Greetings, and welcome to the Vuzix Second Quarter for the Period Ending June 30, 2024 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. And now, I would like to turn the call over to Ed McGregor, Director of Investor Relations at Vuzix. Thank you. Mr. McGregor, you may begin.

Thank you, operator, and good afternoon, everyone. Welcome to the Vuzix second quarter 2024 ending June 30 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, August 14, 2024. Vuzix assumes no obligation to update these projections in the future as market conditions change. 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's 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 second quarter financial results, after which we will move on to the Q&A session. Paul?

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 consumer, will be significantly challenged. We believe 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 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…

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's 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 30, 2024 versus $0.3 million in the prior year's period. As of June 30, 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, but the remainder being completed in 2025. There was an overall gross loss of $0.3 million for the three months ended June 30, 2024 as compared to a gross profit of $1 million for the same period in 2023. The gross loss was a result of lower revenues to absorb many of our relatively fixed manufacturing and plant overhead costs. These manufacturing overhead costs as a percent 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 30, 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 30,…

Thank you, sir. At this time, we will be conducting the question-and-answer session. [Operator Instructions] And the first question comes from the line of Matt VanVliet with BTIG. Please proceed with your question.

Yeah, 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?

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, for the -- and that solution that we've built can go into a 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 like maybe 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.

Okay. 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 update on those?

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.

Okay, 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 pre-order of waveguides or certain blocks of performance for investment into Vuzix? Or what kind of, I guess, overall arrangement are you looking at?

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 are 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.

Okay. Thank you.

You bet.

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

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?

So, Tyler, this is 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.

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?

Well, it's a lot less and we're still making refinements, but I mean, we're going to -- we effectively going to need about $20 million of margin to achieve breakeven. So -- because I think our goal is 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. So...

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

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.

Yeah. 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.

And ladies and gentlemen, that does conclude today's teleconference. You may disconnect your lines at this time. Thank you for your participation.