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*Stock Advisor returns as of August 12, 2024

This afternoon, the company issued a press release announcing its 2Q 2024 financial results and filed its 10-Q with the SEC. So, participants in this call who may not have already done so may wish to look at those documents as the company will only provide a summary of the results discussed on today's call. Today's call may include certain non-GAAP financial measures. When required, reconciliation to the most directly comparable financial measure calculated and presented in accordance with GAAP can be found in the company's filing at sec.gov, which is also available at www.vuzix.com.

I'll now turn the call over to Vuzix CEO, Paul Travers, who will give an overview of the company's operating results and business outlook. Paul will then turn the call over to Grant Russell, Vuzix CFO, who will provide an overview of the company's second quarter financial results, after which we will move on to the Q&A session. Paul?

Paul J. Travers -- President, Chief Executive Officer, and Director

Thank you, Ed. Hello, everyone, and welcome to the Vuzix Q2 2024 conference call. A high-performance waveguide that can be produced in the millions at optimal price points is a critical enabling component for the next generation of smart glasses for the consumer and enterprise markets. We believe there is not a company on the planet better positioned in this regard than Vuzix.

Our unique competitive core competencies of extensive waveguide design capability and production scalability, competitive cost, and volume manufacturing have been forged from well over a decade of product evolution and technology investment and development in this space. Our conviction, which is stronger than it's ever been, is that Vuzix will play a key role in the supply chain plans of many global product suppliers that intend to compete in the smart glasses industry. We believe our ability to offer and support custom optical and mechanical designs for OEMs and ODMs, and then ultimately produce millions of waveguides to support the broad consumer and enterprise markets is game-changing. It's important for investors to realize that we have built a world-class capability around the core technologies and manufacturing facilities needed for design through high-volume production waveguides, a very difficult component in the supply chain for the coming AI-driven smart glasses market.

Without solutions like those that Vuzix can offer, the broader smart glasses market, especially for consumers, will be significantly challenged. We believe that there is currently nobody else in the market that can deliver the needed waveguides at the rates and at the same time hit the quality and costing models required to meet consumer expectations. We fully understand our cash position and the concerns that some of you may have in this regard. I want you to know we are actively working to close with strategic partners a deal that would provide manufacturing assets and value for our partner and provide Vuzix with cash and market access.

They understand the challenges to high-volume smart glasses manufacturing and believe Vuzix can play a key role in supporting their plans for product development and manufacturing in the smart glasses industry. This sort of commitment to Vuzix would be substantial and part of a multiyear supply strategy that will be game-changing for us and the broader industry. We're hopeful we can share more about this relationship in the very near future. Backed with an IP portfolio approaching 400 patents and patents pending, almost double the level of just three years ago, we are on a continual path of innovation, the innovation that is required for the market to evolve with previously stated optical capabilities for see-through waveguides like Incognito, integrated vision correction, low-index, high-performance materials and a second to none production facility with unique Vuzix-developed process capabilities and trade secrets.

The micro-touch production process improvement just announced this week will further distance our production speeds, yields, and volume capabilities relative to other would-be industry competitors. The consumer smart glasses era is just about to commence and we clearly believe our waveguide technology is a cornerstone component to enabling mass adoption. Meta CEO predicted a future where hundreds of millions of people are regularly wearing AI-powered smart glasses. What Vuzix has here is unique.

The ability to produce waveguides in volume at a fraction of the cost of our competitors is again a game changer. And unlike that of most others, our waveguide technology is flexible and can support a large array of optical capabilities and industrial designs for smart glasses products. Our current facility has the capability to drive capacity to as much as 1 million units annually and is scalable beyond this level with minimal investment in operating costs. These are just some of the reasons why third parties are interested in investing in Vuzix and why we are excited about these potential partnerships to help make this happen.

The microdisplay to drive the image into the waveguide is the second most critical component for smart glasses. Today, there are multiple companies working on new, very compact, LCoS-based display projection engines. They will be a great option until either efficient full-color microLEDs or other display technologies arrive on the scene, which practically could be several more years. Knowing that the fashion-forward smart glasses opportunity is right around the corner, there are a couple of handfuls of companies investing in these LCoS solutions.

And it is interesting to note that many of them, like our recent announcement with Avegant, are now working with Vuzix for a viable source of supply for cost-effective waveguides that can be delivered in volume and perform to end customer expectations. Our OEM business opportunities remain robust. We have a backlog of business to deliver against and we expect at least one of our defense contractors and one of our commercial enterprise customers to move into production later this year. Our partnership with Garmin, with whom we are developing waveguide-based optical systems with full custom projection engines, is another milestone relationship.

These products will power solutions for Garmin that will help them to offer significant cost, form factor, and space savings versus current deployed technologies. On the waveguide manufacturing front, we will continue to implement process improvements as we prepare to ramp production capabilities to support underlying demand from partners and the broader markets. As the industry increasingly views Vuzix as a waveguide supplier of choice, more and more projection engine partners are lining up discussions and programs to partner with us. And again, we recently announced a collaboration with Avegant to develop optimized waveguide optical modules for use in future AI-enabled smart glasses, and we have a handful of other unannounced relationships currently underway.

All of these firms realize that their display projectors can't stand alone. They must be paired with the best waveguide solutions available to optimize the end wearers' viewing experience, most importantly, ones that can allow finished products to be produced in high volumes at affordable prices. Our uniqueness in this space cannot be underestimated. Cognizant of our cost competitiveness and cash needs, our strategy will be to utilize third-party manufacturers for select Vuzix branded and OEM products based on projected volumes and costs.

Of course, this will not include our defense products nor our waveguide manufacturing, which is planned for production right here in Rochester, New York. The enterprise market continues to be challenged just yet, as the market slowly matures. Deploying whole-product smart glasses solutions in an industrial environment has proven to be a journey involving pilots, software, IT integration, and ROI determination, among other things. That said, we have a nice pipeline of business opportunities and we have a number of enterprise accounts that are on a path to volume deployment of our smart glasses and solution within their operations to deliver improved productivity, lower onboarding times, and fewer errors.

Although, we are refocusing ourselves, as I said, to waveguides and OEMs, we also remain committed to our network of ISVs and resellers and to our end customers. These use case ecosystems continue to evolve with emerging applications, such as artificial intelligence, transcription, and language transcription. Moreover, as was the case with cellphones and tablets, we believe advancements and volume penetration in the broader markets will also help attract and accelerate wider enterprise adoption in due course. At the same time, we absolutely recognize the importance of liquidity and cash management.

And as a result, Vuzix has made significant reductions across the board to right-size our organization to deliver top-line revenue without losing sight of our core technology aspirations on the R&D side of the house. And as I mentioned previously, we are working to close with strategic partners a deal that would provide manufacturing access and value for our partner and provide Vuzix with cash and market access. Grant will now take you through our numbers after which we will move on to Q&A. Grant?

Grant Russell -- Executive Vice President, Chief Financial Officer, Treasurer, and Director

Thank you, Paul.As Ed mentioned, the 10-Q we filed this afternoon with the SEC offers a detailed explanation of our quarterly financials. So, I'm just going to provide you with a bit of color on some of the numbers. Our second quarter 2024 revenues was $1.1 million, down substantially year over year due to decreased sales of smart glasses, particularly our M400, which had benefited in the prior-year period from a very large order from an Asian distributor in our second quarter of 2023. Engineering service sales were $0.5 million for the three months ended June 30th, 2024 versus $0.3 million in the prior-year period.

As of June 30th, 2024, the company had $2.4 million of remaining performance obligations under a waveguide development project, of which approximately 18% we expect to realize in 2024, with the remainder being completed in 2025. There was an overall gross loss of $0.3 million for the three months ended June 30th, 2024 as compared to a gross profit of $1 million for the same period in 2023. The gross loss was the result of lower revenues to absorb many of our relatively fixed manufacturing and plant overhead costs. These manufacturing overhead costs as a percentage of total product sales increased to 42% from 8% for the same period in 2023 as a result.

Research and development expense was $2.4 million for three months ended June 30th, 2024, compared to $2.8 million for the comparable 2023 period, a decrease of approximately 17%. The reduction in R&D expense was largely due to a $0.3 million decrease in external development costs and a $0.2 million drop in salary and benefit-related expenses after further severance costs implemented at the end of June. Sales and marketing expense was $2.2 million for the three months ended June 30th, 2024 as compared to $2.5 million in the same period of 2023, a decrease of approximately 11%. The reduction was primarily due to lower advertising and trade show spending and reduced salary and benefits expense, partially offset by an increase in allowance for credit losses and further severance costs implemented at the end of June.

General and administrative expenses for the three months ended June 30th, 2024 was $4.5 million versus $4.3 million for the comparable 2023 period, an increase of approximately 5%. The rise was primarily due to a $0.3 million increase in accounting and audit fees related to finalizing our 2023 audit and increased legal costs related to our S-3 filing. Included in our operating expenses for the three months ended June 30th, 2024, was a non-cash charge of $30.1 million related to the impairment of intangible assets and our equity investment in Atomistic. Atomistic exercised on July 1st, 2024 its option to terminate its previously granted license related to certain microLED technologies it was developing, and as a result of the termination of the granted license, which was effective June 30th, 2024, the company determined that the technology license asset, having a net book value of $24.3 million, had been fully impaired as the company no longer had exclusive licensing rights to the technology for its use.

The company had a related equity interest in Atomistic, a private French company, and determined that at this point in time, the company is unable to reasonably estimate its future value and therefore recorded a full impairment of its investment in Atomistic preferred shares, resulting in write-down charge of $5.7 million for the period ended June 30th, 2024. Notwithstanding our impairment of these assets, we continue to support the development path of Atomistic that it is on, and we have previously indicated, Vuzix is entitled to 49% of distributed assets in the event Atomistic is liquidated, as well as certain license royalties. Overall, the net loss for the three months ended June 30th, 2024 was $40.6 million or $0.62 per share versus a net loss of $9 million or $0.14 per share for the same period in 2023. Now for some balance sheet and cash flow highlights.

Our cash and cash equivalents position as of June 30th, 2024 was $9.9 million, and our net working capital was $22.1 million. The net cash flows used in operating activities was $5.6 million in the second quarter of 2024 as compared to a net use of $7.9 million for the second quarter of 2023. Cash used for investing activities for the second quarter of 2024 was $1 million as compared to $6.7 million in the prior-year period, with the current period's investment being all in fixed asset purchases and none for license fee payments. During the second quarter of 2024, the company implemented a voluntary companywide payroll reduction plan for all individuals with optional salary reductions of 10% to 50% depending upon their respective base salary level for the period running May 1st, 2024 to April 30th, 2025.

The expected savings achieved will be approximately $2.1 million and will result in the issuance of stock awards and stock options for the net cash wage reductions. After the impact of the payroll reduction program for equity and two major rounds of staff reductions in January '24 and June 2024, the company's current weekly gross salary cost decreased 38.4% or $5.3 million on an annual basis. And while we have greatly reduced capex plans for the balance of 2024 and into 2025, we intend to reduce our large current investment in smart glass inventories. As a result, we plan for existing products to reduce their selling prices and offer higher volume discount levels to turn as much of our inventory of finished goods and assemblies into cash.

We have over $9 million in finished goods and semi-finished products, and we intend to turn that into cash as we move forward with future models and technologies. Furthermore, we have paused further M400 smart glasses production in Rochester and we are actively pursuing the use of external manufacturers for most of the non-waveguide production needs of Vuzix. Currently, we are seeing some good opportunities to reduce our manufacturing costs going forward, especially if we are able to achieve higher production volumes. We are also actively continuing with the pursuit of licensing and strategic opportunities around our waveguide technologies with potential OEMs, which would include the receipt of upfront licensing fees and ongoing volume supply agreements.

And as most of you are aware, the company went effective with a new registration statement on Form S-3 in May 2024, which included the sales agreement with an investment banking firm for the issuance and sale of up to $50 million of our common stock that may be issued and sold from time to time in an at-the-market, or ATM, offering. Management monitors the capital markets on an ongoing basis and may consider raising capital via the ATM if favorable market conditions develop. And finally, as of June 30th, 2024, the company continued to have no current or long-term debt obligations outstanding. With that, I would like to turn the call over to the operator for Q&A.

Questions & Answers:

Operator

Thank you, sir. At this time, we will be conducting the question-and-answer session. [Operator instructions] One moment please while we poll for questions. And the first question comes from the line of Matt VanVliet with BTIG.

Please proceed with your question.

Matt VanVliet -- Analyst

Hey, good afternoon. Thanks for taking the questions. I guess, first, you mentioned a couple of opportunities on the engineering services side that should go into production later this year. Can you give us a sense of what level of revenue you expect could be recognized from either one or both of those potentially going in and then anything else in the pipeline that you have that you feel fairly confident will go into production at some point in the future?

Paul J. Travers -- President, Chief Executive Officer, and Director

So, let's just qualify those first two. One of them is on the defense side and one of them is a commercial opportunity. On the defense side, it's probably going to be $5,000 to $7,000 per asset that we sell into that piece of business. And the first sort of salable or opportunity that it's going to be filling is upwards of 2,000 pieces.

So, like, do the math, it's pretty easy. It's $10 million to $14 million worth of business, I think, that the solution that we've built can go into multiple different places and this is just one spot that it was initially designed for. So, that's a pretty significant revenues for just one project. And then, the other one is an imaging system for temperature-related inside of enterprise operations or it's maybe the places where there's hot equipment around, motors that might get hot.

You put the glasses on and they can help you determine whether or not there's maintenance or safety issues or whatever. And that's an enterprise product that could have significant volumes associated with it, upwards of 20,000 to 30,000 pieces. I'm not sure when that's going to roll out in that kind of volumes, quite frankly. We're hoping that it starts to move by the end of this year.

Matt VanVliet -- Analyst

OK. And I think going back a couple of quarters, you had four or five projects in the works and it sounds like these two are may be further along, but do you still have the other ones with long-term viability there? Any updates on those?

Paul J. Travers -- President, Chief Executive Officer, and Director

Yes, we definitely do. I mean, one of them is Garmin, which we mentioned earlier in the call. And yeah, that project is moving along nicely. And there's more than a handful of other companies that are working with Vuzix to develop their next-generation products.

Matt VanVliet -- Analyst

OK, helpful. And then lastly, talking about potential strategic partners, could you potentially give a little bit more detail in terms of what kind of arrangements might be in place? Would it be kind of a preorder of waveguides or certain blocks of performance for investment into Vuzix? Or what kind of, I guess, overall arrangement are you looking at?

Paul J. Travers -- President, Chief Executive Officer, and Director

Yeah, Matt, I can't share a whole lot other than to say that for these guys, volume production is key. This business is right around the corner. There's amazing potential. The problem is making waveguides at a price point that works for the market is almost impossible.

Competitive solutions today take literally hours to make a waveguide and you can only do just so many at a time. So, the price per waveguide is super expensive. And with those higher prices, it will never enable the mass market. Vuzix can literally make them.

Well, our current facility, when it's fully turned on, every six seconds, it ought to be able to pump out a waveguide. And that's what these guys are interested in. There's actually more than one that is interested in that. And it's all revolving around -- well, you hear things like Mark Zuckerberg talk about hundreds of millions of users of smart glasses and it's all revolving around that kind of business and in those markets.

So, you might imagine that there's some investments that will probably be part of it and there will be some supply components to it.

Matt VanVliet -- Analyst

OK. Thank you.

Paul J. Travers -- President, Chief Executive Officer, and Director

You bet.

Operator

And the last question comes from the line of Christian Schwab with Craig-Hallum Capital Group. Please proceed with your question.

Unknown speaker -- -- Analyst

Thanks, guys. This is Tyler on behalf of Christian. Thanks for letting us ask a couple of questions. Maybe first just kind of following up on that last question, the last line of commentary there.

You talked about your waveguide production being the market leader there. I guess, competitively, if someone wasn't going to come to you to use a waveguide, competitively, what would they do otherwise? Just produce themselves? Have to make that investment and ultimately produce them less efficiently, more expensively? Or competitively, what would someone do if they weren't going to use you for their waveguides?

Paul J. Travers -- President, Chief Executive Officer, and Director

So, Tyler, it's a great question. It's more than even manufacturing. You got to know how to do a design. You got to know how to do the production for it when it's finally there.

And you have to know how to, in that design, integrate it with the rest of the components that make these optical systems work. And when you come to a company like Vuzix, we offer all of the services associated with that. So, it's soup to nuts. There are other companies that are out there trying to make a waveguide and you're stuck with the one size fits all.

You can't get it easily customized for what you want to have. And then, the problem comes down to just literally how do you get a waveguide every six seconds. And then, some of these people we're working with, they want 20 times that kind of volume. If you think about on an annual basis, it could be 100 million to 300 million smart glasses that get sold.

That is one pile of waveguides. And you go to a third party to have them produced and they would be expensive or you might buy somebody's property so that you could produce them, but the competitors that might be able to set you up like that today, it's 400 or 500 steps to make a waveguide. And so, the price, the quality, the yield, it's really, really difficult to see how any of that stuff could ultimately get there. We are in a very unique circumstance, our ability to produce in volume the way we can and to offer the services associated with actually making it work in the glasses.

Unknown speaker -- -- Analyst

All right. That's perfect. That's very helpful. And then maybe, Grant, with all these cost-saving efforts you guys are putting in place, maybe just a summary update, what kind of revenue level are we looking at now to kind of get to a breakeven-type point?

Grant Russell -- Executive Vice President, Chief Financial Officer, Treasurer, and Director

Well, it's a lot less and we're still making refinements, but I mean, we're effectively going to need about $20 million of margin to achieve breakeven because I think our goal is to get between potentially down to $4 million per quarter in operating costs. So, we're going to need the margin on the top line of $16 million to $20 million.

Unknown speaker -- -- Analyst

Understood. All right. Thanks, guys. That's all for us.

Operator

Thank you. And at this time, we have reached the end of the question-and-answer session. And I would like to turn the call back over to Paul Travers for any closing comments.

Paul J. Travers -- President, Chief Executive Officer, and Director

Yes. Everybody, thank you for listening in. Look, I know it's been a rough ride. The smart glasses industry is a challenge, but this business is coming.

It's never been more exciting for us, and I know I happen to be an enthusiastic person, but it is right around the corner and it should be a fantastic fall for Vuzix. So, we really appreciate you hanging in there to the tough times. The better parts are coming. Thanks again, everybody.

Look forward to the next call and to share with you as the fall unfolds.

Operator

[Operator signoff]

Duration: 0 minutes

Call participants:

Ed McGregor -- Director, Investor Relations

Paul J. Travers -- President, Chief Executive Officer, and Director

Grant Russell -- Executive Vice President, Chief Financial Officer, Treasurer, and Director

Matt VanVliet -- Analyst

Paul Travers -- President, Chief Executive Officer, and Director

Unknown speaker -- -- Analyst

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Vuzix (VUZI) Q2 2024 Earnings Call Transcript was originally published by The Motley Fool