Vuzix Corporation (VUZI) Q3 2015 Earnings Report, Transcript and Summary

Greetings and welcome to the Vuzix Third Quarter 2015 Financial Results 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 conference is being recorded. Now, I would like to turn the call over to Andrew Haag, Managing Partner at IRTH Communications. Mr. Haag, you may now begin.

Thank you, operator. Good morning, everyone. I would like to welcome all of you to Vuzix’s third quarter 2015 financial results conference call. With us today on the call are Vuzix’s CEO, Paul Travers; and the Company’s CFO, Grant Russell. Before I turn the call over to Paul, I would like to remind you all on this call that management’s prepared remarks 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 is contained in the Private Securities Litigation Reform Act of 1995. Actual results could differ materially from those contemplated by the forward-looking statements, as a result of certain factors 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, and changes in the legal and regulatory requirements. In addition, any projections as to the Company’s future performance represent management’s estimates as of today, November 13, 2015. Vuzix assumes no obligations to update these projections in the future as market conditions may change. Last night, the Company filed its 10-Q with the SEC and issued a press release announcing its financial results. So, participants in this call who may not have already done so, may wish to look at those documents, as we provided summary of the results discussed on today’s call. Today’s call may include non-GAAP financial measures when required a reconciliation of the most directly comparable financial measure calculated and presented in accordance with GAAP can be found in the press release which also is available at www.vuzix.com. I would like to now turn the call over to Vuzix’s CEO, Paul Travers, who will give an overview of the Company’s business activities and developments during the third quarter 2015. Paul will then turn the call over Grant Russell, CFO, who will provide an overview of the Company’s key financial performance and metrics. We will then open the call for Q&A. Paul?

Thank you, Andrew. Hello everyone and thank you all for joining our call today to discuss Vuzix’s third quarter results. I’d like to start the call, I think a little bit differently today. I think it’s important to get some background on the whole wearable display marketplace, specifically as it relates to Vuzix. Although I think most people understanding the idea of wearable technology, I think there are many questions as where it’s going; what does it take to be successful in this business; and what form will it likely take over the coming several years. There’s lots of companies that are out there in the forte. So, I’m sure it brings lots of questions to people’s mind. First, I think it’s obvious that there are many different kinds of wearable technologies beginning to enter the market from watches to fitness bands, clothing [ph] sensors. But by far the one piece of wearable technology that is poised to significantly change the world is the wearable display. And today there are several evolving categories. And it’s obvious to folks that Vuzix is a wearable display company, passive viewing is one of the categories that has been around for year. This is the simplest of the categories and as such is the easiest market entry point. Think of glasses with the display built in that simply convey information to the wearer. This typically includes video and audio, and it could be wired or wireless, talking to your phones, talking to your; talking to a Bluetooth, [ph] wire et cetera. Vuzix has sold hundreds of thousands of these types of wearable displays over the years. The other category that’s coming is the virtual reality wearable display, full immersion from VR type experiences like the Oculus is probably the most recognized potentially used case today. Without doubt, this is going to be a major wearable display use case, which we believe millions of units will ultimately be sold. Because of the nature of VR and immersion, this use case makes it very limiting though. The type of wearable display or when you think about it, what you’re doing is you’re putting something on somebody, you’re blocking out the real world. And so, it’s you in the virtual space, which it forces it to be used in only certain areas. If you think about it, the only viable places for full immersion VR headsets or in controlled environments like your home, this needs for the most part to be used at home at the end of the work day at best, training applications and all the like will probably happen also. That said, this business is going to be big for a period. And Vuzix has a series of products planned that will address that. In fact as part of the 2016 CES show, our new iWear wireless video headphones, a second in the series of eyewear products, which I’ll discuss a bit more about here further on, have won four awards, with one being a coveted Best of Innovations. There is very few companies that get Best of Innovations category. So, as you can see, Vuzix is a player in the virtual reality and sort of a mix with the personal viewing device that iWear product does a little bit of both there. And then the final category that Vuzix sees is the augmented reality wearable display. An augmented reality wearable display allows the user to see the real world while at the same time placing virtual reality information and combining both the real and virtual. Having this kind of capability is going to drive amazing innovation and change the way people interact with each other in the world around them, not just at home but everywhere. Because of this and its ability to be used anywhere, the augmented reality wearable display is going to be by far and most exciting and prove out to be the largest market of them all. In fact, by some estimates, the AR and VR markets together could hit upwards of a $150 billion in revenues by 2020, and amazingly AR taking the lion share of that business with about a $120 billion of it. It’s going to be the big use case. And the reason why is you can use it everywhere, and it’s got the ability to do unprecedented things. If you think about it, given the ability to intimately connect the digital world to the real world will completely change new communications, literally having this kind of capability will enable applications that are impossible any other way. And I believe that this will be -- this will prove to be the beginning of replacing people’s current personal communication devices; the smartphone with augmented reality Smart Glasses. That said, for this kind of AR wearable display to be successful in the broad consumer markets, it cannot look odd. It really has to have a fashion appearance to it and the technology needs to disappear. And there are lots of companies out there that for some time now have been trying to do this; it is not easy. There’re just a few companies today that are working towards the kind of solution that will solve those problems. And this is where Vuzix really intends to excel. Most people have no idea how difficult this is to achieve. It is not as simple as a small display and a conventional lens that gets tucked up in the corner, giving away small experience. At almost every product [ph] out there today, we bid optics in complex display engines to make them work, even alternative waveguide optics, they’re talked about by competitors have these same problems. You hear about amazing experiences, if you don’t see how big and how bulky the display systems might be there actually are used to generate them. This is where Vuzix has the years of efforts on waveguides and display engines puts us ahead of the competition in our opinion. Because of our unique IT around the waving light inside our waveguides, we have recently been able to shrink our display engines to about the diameter of a pencil and it’s getting smaller. And our optics are now, it’s been [ph] in reading glasses. This is an almost impossible combination to have, especially with large field to view and full color images, all the requirements to make this augmented reality dream happen. To this end, as many of you know, we just opened a new waveguide manufacturing facility and research and design center here in Rochester, New York. And it’s focused on delivering on the dream of augmented reality Smart Glasses. It is also interesting to note that Vuzix has won four awards at the 2016 CES show, two for our Vidwear sunglass styled wearable displays and two for M3000 Smart Glasses for enterprise, all waveguide based with using our tiny display engines. CES is going to be a lot of fun this year. So, that’s sort of the background. We believe AR is going to be the big one. There’s a lot of business between now and then, and Vuzix intends to be part of it, but the ultimate goal here is to get the augmented reality sunglass styled systems. So, taking a step back, I’d like to now review some of the operational results of the third quarter for 2015. First, let me offer that we’re very excited about momentum that we’re seeing in our business right now. And I’d like to convey a sense of some of the milestones we achieved and some of the catalysts that we’re looking forward to. Let me start with M100. The M100 has been transitioning to a lifecycle of pilot to limited production to large scale rollouts. We currently have hundreds of proof of concepts and pilot programs in some part of this cycle. Our unique to the industry ability to be accessible to these early adopters has allowed Vuzix to work hand-in-hand with them. If you think about it, Vuzix is really the first player here. There’s not a lot of other smart glasses that have the capabilities of Vuzix’s M100s. And so, we’re really a go-to company today. We work hand-in-hand with these companies to upgrade software, make hardware ergonomic changes et cetera to help to support these new use cases. Because of this, each quarter, we’re beginning to experience larger and long-term pilots rolling into initial production environments. GE, [ph] HP, large pharma companies, post acute care facilities, hospitals and others are leveraging Vuzix to deliver ROIs and improved client experiences, with other examples like public go-live such as Bechtle via SAP rolling out complex warehouse picking applications just recently. Actually there’s a big open house happening in December. DHL announcing the extension of their Ricoh pilot as well as two new large scale pilot programs and third party logistic applications in the USA. In this last quarter, DHL is driving for additional adoption in logistics space by speaking and educating at such events as material handling at user forums, the enterprise wearable technology symposium and just yesterday at the American Material Handling, ERC industry group and larger scale rollouts like XOEye with three majors with significant users have started production rollouts of XOEye’s telepresence software across construction, manufacturing and equipment maintenance, all focused on our Vuzix M100 Smart Glasses. Another great trend we’re seeing is that the enterprise itself -- enterprise space itself is adopting this technology and preparing for ubiquitous use. For example, large organizations are certifying Vuzix’s M100s for their corporate and regulatory requirements. An example here is Airbus via Accenture, Vuzix with them are in the final stages of becoming the first certified Smart Glasses hardware to be used within the Airbus manufacturing process. Mobile device management is becoming important. And Vuzix is the first certified Smart Glasses for Xovi, [ph] Augmate and soon AirWatch. MDM or Mobile Device Management allowed M100s to be secured, managed under the same IT end systems as phones, tablets and laptops. The reason for needing MDM is to manage larger volumes at device in the field. And these industry leaders are supporting Vuzix Smart Glasses in preparation for the continuing trend of pilots becoming real programs. Industry consortiums are beginning to be created also with standards. For example allowing glass consortiums of the world’s largest companies are releasing Smart Glasses standard glass for their industry. The same is happening in the pharma, life sciences and healthcare industries. Vuzix is actively involved in developing these standards and of course and ensuring [indiscernible]. Finally, Vuzix’s application partners continue to rollout second and third generations of their software applications learning from their pilot experiences and adding over the year update security and other features to accommodate large scale instrumentations, some examples include APX Labs with a new platform release of their Skylight product from Vuzix M100; Ubimax suite of standard enterprise applications again will support Vuzix M100; and SAP with multiple rolling releases for both warehousing and field service. Business service providers like Deloitte and Accenture are beginning to ramp up competencies in Smart Glasses deployment while others are focused on business services necessary to roll out Smart Glasses in large organizations addressing issues like change management, key performance indicators or ramp up, rewrite and process documents, human resource et cetera. Finally, out of the box standard software solutions for smart glasses now live in the market with examples from powerhouses, like HP MyRoom and video proving that these organizations believe smart glass’s adoption will drive significant revenue expansion for their existing client base and help them penetrate the client base of their competitors with this technology. Seeing the impact and improving metrics, all of this activity continues to forward Vuzix’s business. And because of all that I am pleased to report that sales in Q3 increasing 125% over Q2 of 2015. Ongoing and upcoming product launches, I’d like to talk a little bit here a minute about our iWear. The Vuzix iWear video headphones are the ultimate mobile video entertainment gaming system. They are not just a VR system, they’re sort of a mix between a personal viewing device that we talked about earlier in VR; they’re compatible with any device supporting HDMI output which gives them a big advantage over just a virtual reality system; integrated most interacting OSVR, Unity 3D, Unreal gaming engine support. The Company is able to offer growing list of games and VR title support. The iWear features dual HD Displays and revolutionary nano optics that provide the equivalent experience of a 125 inch home television from about 10 feet away. And it allows the wearer to play games, interact with apps, watch 2D, 3D, 360 VR movies and even fly drones. This thing plugs and plays with just about everything. iWear is completely portable and battery-driven, so that the user can enjoy it at home or on-the-go. And as exciting as all of that is and our customers are immediately pushing the Vuzix hard to get their hands on them, it has taken us much longer to perfect for mass production than we had planned. Issues around cables, optics and the quality of certain components have slowed us down but we’re finding within days of shipping to the end customer. We simply did not want to ship until the iWear were right. That said, in late October, we started shipping early units to our key development partners and we’re expecting to receive our first production shipments from China in the next week, Wahoo. In the meantime, we’ll cautiously be marketing the iWear in preparation for its volume debut. Just to finally hear, Vuzix is working with the more than 60 plus developers to-date from a variety of international markets. These developers have been forwarding and developing titles to leverage the technology of the Vuzix video iWear headphones. The Company is also helping to drive standards here with the open source virtual reality platform and support gamers under the umbrella of the open gaming alliance and its machine [ph] gaming ecosystem open. Another point I would like to make, we got a lot of people saying gosh, for a company as wonderful positioned as Vuzix is, its website certainly doesn’t look at. And I cannot agree with people more or like to say that very shortly Vuzix will be opening a brand new website. We’ve been actively working on this website for some time now to bring it to look and feel and in line with the modern capabilities and the amazing new products Vuzix offerings that we’re bringing. We expect this new site go live shortly. I hope within a week but maybe two on new facility. We’re getting prepared for what we expect to be accelerating demand for our products in 2016 and beyond. This October, we move to a new corporate facility in Rochester, New York that houses our corporate offices and product development team and will also host modern clean room facilities for advanced optics tooling and nano-replication equipment for manufacturing of our waveguides and display engines. It will be operational soon and will be capable of producing millions of waveguides annually for not only Vuzix’s products but also the various OEM partners that we anticipate it may go in through 2016 in the future. And although CES announcement did not happen in the third quarter, I wanted to talk just a little bit about it here. Even though it was just announced and not part of the third quarter, I wanted to make note the amazing progress we have made on the new product development front. We've been putting our capital to work as responsibly as possible. And as a result of the last 10 months since Intel invested in Vuzix, we've put in development multiple new products. Again as mentioned, CES has recognized Vuzix with eight awards this year around some of these new products. The iWear Wireless has won four awards with one being Best of Innovations which only 20 companies are graced with. The iWear Wireless which is new to everyone here is a standalone version of the iWear Video Headphones with built-in Android. And a good way of thinking of this is simply a wearable smart TV. You guys get home, you turn on your TV set, and there's all those applications that you can run on the desktop of your television. That's exactly the way the iWear Wireless works. You put it on, there's no cables, you cruise the web, you can watch 360 videos with; it's fully VR capable and it can run standard Android apps. The M300 Smart Glasses are a next generation pair of Smart Glasses for enterprise that was for Vuzix's advanced new waveguides and they have won two awards. And finally, our Vidwear B3000 AR viewers which are a consumer targeted pair of sunglass styled glasses with vibrant full color displays built in, have also won two innovation awards. All of these products we feel represent major advancements in the wearable display industry and are part of the foundation of Vuzix's future. For such a short period of time, Vuzix is moving as fast as it can to continue to lead in this space with the real products, not just ideas that are in a lab and not videos that are hand-built and put on some websites. These are real products folks. Going forward, the outlook for Vuzix is extremely promising with the launch of the eyewear video headphones and enhancements in our M100 Smart Glasses. We are also focused on developmental activities for the introduction of the new waveguide products in the first half of 2016 and our enhanced Smart Glasses models for the enterprise markets. With all the forward momentum we have now, we're excited to attend CES 2016 and expect to continue driving the initiatives in 2016 that will deliver value for Vuzix and our shareholders. I'd like to conclude by again thanking you all for your support. Now, I'd like to turn the call over to our CFO, Grant Russell to review our financial results.

Thanks Paul, good morning everybody. Before jumping in, I'd like to point out, I'll be rounding many of the numbers, discussed numbers to thousands, even though we currently report in dollars. And I'll try to go through this quickly, so we have some adequate time for questions. Quarterly revenues for the three months ended September 30, 2015 totaled $970,000 and they were up a 127% from our second quarter ending June 30, 2015 and up over 46% for the same period ending September 30, 2014. The increase in product sales was primarily the result of increased M100 Smart Glass sales and waveguide display engine shipments through related party. Reflecting our planned phase out of Wrap augmented reality products and video iWear, I've got a few of our Wrap AR models had been discontinued in early 2015 and consequently, we have very limited quantities leftover for sale as compared to the 2014 period. As a result, sales from these products decreased by 71% over the comparative period in 2014 and represented just 5% of revenues as compared to 26% in the 2014 period. Importantly, other than the new products more than offset these phase out and sales, we're up over 38% just from our M100 Smart Glass family. Waveguide display engine shipments, as I mentioned earlier, were 24% of quarterly 2015 revenues versus nil in the comparative period in 2014. Gross margins for the third quarter increased to 34% as compared to 31% to the 2014 period, directly the result of products mix changes in the higher gross margins earned on our new products. This improvement is impressive when you consider that despite the increased expenses charged to cost of goods related to the amortization of software development cost of $72,000 in 2015 versus nil in 2014 and $44,000 and increased in software royalty, some of them minimum related to the M100 product sales for the 2014 period. We were demonstrating that as sales volume increase, our gross margins are going to get back to our overall target of 40% pretty quickly. R&D costs in the third quarter effectively nearly doubled and they were up 95% over the corresponding period in 2014. Some of the major increased expenses related to new staff hires, which increased salary benefits and stock comp expense by $264,000 and the cost of recruiting new staff members of $64,000 as compared to nil in the prior year. Please note in the 2014 comparative periods, we've been capitalizing part of our R&D wages and software development cost, so in fact the increase was actually $64,000 less. Other R&D product costs increased by $89,000 and we had a bump in travel related costs which are related to the launch of new product manufacturing, namely the iWear in Asia. G&A for the quarter increased by 528,000 but the majority of this increase was related to non-cash expenses. The increases were primarily driven by higher investor relation costs, totaling a $189,000 of which a $173,000 was non-cash expenses for shares of common stock awarded to consultants; $228,000 increase in stock awards and fee paid to our external directors, most related to their annual retainer for serving until next June 2016, after their election of the company’s annual meeting, last June and a $52,000 increase in salary and benefit costs over the third quarter in 2014. Other income for the 2015 period was -- I mean other expense was a $128,000 as compared to $2,032,000 in the 2014 period. The big swing there was related to derivative liability. In the last quarter of 2015 we recorded a income of $58,000 versus a third quarter loss of 2014 of approximately $1.7 million. This change is related to changes in our stock price. And as our stock price goes up, that creates a bigger loss; if it goes down, we get income. So, but, there is a change over the periods. And then the second biggest item there was expenses related to the amortization of term debt discounts and amortization of the operating costs and expensed, our convertible notes have decreased in size. And we’ve experienced reduction on those expenses of -- down to a $116,000 from $254,000 in 2014. On the bottom line, the company reported net loss after the accrual of dividends on a Series A preferred stock attributable to common stockholders of $2,811,000 loss or $0.17 per share through the three months ended September 30, 2015 versus a loss of 3,301,00 or $0.31 per share for the same period in 2014. Now moving to our balance sheet briefly, as of September 30, 2015, we had cash and cash equivalents of $16,072,000 with a positive working capital position of $18.8 million versus a negative working capital position last December. Clearly the sale of about 25 million in preferred shares last January greatly improved the Company’s financial position. And since then, the Company has been investing in things like R&D and has paid down its accounts payable and is now investing in inventory and components for recent and upcoming product launches. During the third quarter 2015, I’d like to point inventories and vendor component purchase deposits increased from $1.9 million at June 30th to just over $3 million as of September 30th. A further $1 million plus increase is expected in the fourth quarter, as the supply chain gets fully ramped for the commencement of volume production of our new products. With that I’d like to turn the call back over to Paul.

Thank you, very much Grant. Just a couple of points here. The enterprise side of our business, these guys are not doing it just because it’s kind of fun for them. Literally, companies are seeing as much as 25% to 30% improvement in efficiencies by using our glasses. And firms like Airbus using a layout inside of an aircraft, six reduces [ph] one-sixth the amount of time and almost zero mistakes. It’s a big deal. This is game changing stuff. And I didn’t make those points very clear, I think when I was talking through there. We’re also going to be attending the Benchmark Conference in Chicago, I guess one of us will be there. So, if anybody happens to be around, you’ll be more than welcome to stop and say hello. To end here, we at Vuzix, we’re excited about our opportunities ahead us. The team is as if on an almost weekly basis we’re seeing new use cases for our wearable technology and we’re highly confident that users can continue to remain at the forefront of this emerging space. We look forward to updating you on our continued progress in our next call. And we’d like to now open the call for questions.

Thank you. We will now be conducting a question-and-answer session. [Operator Instructions] Thank you. Our first question comes from the line of James McIlree with Chardan Capital. Please proceed with your question.

Can you talk a little bit more about the inventory? I think you said that you’re going to invest another 1 million in Q4. So, that’s obviously going to increase inventory levels. But do you have a lot of the raw materials turning into finished goods and moving out of inventory as well, so there’s going to be some offset to that $1 million increase?

Yes, I mean clearly I mean we expect it to sort of peak this Q4. I mean it’s gone up a little higher than we anticipated. We did make component supply chain commitments related particularly to the iWear. We thought we’d be in production effectively in summer. Due to these delays, some of the components come in, clearly some of them have gone back, and we’re achieving [ph] what’s there. But while we work through this process and start the real production going, quickly we will be transformed components into finished goods and then go out the door of sales. I am just saying from a work gauge standpoint, if somehow things drag out a little, few more weeks slip by, I mean the products are still flowing in. I mean it’s good inventory and it will be converted into finished goods. But it’s giving everybody sort of heads up that inventory levels cloud rise $1 million before they start heading back up.

Okay. And I think you just answered this question, but I want to make sure. So, most of the inventory is associated with the iWear; is that correct?

Yes.

Okay, great. In your prepared remarks, Paul, you talked about moving from pilot to production. And I am wondering if you can be a little bit more precise to the extent possible about when you think that might happen?

Well, it’s happening on a continuing basis, Jim. The reason why revenues in the third quarter increased over the second quarter is because there are active programs that are coming on line. And we anticipate that’s going to continue. I will say there is a large amount of excitement around our M3 series products. And so, we’re working through that issue too. We have to be cautious about overselling M3 while the M100s are here and et cetera. But companies like Lee, they’ve announced that [Indiscernible] just maybe four weeks ago, they gone on live in two different divisions and need product for as much as 850 systems as they put them in the field for their employees to use. That’s an example, and there is more. And I mentioned a few data points on that in my prepared remarks and you will be getting more and more from Vuzix as we can announce these companies.

Yes, let me rephrase it a little bit then. So, what I am really trying to get at is when we see that hockey stick in the production rollout such that the revenues are reflecting more of those larger scale deployments versus either the smaller scale or the pilots; that’s what I’m really looking for timing on that.

I hear some companies are buying 50, other companies are buying upward of 1000. Some of these companies we’re working with the volumes are going to end up being significant. And it’s just taking time to actually that happen but through 2016, you will see a continual ramp on the sales of our enterprise based Smart Glasses as more and more companies are allowed.

Okay and then…

I wish I could tell dead nut on January 31st, XYZ is going to take the first 10,000 pieces, but there are discussions around those kinds of things. And they’re just -- it’s really difficult because there is so many things that have to happen, but as you can see it’s beginning to happen.

And I am not trying to pin you down to a date certain and you’ve answered my question as I -- in the timeframe that are kind of thought you would. So, thank you for that. And then lastly, on operating expenses, as you roll into Q4 and next year, as things start ramping up, would you expect operating expenses to take another step upwards or is there -- do you have enough infrastructure for a certain level of sales and then your OpEx is really going to take that next step up, let’s say in the second half or is it more of a linear increase; can you just be descriptive of what OpEx looks like over the next few quarters?

Other than spending on R&D, we’re not anticipating any big report or changes there. So, I mean there will -- we’re making some further additions to our finance group to try to get closer to a full stock [ph] presentation. But I mean our infrastructure should allow us to operate and have a substantial increase in revenues without any major increases other than maybe one or two people here and there. But R&D is going to be the area where we continue to -- should see increased spending.

And does the new facility have significant impact on OpEx in Q4?

Well, I mean our rolling costs -- and we still have retained the other facility to march but primarily there is some specialized manufactured equipment we didn’t want to move until we’re ready; it takes a couple of months to bring on get certified the clean room space. But our monthly cost related to premises et cetera will be about $25,000 more per month, so $75,000 a quarter.

Okay. And I lie, there is one more question. The waveguide development is on track as far as you’re concerned?

Yes, it is. It’s very exciting actually.

Okay, great. And is that going to be available to witness at CES, some version of that?

Yes, it is.

Fantastic, okay, great. Well, I hope to see you there and good luck with everything.

I’d like to talk around that on waveguide development effort, for Vuzix’s internal programs and some of our partners. So, there are not just Vuzix’s necessarily products and see some of our waveguides in.

Our next question comes from the line of Aaron Martin with AIG. Please proceed with your question.

Going back a little bit to the enterprise pilots, you put out a press release a few weeks ago about Bechtle or XOEye from their customers, were those supporters in Q3 or those conversions to production will happen in Q4?

A portion of it is Q3 numbers and a portion Q4 numbers.

Okay.

In fact, if I can elaborate just a little bit, those are programs that don’t just happen in one quarter, some of those efforts will continue the business that you will see show up in quarters through 2016.

Okay. So, you’re saying, in a sense that large enterprise orders don’t necessarily create a lumpy revenue because the rollout will over time?

They’ll take x amount, put them in play hen another quarter they will put some more in play as they start to roll bigger into the team of people that are using it.

Okay. I don’t really want to push it too hard in individual customers but you mentioned Airbus on the call but you mentioned HP, do you have a sense in terms of when those rollouts will be happening?

What HP has even made announcements. They have a pile of customers that are starting to go live with their solution, as we speak. So, that’s right now. Airbus folks, they’ve already done, they absolutely love it. We’re in the process today of going through all this qualification stuff. And I’ll tell you this is one of the things like Vuzix is far ahead of competitors. This stuff associated with making a product, get through an IT department, it is material [ph] from power levels being just set at the right levels for Bluetooth and Wi-Fi connectivity to certain security requirements. And I believe that Vuzix is one of the only companies that are at those stages of effort with companies.

Okay. And the question for Grant. In terms of the preorders on the iWear 720, that hasn’t been recognized revenue yet, right?

No.

Okay. That will -- those will turn into revenue on in Q4, as soon as we start shipping?

Yes.

Okay. Moving on to the waveguide facility, you talked about -- can you talk a little bit about the progress there, getting with the facility up and running? You talked about it being completed soon, any more specific can be around there in terms of -- is it going to be a ramp up of capacity or first will have the capacity for hundreds of thousands of waveguide then eventually willing to waveguides or what will that be like?

The facility has been designed to expand. We can right now build by a reasonable number of waveguides every day. We have brand new nano-replication equipment that has just come in over the last month or so; it operates very well. It’s still a hand process so, it does limit us. But the next step in that process is relatively simple to augment this stuff.

So, waveguide that you’re producing right now are going to produce in the new facility?

As Grant said, there is a bit of mix going on. If you can here, you’d see a portion over the new facility operational and you’d see another portion of our effort still happening in our previous smaller facility.

Okay. And finally…

Hey…

Sorry, go ahead.

It just takes time to get a clean room and certified. It has to run for a given period before air levels -- required air levels can be achieved. And moving the IMH [ph] equipment is not attributable task. So, and right now, we’re still busy. We don’t want them to be down for a day to for the process.

Got it. And you talked about shipments to related party and then the Q talks about $325,000 [ph] of revenue from related major shareholder. Is that an early [ph] revenue or is that product revenue?

Well, the bulk, the majority of it is product revenue.

And that’s the waveguides comes from both facilities, that’s the mix?

Yes.

How should we think about that revenue going forward, is that one-time thing, or does that continue into Q4 into 2016, how should we be thinking about that revenue?

The revenues in Q4, one from some subsequent deliveries. Looking forward, we really can’t comment on that party’s intentions and plans.

[Operator Instructions] Our next question comes from the line of Orin Hirschman with AIGH Investment Partners. Please proceed with your question.

Just following-up on the last two questions, are you feeling comfortable not to say that the waveguide has gotten to the point of commercialization, and can we read into the fact that you shipped some to your partner that they are ready for predominantly for certain applications?

It’s impossible to speak to the third-party question, Orin, unfortunately. I can’t tell you that Vuzix feels the versions that we’re building for ourselves are good enough to go into production and they will be in our products.

Again, the follow-up and a very quick question, it sounds like CAF [ph] people will be able to see a little finally?

That’s correct.

Okay. That’s helpful as well.

Will have to call apart [indiscernible] that matter happen. There’s always this weird that could happen that we can’t control but right now we’re on track for that.

Do you, obviously different parameters that you could have on those waveguides in terms of how much of the lens it fills and how wide a viewing angle. Have you been able to demo different varieties of that successfully?

We’ve even built in the past upwards of 70 degree fields of view systems. The ultimate set of parameters that get put in parallel that’s what a function of the product that we’re building. And in some cases, it’s just a simple information display and it doesn’t need to fill your field of vision and in other cases, it’s a bit more and it really is so product dependent.

But is this capable of doing that in terms of that view?

Yes.

We’re not at point up to 100 plus oculus VR would we’ll get there.

And there’s not wearing any optical future systems that can fit in some glasses that can view that…[Multiple Speakers]

And just a follow-up on that. It sounded like from the first set of questions that they may actually be demoed from potential partners and customers at CES as well?

I can’t comment on that. I will not. Come to [indiscernible] we have 20 by 50 [indiscernible] this year and if you want to see demos of this stuff operate that’s where I recommend to go.

Our next question comes from the line of Ross Silver with Vista Partners. Please proceed with your question.

Just a question for you guys related to CES. They have talked about having a considerable mass force base dedicated to those AR and VR. And so, the competition, as a result has obviously increased for Vuzix. And so the magnitude of the press release that you put out a couple of days ago, could you just talk a little bit about who you are competing against and what sort of -- why it’s so significant that those awards that you won, what that represents, if you could just kind of give some granularity on that?

Yes, there’s over 10 -- maybe upwards of 10,000 companies that might attend CES. I don’t know exact numbers are, it’s big. They pick 25 up for Best of Innovations. That’s it, and have entire landscape. So, it’s pretty cool to think that we’ve got Best of Innovations for our iWear wearables product. They are a bit more generous on the other categories, on the -- what they call it? It’s not Best of...

Honoraries

Honoraries, but still it’s a limited group. And for Vuzix to have won eight awards this year, it’s -- I think it’s awfully impressive inside, there’s a lot about the new technologies that we are bringing to the table.

And just given the types of companies that are attending these -- CES which is pretty much every major electronics company in the world. The number of awards that you’ve received, obviously people are going to notice that and know that, but is it greater than that of other optical equipment companies that are there or I mean do you have any way that to know, say you did better than one of your potential competitors, or can you comment there?

I don’t really know.

I don’t believe there is any other players have received related awards. But in regards to boost space, I mean Vuzix we’ve been going to see it for quite a few years. We’re in the main hall, not too far away from Samsung, LG and Sony. The VR space is in south hall. We have products for a variety of uses. And we think most people, this is the main hall. We were where the little [indiscernible] for VR company. We still may take a secondary boost there but I mean Vuzix is -- we prefer to be in t he main hall. We have to seniority and the resource to get in there and our preference is to be there because I mean you can -- Sony, those companies, every single one of them is going to have cell phones strap to your head and a goggle; they’re going to call it VR. We’re trying to deliver much more than and none of them frankly are going to be doing AR like our products. We’ll typically make it across the field in the sunny Las Vegas sunshine to check out the competition like they do for us.

Yes, I think it’s nice to be in the main hall. That’s great. Well, thank you very much. I appreciate taking the question. My other questions were answered. Again, congratulations.

Our next question comes from the line if Rick Elkin with Oppenheimer. Please proceed with your question.

Hi, Paul and Grant. Congratulations on the big, big uptick in the sales of the products. Just a question on the manufacturing, once the Rochester plant is fully operational, what manufacturing will be left in China?

We manufacturer the higher volume stuff in our partners in China. When it come to U.S. facility, the lower volume stuff, stuff for enterprises that are -- but the biggest piece is the waveguide and some of the optics tech. Vuzix is not really interested in teaching anybody else how to manufacture these nano-optics. So, it’s going to be done here part of that; a lot of it has to do with intellectual property reasons. We don’t even, in some cases, want to file patents on some of these processes because anybody then in foreign country could just look at those patents and use them as sort of the ground work for how they would manufacture these things. So, in the interest of keeping our intellectual properties and technologies safe, the waveguide et cetera will be produced here in Rochester, New York and smaller runs of products for the enterprise base with ultimately the high volume stuff will be done in China. But again, every optic will be built in Rochester, New York and sent to China to be finally assembled in the products and so the volume pick that way.

Are the deliveries -- are they being held back by in our production right now?

We’ve had problems with some cabling issues around emissions testing, so we’d have to have some cable changes and we had problems sourcing some optics, being an optics company. And it’s just the quality of the optic left from Vuzix’s perspective a suboptimal image and we just didn’t want to shift that. That’s really what the issues have been related to.

So basically, the answer for the time being would be yes.

Yes.

And do you see those being solved quickly or…?

We’re receiving next week production product that has those problems fixed.

Our partner in China think they’re all fixed, so we’re going to do our final and we do have three people over there. They said they have never seen -- they’re great, they are the best they produce but they could be still jetlagged and want to see for ourselves when they get synched...

I pretty much trust those guys; they’re senior people. I think we’re in pretty good shape now.

Okay.

In specifying optics, sometimes communications issues, even though they might be on print because the prints of Chinese to English misunderstandings on AR codings and codings on materials and those kind of things to happen. So, again I believe we’re [Indiscernible].

And on the waveguide development, can you talk a little more about specifically what remains to be still done?

We can make tools, we can reproduce off of those tools, and we can make parts that can go into product. We have designed little tiny engines display engines that eliminate the waveguides. And our first versions of those are just coming in and they look fantastic. Maybe to get tolled up, so they can go into volume production. And that’s why it’s going to be the first half of 2016 when those products start shipping in volume. So, it’s just I believe at this point in time prioritization and finishing tools.

Okay. Well, thanks very much.

No problem. And just to give you a feel, I mean in midsummer, we were getting yields of like 50%. We now can produce in 10 out of 10 or perfect waveguides. So, the system has gotten to be pretty repetitive, pretty accurate. So, that’s just ramping it up from the volume side of it. And on the engines, even though they are the smallest display engines that have been built around these particular display systems that we’re using, they’ve all proven out. So, it’s just a get it prioritized now, tool it.

Okay. So it’s nothing in the area really of designing things, it’s just a matter of source of getting the tools and starting to make them with the tools and then working out on those kinks that type of thing?

It’s not invention at this point.

Okay

Although we’re doing some cool inventions around some of the designs that we’re building into, it’s not stuff that’s how are we ever going to solve this problem. This is just we’ve got to build it.

Our next question is a follow-up question from Aaron Martin with AIG. Please proceed with your question.

Just one follow-up question, we’re not all the way through with the institutional holdings on filings but there not really has been an uptick there, can you talk about your average to shareholders and what that’s been like?

Yes. First of all, we have a great team of IR people across the board quite frankly. And most recently, we brought on another gentleman [indiscernible] who is also been introducing us to new institutional players. We haven’t spent a lot of time in past other than going to conferences talking to institutionals. I think, Vuzix is growing up; we’re on the NASDAQ; we no longer an OTC company. We’re part of the it. Our storage is really coming together nicely. And I think just in general, it’s a more appealing story to institutional players. And I’ll add up, I think Vuzix is a great opportunity for institutional investors and I think they’re beginning to see that.

We have no further questions at this time. I would now like to turn the floor over to management for closing comments.

Thank you very much. We at Vuzix are excited about the opportunities ahead of us that seems -- I’ve already done all of that folks. Thank you very much for the call. Robert -- Andrew do you have anything to add to close?

No, I’d just like to thank everybody and all the shareholders for their participation on the call today. And this concludes the 2015 third quarter financial results conference call for Vuzix.

Yes. Thanks everybody. Have a good day.

Ladies and gentlemen, this does conclude today’s teleconference. You may disconnect your lines at this time. Thank you for your participation and have a wonderful day.