Greetings, and welcome to the Vuzix First Quarter ending March 31, 2023 Financial Results and Business Update Conference Call. At this time, all participants are in a listen-only mode. A brief question-and-answer session will follow the formal presentation. [Operator Instructions]. As a reminder, this call is being recorded. Now, I would like to turn the call over to Ed McGregor, Director of Investor Relations at Vuzix. Mr. McGregor, you may begin.

Welcome to Vuzix's first quarter and 2023 ending March 31 financial results and business update conference call. With us today are Vuzix's CEO, Paul Travers; and our CFO, Grant Russell. Before I turn the call over to Paul, I would like to remind you that on this call, management's prepared remarks may contain forward-looking statements, which are subject to risks and uncertainties, and management may make additional forward-looking statements during the question-and-answer session. Therefore, the company claims the protection of the Safe Harbor for forward-looking statements that are contained in the Private Securities Litigation Reform Act of 1995. Actual results could differ materially from those contemplated by any forward-looking statements as a result of certain factors, including, but not limited to, general economic and business conditions, competitive factors, changes in business strategy or development plans, the ability to attract and retain qualified personnel as well as changes in 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. Vuzix 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 in the company's Form 10-Q filing at sec.gov, which is also available at www.vuzix.com. I'll now turn the call over to Vuzix CEO, Paul Travers, who will give an overview of the company's operating results and business outlook. Paul will then turn the call over to Grant Russell, Vuzix's 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. Paul?

Thank you, Ed. 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 quote 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…

As Ed mentioned, the 10-Q we filed this afternoon with the SEC offers a detailed explanation of our quarterly financials. So I'm just going to provide you with a bit of color on some of the numbers now. Our first quarter total revenues for the three months ended March 31, 2023 was 4.2 million as compared to 2.5 million for the prior 2022 period, an overall increase of 67%. 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 waveguide 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 and 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 31, 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 31, 2023, unchanged versus the comparable period in 2022. Sales and marketing expenses for the three months ended March 31, 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 31, 2023 was 5.1 million, a decrease of 6% versus 5.5 million in the prior year period. The decline was…

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 15, and will be held in person this year. We will have an open house and we'll be providing tours of some portions of our amazing new facilities. We look forward to seeing everyone here at the Vuzix's West Henrietta site. With that, I would like to turn the call back over to the operator for Q&A.

Thank you. We will now be conducting a question-and-answer session. [Operator Instructions]. First question is coming from the line of Matt VanVliet with BTIG. Please proceed with your questions.

Good afternoon. Thanks for taking the question. Paul, you've mentioned a number of I guess transportation or 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 can help us characterize sort of where in the process or 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?

Sure, Matt. First of all, there's a bunch of them in the logistics space. We mentioned three companies that we work with that are ISV, the TeamViewer folks, Ox and LogistiVIEW. And they all have programs, in some cases multiple companies that are starting to roll out. These are not -- maybe they're going to do a rollout of 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 that we talked about. And we'll say still in Q1 and even in Q2 we won't see a significant impact from these. In the latter half of the year, it's going to be a 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 rollout faster, although the faster they can do, the better for us. There's no doubt about that. But to give you maybe a quantified number, it's I would say hundreds of shifts thus far, and it will start to go into the thousands as we get into the fall of the year.

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, maybe things in the pipeline that haven't received any substantial orders yet, just trying to gauge how capacity constrained might you be in the short term, which obviously would be sort of a good thing in general, but might limit future bigger orders that could possibly come in?

In 2024, we should be at a run rate of around 1 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 there's things that we're doing with some of these high performance waveguides on the defense side and the likes 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 delving these upgrades, we would not be able to meet the capacity requirements in next year, for sure. Our Ultralite 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 grow 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, smart phone kinds of [ph] quantities these smart glasses. And when you finally solve this problem of that sexy looking feel glasses that people will actually wear, it changes everything. And so 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.

And then just one quick --

Sorry. That was it.

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 our gross margin trajectory as the new capacity is coming online later this year and into '24? And how much of that is sort of an upfront investment that we should contemplate having more of a return later on then?

Well, most of the investment is upfront. 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, it's not going to be huge for us, and we will staff accordingly. So we're trying to keep the capacity capability as variable as possible. So it's not going to 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.

Thank you. Our next question is coming from the line of Jim McIlree with Dawson James. Please proceed with your questions.

Yes. 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?

No. Sort of what we're spending on the new facility, which 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 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 margin 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 is breakeven.

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 [indiscernible] you might have on the defense side of the work?

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 U.S. military. If there are -- 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 gotten them designed into the gizmos. And so that's why I tried to explain that by this fall/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 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 it's just the nature of the beast here. Sometimes it's quick and sometimes it takes more time to get the designs finished.

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?

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, quite frankly, it's almost just like they got to turn the crank on the couple of these milestones. So 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.

Okay, very good. Thank you. That's it for me.

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.

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 around relationships right on through the revenue streams and margin growth, et cetera. So it's exciting times at Vuzix. Thanks again for listening in. I hope folks can make it to our annual shareholders meeting. We 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.

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.