players such as BAE Systems, Elbet Systems, Honeywell Aerospace, Rockwell Collins, and Talus Group are currently selling large complex aviation heads-up displays for well into the six-figure range per aircraft. Factors such as increasing awareness about passenger and vehicle safety are driving the growth of the market during the forecasted period. Vuzix has just started to approach this market and with our new manufacturing capabilities we already have companies reaching out to work with us. Our waveguides and micro-LED display engines taken together can offer a significant reduction in the needed space and cost to implement the heads-up display within the precious little space available inside the aircraft. According to AR Insider, quote, the entire SMART augmented reality glasses market revenue is projected to grow to $17.7 billion by 2025, a 61.8% compounded annual growth rate Specifically, enterprise is expected to grow to 1.87 million units by 2025. Consumer AR glasses will trail enterprise in early years, but will pull ahead in later years. Why is this? The consumer AR market barriers will alleviate over time through improving standards and specs for consumer grade smart glasses around size, weight, style, et cetera, unquote. In fact, We feel Vuzix Ultralight Platform is the first AR glasses solution that solves for these critical issues, along with the most important basic requirement of delivering the number one issue, and that is the need for prescriptions for the 64% of users that need glasses just to see. Vuzix has IP around prescription-based waveguides, and based on our research and ongoing discussions with eyeglass brands, we will believe we'll be able to drop our prescription-based waveguides right into their current supply chains for prescriptions. The Ultralight platform was announced about four months ago. And because it is utilizing the latest micro-LED technology and waveguides from Vuzix, the form factor is the first smart glasses form factor that appeals to the broader markets. Because of this, we already have an array of potential customers lining up from multiple consumer market areas including the fashion glasses industry. And I have to say, in the 26 years I've been doing this, I have never seen that industry salute smart glasses until now. The sporting goods industry, the wireless phone industry, the entertainment and gaming industry, and more. The customers in these markets are talking tens to hundreds of thousands of devices to address what they see as their market needs. Vuzix Ultralight platform will start production by the end of this year and should be going to market with multiple well-known brands through 2024. I would like to now take a few minutes to share some details on the intellectual property position Vuzix has built over the years. First, we feel that our current market capitalization does not fully reflect the vast amount of intellectual property we have created in a market that is touted by industry experts to be in the trillions of dollars within a decade. I would like to help frame this better for everyone And let's start with our patents. The Vuzix patent portfolio currently includes 308 patents and patents pending. This breaks down to 173 issued patents and 135 pending applications. Our portfolio covers a broad range of technologies, including several applications directed to different designs for Vuzix eyewear products, including designs related to the Vuzix Blade, the Vuzix Shield, the Vuzix M400 and the 4000, and Smart Swim, as well as designs related to the Vuzix Ultralight OEM platform. The heart of the portfolio stems from our vast collection of waveguide design patents and applications, making up roughly one third of the portfolio. Traditionally, multiple waveguides are needed within a display to achieve multiple colors. A number of our patents and patents pending are directed to designing the diffractive optics of a wave guide to allow for multiple colors within a single wave guide or a reduced number of wave guides. The compact designs that we have developed allow significant weight reduction of the overall system while maintaining color performance, allowing Vuzix to lead the industry with lightweight fashion forward eyewear products. We have also focused on designs that reduce crosstalk between color channels within a single wave guide and allow for more compact solutions that offer more pupil expansion and fit in tighter spaces. We have several applications and patents directed to optical coupling mechanisms, example prisms, that allow us to fold projectors into places and positions virtual images in space without compromising our design intents. Several patents are directed to our fixed focus technology that allows us to change focal distances of virtual objects without the addition of extra push-pull optics around the waveguide to position the virtual image in space. This again allows for the work to be done without adding more heavy and expensive optics. We also have patents and pending applications directed to methods for building better waveguides. Example, making them flatter and more parallel than is possible with other methods that improves resolution or sharpness of the virtual image, and methods for making waveguides that utilize diffractive optics on the top and bottom surfaces of the same waveguide. We also have patents that leverage different multiprojector solutions and ways of layering gradings across multiple parts of a waveguide stack to create larger fields of view. On a system level, we have applications that are directed to expanding our prescription capabilities beyond a simple insert and providing some customization in the form factor and fit of a pair of fashion-forward smart glasses. Some of our latest filings include methodologies for incorporating complex, stronger scripts in the same compact space so the waveguide becomes part of a fully custom pair of glasses. and some designs incorporating replaceable components including custom lenses and custom nose bridge designs. Zuzix also has a large trade secret war chest we have built. We have a combination of both patents and trade secrets regarding nano imprinting, process equipment and materials like polymers, adhesion, promoters and release agents. I can't share a lot in this regard as these trade secrets are critical for how we can produce in volume and at low cost. I hope you can understand, but we just can't share how our Coca-Cola is made. Add to this our patents and trade secrets regarding replication and double-sided formats, and Vuzix is the complete package. Finally, our core patents are layered atop the original core Nokia patents in this space. These patents range from stacking to wide field of view to 2D grading arrangements for compact designs. And of course, our agreements can flow through to our OEM customers providing access to these basic protections. Bottom line, we feel Vuzix has the best intellectual property position of any other company in this critical area of the AR glasses space. Clearly, waveguides and micro LED displays are essential components for lightweight AR smart glasses and other wearables, and our ability to design and fabricate waveguides in high volume and at low cost is second to none. From specification, to design, to mold production, to replication, to test and system integration, we do it all in-house in our New York facility. We can customize a ground-up system based on specifications, offer a reference design, or provide design parameters so we can build to print based on a customer's own waveguide layout. We can make them small or large, and we can turn a design around quickly. Our expertise and capabilities in this area are unmatched. in our opinion, substantially undervalued relative to our current market capitalization. And we're going to push and leverage these advantages as hard as we can. The significant advancements in our core technology we are making behind closed doors to our waveguide manufacturing processes will fortify Vuzix's position to play a critical role in an industry that should ultimately represent many billions of dollars of revenue annually. Our wave guide manufacturing expansion is being implemented in our recently released facility, which provides an additional 12,000 square foot of manufacturing space adjacent to our existing plant. This new facility is designed to support our latest wave guide technologies, increase our unit capacity, and significantly lower the unit cost to manufacture our wave guides for ourselves and our OEM customers. The new facilities will also focus on the advancement of higher index materials, advanced glass substrates, and unique formulation technologies. We expect optical component waveguides and parts to be coming out of this facility during the second half of 2023. In the meantime, our current facility continues to meet the needs of this growing part of our business. The ability to produce RGB micro LEDs on a single substrate that still have high efficiency color remains incredibly difficult. However, there have been varying degrees of success to date by some, but just barely to an acceptable level, and no one is shipping anything that's full color yet. Because they are so strategic and fit hand to glove with the optical waveguides, we will feel it is critical to secure the supply of cost-effective, high-volume fabrication of these devices. To that end, we have fortified our microLED efforts by establishing working relationships with several of the most advanced vendors in this space through both partnerships and investments, many of which we will not publicize for competitive reasons. Of course, our highest profile development in this area is the agreement we signed with Atomistic roughly one year ago. While we have been short on specifics today, I can say that Atomistic, with its very novel approach, is making great progress. The design process takes time, And portions of the fabrication process will use very complex and customized equipment that had to be designed from the ground up. We'll have more to share with you once all this unfolds. But suffice to say, Atomistics technology has great potential to create incredibly advanced, full-color, high-efficiency micro-LED displays, displays that have the potential to upend the entire smart glasses industry, and quite frankly, the display industry in general, with full-color, exceptionally bright in all-day battery performance to be incorporated in a fashion-forward smart glasses form factor that everyone will wear. I'd like to now pass the call over to Grant for his financial review. Grant?
spk05: As Ed mentioned, the 10Q 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 and some of the numbers now. Our first quarter, Total revenues for the three months ended March 31st, 2023 was 4.2 million as compared to 2.5 million for the prior 2022 period, an overall increase of 67%. The revenue increase was solely the result of higher product sales as we did not realize any engineering services revenue in Q1. Please note, we have remaining performance obligations of just under 0.2 million on a current wave guy development project which we expect to complete and recognize as revenue in q2 of 2023 product sales were primarily driven by record unit sales of our m400 smart glasses partially offset by higher average sales discounts due to larger volume reseller sales as compared to those in the same period of 2022 there was an overall gross profit of 0.9 million or 21% for the three months ended March 31st, 2023, as compared to a gross profit of 0.5 million or 19% for the same period in 2022. The improvement was due to our increased sales, which resulted in further manufacturing overheads absorption. R&D expense was 3.1 million for the three months ended March 31st, 2023, unchanged versus the comparable period in 2022. Sales and marketing expenses for the three months ended March 31st, 2023 was $2.5 million as compared to $2 million for the 2022 period, an increase of 26%, largely due to increases in staff compensation expenses due to headcount increases. General and administrative expenses for the three months ended March 31st, 2023 was $5.1 million, a decrease of 6% versus $5.5 million in the prior year's period. The decline was largely due to a decrease in non-cash stock compensation expense related to our 2021 performance-based long-term incentive plan. Depreciation and amortization more than tripled to $1 million for the three-month ended March 31st, 2023 versus the prior year's period. The bulk of the increase was due to the amortization of the technology license with Atomistic, which was not in place in Q1 of 2022. The net loss for the three months ended March 31st, 2023 was $10.2 million or $0.16 per share versus the net loss of $10.5 million or $0.16 per share for the same period in 2022. Now for some balance sheet highlights. Our balance sheet remains strong with cash and cash equivalents of $63.2 million as of March 31st, 2023 and a net working capital position of $67 million. The overall net cash flows used in operating activities after the net changes in operating assets and liabilities was $4.2 million for Q1 2023 versus $6.4 million in the comparable 2022 period. Improvements included a $1 million decrease in inventories and vendor prepayments and a $0.6 million reduction in accounts receivable. Cash used for investing activities for the first quarter of 2023 was $4.7 million as compared to $0.2 million in the prior year's period as we made further investments of $2.3 million in our waveguide expansion project and made a $2 million payment towards our atomistic technology licensing fee commitment. As of March 31st, 2023, the company continues to have no current or long-term debt obligations outstanding other than the currently outstanding license fee commitments to Adamistic. Looking forward to the balance of 2023 and 2024. We are confident that we have the resources to execute on our growth business plan and further invest in our future. With that, I would like to turn the call back over to Paul.
spk01: Thanks, Grant. As a public company, we are well aware of the importance of growth, profitability, and positive cash flow as key drivers of a stock's market valuation. As our revenues continue to grow, our line of sight to achieving profitable operations get clearer and nearer. We expect the pace of our growth in the coming months and quarters will continue, and with it, our operating cash runway will get longer, and of course, our path to profitability will get shorter. It is a focused effort for Vuzix, and as Grant just said, we have all the resources we need to execute our plans going forward. Finally, the Vuzix annual shareholder meeting is on June 15th and will be held in person this year. We will have an open house and will be providing tours of some portions of our amazing new facilities. We look forward to seeing everyone here at the Vuzix West Henrietta site. With that, I would like to turn the call back over to the operator for Q&A.
spk04: Thank you. We will now be conducting a question and answer session. If you would like to ask a question, please press star one on your telephone keypad. A confirmation tone will indicate your line is in the question queue. You may press star two to remove your question from the queue. For participants using speaker equipment, it may be necessary to pick up your handset before pressing the star keys. One moment, please, while we poll for your questions. first questions come from the line of Matt VanVleet with BTIG. Please proceed with your questions.
spk02: Yeah, good afternoon. Thanks for taking the question. Paul, you've mentioned a number of, I guess, transportation and logistics and warehousing deals that have been signed over the last year or two, and a lot of those projects being in early stage and now reaching more of a mainstream deployment. But curious if you could help us characterize sort of where in the process or, you know, of the overall scope of a number of those projects, how many of the units have been shipped to date? And just give us kind of a sense of how far along we are, at least in the initial contract terms.
spk01: Sure, Matt. First of all, there's a bunch of them in the logistics space. We mentioned three companies that we work with, the ISV, the TeamViewer folks, Ox, and Logistiview, and They all have programs with, in some cases, multiple companies that are starting to roll out. These are not maybe they're going to do a rollout. At least two or three of these, they are rolling out, physically filling up distribution centers, and they're part of the base and the growing base of our growing revenues program. that we talk about. And we'll say still in Q1 and even in Q2, you won't see a significant impact from these. In the latter half of the year, it's going to be the really much more steeper part of the rollout with these guys. Our second quarter is looking great. We don't need those guys to necessarily roll out faster, although the faster they do, the better for us. There's no doubt about that. But to give you maybe a quantified number, I would say hundreds have shipped thus far, and it'll start to go into the thousands as we get into the fall of the year.
spk02: Okay, very helpful. And I guess bringing a lot more production capacity online, how much at this point is sort of earmarked for a number of the projects sort of already under contract or in some capacity sort of already negotiated versus looking at opportunities ahead Um, maybe things in the pipeline that haven't, uh, received any, uh, substantial orders yet. Just, just trying to gauge, you know, how, how capacity constraint might you be in the short term, which obviously would be sort of a good thing in general, but, uh, might limit, uh, future bigger orders that, that could possibly come in.
spk01: Um, in 2024, we should be at a run rate of around a million unit capacity for the year, kind of a thing out of the new facility. Let me say that the new facility does more for us than just capacity, Matt, though. You know, there's things that we're doing with some of these high-performance wave guides and the defense side and the like that need higher index materials and a bunch of other things that would be boring for you to hear, but there's a whole bunch of things this new facility brings us. I can also say that some of the broader market opportunities that we have, without this facility having these upgrades, we would not be able to meet the capacity requirements in next year for sure. I mean, our ultralight starts shipping before the end of this year. We're talking to some very large partners in this regard that they just don't do these things unless there's volume and their expectations are pretty significant. And our plant will be busy in 2024 delivering to it. This facility has the ability to grow. We can rent the entire facility. We have options for it as our business grows. and increases our intentions are to expand, to address the market as they go even further. This is the beginnings of the tip of an iceberg, Matt. The broader markets are literally, it's going to sell in cell phone, smartphone kinds of quantities, these smart glasses. When you finally solve this problem of that sexy look and feel, glasses that people will actually wear, it changes everything. We're in an okay spot right now. We're going to be, I think, under the pressure next year, but we'll have enough in capacity, but then we're going to have to look at expanding again as the business unfolds, which is great.
spk02: And then just one quick question.
spk01: Yeah, I'm sorry. That was it.
spk02: All right. Thank you. And then, Grant, just maybe a modeling question on sort of the extra capacity and the cost side of things. At current volume levels, or at least committed current volumes, maybe through the second or third quarter, how are we looking at a gross margin trajectory as the new capacity is coming online later this year and into 2024? And how much of that is sort of an upfront investment that we should contemplate having more of a return later on then?
spk06: Well, most of the investment is up front. As I pointed out, we spent a little over $2.3 million, I think, in Q1, and we got some more to go. But it's mainly CapEx as far as operating costs. I mean, it's not going to be huge for us, and we will staff it accordingly. So we're trying to keep the capacity –
spk01: capabilities as variable as possible so it's not going to be have a material impact on our ongoing operating costs i will say the good part of our volumes picking up is that as they do the cost to manufacture per unit goes down because the overheads get kind of spread out over the unit volumes and you should see margins get better and better through the year because of that all right great thank you
spk04: Thank you. Our next questions come from the line of Jim McElroy with Dawson James. Please proceed with your questions.
spk03: Yeah, thank you and good evening. Paul, in your commentary, maybe I'm just imagining this, but it sounded like you would need to increase expenses for some of these initiatives. Did I hear that correctly or am I just making that up?
spk01: No, sort of. What we're spending on the new facility, which, I mean, we're very clear on what that is, I think. No. The engineering programs, OEM programs, if they're customized, Jim, they're paying to play. So, you know, it doesn't come out of our pocket. It's engineering fees that our partners pay. Once they're in production, they're in production. And on the defense side of this stuff, our margins are wonderful. to Matt's earlier question, those programs actually met great margins for Vuzix. And it's not costing us more. Our team that we have here right now is all we need to be very effective at executing to, I believe, to get to the point to where Vuzix doesn't break even.
spk03: All right, thank you. I think I just confused something that you were saying. Thank you on that. And on the defense side, I'm still a little bit confused on the – not necessarily the timing, but on where you are with your – I'm assuming you're working with multiple partners on multiple bids. Have these relationships been formalized? Are you exclusive on some of these bids that are out there? Are you – displacing somebody? I'm just trying to understand a little bit better the teaming you might have on the defense side of the work.
spk01: Really, it's a great question, Jim. And in some cases, we are replacing alternatives that are in the market. And those alternatives are coming from sources that aren't necessarily the best sources when you're in the US military. Some Asian sources just are not the best place to be buying things that need to go to the U.S. military, as you might imagine. So in those cases, it's replacement. In other cases, we don't necessarily have a stated exclusivity, but I'm telling you, it takes so much time and energy to get to the point where you can deliver the waveguides we can make that it's not like people have options. They really don't. So they're coming to Vuzix because we are the de facto standard. As far as how far along we are, in some cases, Jim, these guys are using our in-house versions of wide field of view optics and engines that we've built. And they've already got them designed into the gizmos. And so that's why I tried to explain that by this fall slash towards the end of this year, we have several of these defense-based programs that we anticipate will be going into production. We have one in an enterprise mode that also we feel will be going into production. This year, in the fourth quarter, you should start to see revenue that's on the OEM side of the fence that is production product. And, of course, it should accelerate nicely into 2024. There are other programs that they've got a longer runway. They could be a couple, three years out. But, you know, it's just the nature of the beast here. Sometimes it's quick and sometimes it takes more time to get the designs finished.
spk03: Great. That's helpful. Thank you. And my last one is on Atomistic, can you update us on any milestones that they have hit? And have there been any milestones where they have not delivered at the expected time?
spk01: I don't know how to gauge against the expected time. I'd rather not touch that one. I will say that milestone notwithstanding, these folks are making some amazing progress that I personally think is ahead of schedule in some ways. In other ways, you know, quite frankly, it's almost just like they've got to turn the crank on a couple of these milestones. So, you know, I would suggest, Jim, that there are milestones that they've already hit in some cases. So it's a bit of a mixed mode answer there. I will say it's darn exciting, and I really wish I could share more, but they're making great progress.
spk03: Okay. Very good. Thank you. That's it for me.
spk04: Thank you. We have reached the end of our question and answer session. I'd now like to turn the call back over to Paul Travers for any final remarks.
spk01: Everybody, again, thank you very much for listening in. We look forward to a phenomenal Q2. I think it's going to be more exciting than our Q1 was, and the back half of this year is going to be even more exciting than that. We're on a great track this year. It would be great to unfold some of the announcements we have on our relationships right on through the revenue streams and margin growth, et cetera. So it's exciting times of music. Thanks again for listening in. I hope folks can make it to our annual shareholders meeting. We've got some really cool stuff to share, and I think a nice agenda of discussions that we'll be sharing at the same time. Thanks, everybody, and have a great evening.
spk04: Thank you. That does conclude today's teleconference. We appreciate your participation. You may disconnect your lines at this time. Enjoy the rest of your day.
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