Vuzix Corporation (VUZI) Q3 2016 Earnings Report, Transcript and Summary

Greetings and welcome to the Vuzix Third Quarter 2016 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 call is being recorded. Now I would like to turn the call over to Andrew Haag, Managing Partner at IRTH Communications. Mr. Haag, you may begin.

Thank you, Operator. Good morning everyone. I would like to welcome you all to Vuzix's third quarter 2016 financial results conference call. With us today are CEO, Paul Travers and CFO, Grant Russell. Before I turn the call over to Paul, I would like to remind you that in this call, 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 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 not limited to general economic and business conditions, competitive factors, change in the business strategy or development plans, the ability to attract and retain qualified personnel, as well as changes in the legal and regulatory requirements. In addition, any projection as to the company's future performance represents management's estimates as of today, November 14, 2016. Vuzix assumes no obligation to update these projections as future market conditions change. This morning, the company filed its 10-Q with the SEC and issued a press release announcing financial results and business developments. So participants in this call who have not already done so may wish to look at those documents as the company will provide a summary of the results we discussed on today's call. Today's call may also include non-GAAP financial measures. When required, reconciliations to the most directly comparable financial measure calculated and presented in accordance with GAAP can be found in the Quarterly Filings at www.sec.gov and it's also available at www.vuzix.com. I will 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 2016. I will then turn the call over to Grant Russell, Vuzix's CFO, who will provide an overview of the company's financial results and after that Paul will then talk more about the company's outlook technology and programs for growth. We will then open it up for Q&A after management's update. Paul?

Thank you, Andrew. Hello everyone and thank you all for joining our call today to discuss the company's third quarter 2016 financial results and our business outlook. As most of you know, the market potential for AR and VR devices is significant, with ADR Research projecting the overall market to reach $120 billion and technology are forecasting enterprise smart glasses to make up at least $6 billion in that market all by 2020. Addressing this market, Vuzix testing shipping is M100 smart glasses for several years now. Within a few weeks we expect to begin commercial shipments of our next generation M300 smart glasses. There is significant interest from the VIP members that we have announced and their customers as well as many other players we have yet to announce. For instance, as many of you know, in the third quarter DHL was one of the world's -- DHL is one of the world's leading logistics companies have expanded its global AR program and made the M300 a key component of this. So we're solidifying our strong position in this growing space. This is one of many great examples and I will share more here a bit later on the call. Our goal at Vuzix is to be at the forefront of this anticipated trend and in keeping with that leadership role, last Thursday night we announced that we won four CES 2017 awards for our new Blade 3000 smart sunglasses. The Blade 3000 is world's first and I think it's important to make the point that it represents a milestone for Vuzix that we believe no other company has been able to achieve thus far, companies that have billions of dollars for research and development even. Vuzix is going to be the first company to deliver smart glasses in a form factor that looks just like sunglasses. Let's look into competition for a moment here. There is not a single solution out today that is not big, bulky, and odd looking. Nothing when we believe has even come close to a form factor and the needed performance of the average user would consider to wear in the real world. The Blade 3000 will be one of the first products to cross that fashion chasm. Finally users will be able to dawn a pair of Vuzix's smartphone glasses and not feel or look odd wearing them. And with the blade's wireless capabilities, users won't have to take their phones out of their pockets. You can just imagine applications like Pokemon GO and what they would be like in our glasses. The bottom-line we believe and expect Vuzix Waveguide in the Blade 3000 to be dealt under. In the past several months Vuzix also initiated and expanded shipments of the M3000 smart glasses to select developers and key partners in VIP, Vuzix Industrial Partner program. We completed the DVT and EVT process and we are in the final phase of moving into commercial shipments to end users. Thanks to a team of engineers at Intel and Vuzix, we expect to begin shipping the M300 before the end of this month. Continuing here the M100 enterprise smart glasses became one of the best known smart glasses in enterprise and we are even more optimistic about the M300. We are receiving valuable feedback on the M100 from partners and customers that we implemented with M300 and these efforts have already been recognized. For instance the Vuzix M300 recently won Compass Intelligence Enterprise Wearable Device of the year award. We expected over the coming months the M300 will far outpace the M100 in sales both in units and speeds of sales ramp. We expect robust demand as customers discovered just how multifunctional the M300 is and the kind of productivity enhancements it can deliver. Moving on to the Vuzix's iWear and video headphones let me start here with a most important point. I'm happy to report that our manufacturing problems are stabilized and we are now currently running at a production rate of 250 units per week and we just opened a third line in China to bump production rates for this. This has been a major road block with iWear and finally it is behind us. On the iWear sales and marketing side, we're excited about the response we continue to see from our partners and customers here and being able to make commitments on deliveries is allowing us to fine open up on more expanded channels. Let me now turn the call over to Grant for a review of the financials and then I will provide a more detailed update on Q3 and going forward expectations. Grant?

Thanks, Paul. Good morning everyone. Before I begin, I would like to point out that I will be rounding many of the discussed numbers to 1000s, even though we currently report in dollars. I also encourage interested listeners to review our 10-Q for a more detailed explanation of some of the quarters, year-over-year differences as I would just be highlighting it to you. For the three months ending September 30, 2016, Vuzix reported $583,000 in total revenues as compared to $970,000 for the same period in 2015. Product sales of $583,000 were down 35% from $891,000 registered in the prior year's period. Decrease in total sales was primarily the result of lower M100 smart glass revenues caused by existing and new customers choosing to defer purchases until the new M300 smart glasses is available along with the fact that only conservative percentage of the M100 smart 300 migration package sales recognize this revenue, when the M100 portion first ships. Contributing to the overall decrease is the fact that we recognize no sales of engineering services during the quarter compared to $80,000 contributions in the prior year's quarter. Sales of our iWear video headphones which were not available in the same period in 2015 compared with 29% of the product revenues for the three months ending September 30, 2016. Revenues from this product line has remained constrained due to production yield difficulties, which as Paul mentioned, should be well behind us now. Lower seals resulted in net gross and negative gross profit for the three months ending September 30 as compared to the prior year. This would primarily the result of revenues not being high enough to absorb a relatively fixed amount of software royalties and software amortization costs. Additionally we paid $98,000 in increased manufacturing overheads and direct labor, all iWear rework related, as well as $82,000 increase in freight costs for the 2016 quarter as compared to 2015. Next quarter we hope to finally move more shipments to see from there. Actual direct product gross margins and there is a table in the Q on this before any freight overheads and amortization were 49% to the third quarter of Q3. And this is down from the prior 2015 quarter as a result of the much lower margin currently under iWear and slightly lower gross margins on our original M100 smart glasses due to the M300 migration package revenues recognition allocated to the M100 forecast. As we begin to achieve higher sales, revenues are expected to absorb the somewhat fixed overhead costs. This should begin in Q4 as the revenues pickup once the M300 begins to commercially ship. At the same time, lower iWear headphone sales, lower iWear headphone production rework cost and air freight cost should also contribute to some level of margin improvement. R&D costs for the three months ending September 30, 2016, were $2,178,000 as compared to $944,000 for the same period in 2015. This increase represents our continued commitment to invest in our new technology and upcoming products. We incurred a $272,000 increase in salary and stock compensation expense primarily related to the additional new staff year-over-year. We also recognize an increase in product development research cost of $884,000 primarily related to the new M300 in the beginning of production design for manufacturing and refinement activities on the M3000 smart glasses with the contract manufacturers who will ultimately produce unit. This level of product development expenses will not need to continue once the product ships commercially. Other R&D departmental cost increases related to higher facility cost and increased external research, consulting fees related to raise iWear. Selling and marketing cost increased overall for the three months by $379,000 or 79%. This increase was primarily due to the following factors: higher salary and stock compensation expense related to new staff additions totaling $138,000, $71,000 due to higher Trade Show cost we did Exhibit at EFA in Germany this year not so first for us, and increased public relation and website cost as well as $25,000 increase in travel cost. G&A increased by $154,000 or 14% for the three months ended September 30, 2016, as compared to the same period in 2015 primarily due to increased higher activities and shareholder communication costs of $146,000 and $145,000 increase in professional fees related to the retention of stock consultants to help strengthen and improve our financial reporting control as well as the approvals for increased external auditor stocks and related fees that we will be incurring at the end of this year, offset by $176,000 decrease in stock compensation expense. Total other expenses for the quarter were $311,000 as compared to $128,000 in the same period in 2015. This increase in expenses were primarily result of a loss of $59,000 on the delivered warrant derivative liability valuation mark-to-market for the 2016 period versus a $58,000 profit in the same period in 2015, and an increase of $39,000 in senior term debt discount and issuance expense amortization. Overall the company recorded a net loss after a provision for accrued dividends of $5,435,576 or $0.29 per share versus a net loss of $2,811,000 or $0.18 per share for the same period in 2015. Quickly moving to the balance sheet as of September 30, we had cash and short-term marketable securities totaling $5,942,000. This is $1.35 million increase from the balance we had at the end of June of this year reflecting our recent equity offering which was completed in early July. Inventories including vendor prepayments for components were up as of September 30 compared to the balances we had at year-end in the prior quarter. This increase represents the procurement of component inventories for the M300 productions, net smaller than planned decreases in our iWear and M100 inventories. There is I should point out further disclosure in our 10-Q MD&A section regarding inventories by products and the expected strong cash contribution that their ongoing product sales should generate. With that, I would like to turn the call back to Paul.

Thank you, Grant. I'd like to now get into some specifics around Q3 and the outlook for the rest of 2017. Let's start with the M100. Even with the M300s eminent release, we are seeing new and expanded Vuzix M100 deployments across several core industrial sectors including supply chain and warehousing, manufacturing, insurance, and inspection, and of course field service. Although this effort resulted in Q4 sales for Vuzix, our VIP partner XOI Technologies has again began deploying on the large scale Seattle-based MacDonald-Miller, a full service design/build contractor. Thus far over 150 of their technicians are now using the M100 for worksite reporting, safety compliance, remote expert video support and POV video collaboration with the business owners, architects et cetera. The potential use of smart glasses to produce immediate ROIs and effectively multiply the effectiveness of the scarce, expert technicians in the construction and service industries. A negative trend is projected to grow significantly over the next four years. Bradd Busick, MacDonald-Miller CIO commented, while there are incredible operational efficiencies that enable mobility and collaboration for MacDonald-Miller staff through telepresence and increased accountability, the real benefit of this technology is add our customers to now witness firsthand, the current state of the building through multimedia experience. The old outage a picture is worth thousand words brings to. SAP also recently acquired with an expanded offering of their AR ticker application at Besly, a major IT hardware provider in Europe. The M100 is now across the complete warehouse operation from receiving, product put away, picking, and packing. This allows Besly to leverage a single device to direct the employee in real time to the next best cast to perform based on where they are located in the warehouse and what is the highest priority. Previously they were single function either picking or receiving et cetera and use both hardware and our software applications. Another example here is DHL, they've expanded their efforts with Vuzix smart glasses already mentioned and now have the M100 deployed at six sites across Europe, the UK, and the United States with plans to launch in Asia-Pacific next. The DHL vision picking application has been optimized based on their findings Phase 1 findings which already produced 25% labor savings. Early results from Phase 2 shows an additional 6% to 10% gains which significantly increased accuracy and training time reduction from two weeks to two days. Think about that, there is firms like Amazon they hire 120,000 people; they have to go through a training process before they can put them on the job site, a significant savings just in training. These strong results of DHL investigating the application of smart glasses and other warehouse applications such as value-added services like getting an assembly. They are directed power, building, complex, reverse, route vehicle, loading of parcels, and equipment maintenance. Markets loss Seattle's DHL supply chain commented that the vision picking program which is a UVmax piece of software program is DHL supply chain's number one translation of what AR solutions can look like for supply chains and the potential of this technology for DHL business is still largely untapped. We believe vision picking, this vision picking program is a game changer and how DHL will run the supply chain operations to deliver added value to our customers. These are just a few examples of real users, producing real results right now with the users M100 smart glasses in the industries of field service, logistics, manufacturing, telemedicine, and more. Immediate hand free access to people and data the M100 provides can increase productivity in any industry and this created the opportunity for individuals to do their jobs better, faster, safer, and more accurately. The effectiveness of Vuzix technology has been proven over the course of years of real-world use and has become the industry standard in the process and these customers are excited to move to Vuzix's M300 when it's available. The M100 will continue to open doors for our next generation smart glasses and when M300 is shipping here shortly, the M100 will be positioned to represent a low-cost alternative for price sensitive applications. Moving to the M300 let me start with a production and shipping update. Again thanks to Vuzix internal team of engineers and a large team of Intel folks, the M300 is right around the corner from shipping. With the emission testing being the long pull and attempt. To be clear here, we're already in production and we're building inventories, so we can hit the ground running as soon as the emissions testing environment are completed. We've been working on emissions testing for the last six to seven weeks and are very close to being completed. We expect to have tests and finally done in next week or two, the paperwork here is luminous with hundreds or more unit to be tested we are approaching to finish on. We'll be doing this in stages still as I mentioned previously but the largest markets we have will be done first and we expect will enable shipping before the end of the month. VIP program update as we all know to provide our end users with a full enterprise solution they seek an important part of Vuzix success is the success of our software application partners. In the region, we created the Vuzix Industrial Partner program and its final form the VIP program do not only include application developers but also key end users and clients such as GD, Philips 66 et cetera as well as consultants and integrators essentially delay in KPIT. At this juncture Vuzix is focused on maturing the software and software application ecosystem for the M300 smart glasses and to-date have dozens of VIPs committed and we expect over 200 ones M300s become more readily available. At this point all of our signed VIPs have been upgraded from the product like M300 EVT units to the essentially final format M300 DVTs. This allowed our VIPs to expand our pre-existing M100 applications to take advantage of all of the M300's features and to stress test these units and their unique cased environments. These VIPs have been working closely with Vuzix development team to help ensure that when the M300 is certified publically that their devices will meet the regulatory demand of the investor used cases they were designed for. Another important part of the DVT phase of the M300 product rollout is to share the M300 with the public to give us a feedback in supply and the sales demand pipeline. Our VIPs have been taking the M300 units to their current client base and demonstrating their applications running on new devices and their reactions have been incredible. Let me give you just a few examples. APX Labs the resolution of the M300 video even without autofocus fully optimized allows us to stream video over standard bandwidth and be able to read every letter on the page of the paperback book. There is no other hardware in the market that comes close. And with GE we easily ported our application in immediately recognized that the M300 is a superior product to anything else out there. The ergonomics clearly were designed for the warehouse. We have taken this to one of the world's largest logistics companies and will immediately move into a pilot once the M300 is certified. SAP our major manufacturing clients want to bring this hardware to their dealer network immediately and from Pristine, our clients have said if the M300 that they don't want to deploy, they only want best for their clients. The public has had exposure to the M300 at many Trade Shows such as WTS USA, AWE Europe other examples include SAP at DTNA Evolution, a theory to Dell World, Philip 66 at the Gartner Catalyst Conference and this month alone the M300 will go to Siemens to Phoenix Connect, Pristine will take the M300 with major manufacturer pump to FabTech in Las Vegas. APX Labs and GE will show the M300 at GE Minds and Machine in San Francisco and our VIP [indiscernible] labors have been taking the M300 on a Road Show to over 15 European cities. All of this has generated a lot of excitement in pent-up demand around the M300 in this coming release. The initial production shipments of the M300 will be prioritized to supply our VIP partners that we need to deploy immediately in 2016 at many of their biggest clients who have assessments been ongoing and wait for the smart glasses, hardware they felt could truly be scaled to their workforce. All of these VIPs and most of the clients have been in the smart glasses franchise so to speak with Vuzix since the early days of the M100 are expecting a good amount of simplicity and feedback from these early rollouts. These will be the first of many large deployments we anticipate for the M300. Following this Vuzix will begin a general release of the M300 which will include the fulfillment of all migration packages and other VIP pre-orders. In the coming weeks, Vuzix will open up three other programs for our normal world of thousands of existing M100 purchases and our 3000 plus registered developers and for the general public. The important part of all these early M300 sales in 2016 and the VIP application software ecosystem is that we have been using this to prime the pump so to speak for the 2017 business. As it currently stands, the 2017 sales demand pipeline is very strong for the M300 and although I cannot share specifics here, I can say that demand is significantly greater than it was for the M100 upon launch. The application and developer ecosystem we have now didn't exist for the M100 and as a result we're starting added gates with more orders for long shipments. We are also in discussion with companies with potential needs ranging from hundreds of units, in some case tens of thousands of units. It's a completely different atmosphere than when we launch the M100 as the marketplace to smart glasses has reached a new level. Back then, we were talking with researchers, experimenters and folks testing the concept out. Today we're talking with CIOs and leaders within companies that are preparing to deploy. I think it's good here to take a step back and look at the competition. If you look at the overall marketplace and they're talking $6 billion by 2020 right and if you think about who could supply to those marketplace, looking at the competition and seeing where we sit amongst those folks is important. So hope you guys understand why Vuzix here is confident with our growth in 2017. The enterprise space is made up almost entirely of devices today that are cumbersome, bulky, complex, and possible to use for an eight hour day. If you look at the competitor stacks and capabilities most of the competition have completely missed what the real used cases are unbelievably many even have basic safety issues will use our job sites and they are simply not seeing for the plan for construction sites or even in the warehouse. Vuzix's M300 seems standalone with the features that is needed to address most of the markets properly and these markets look to represent millions of units sold annually. We really fit in a unique place with M300; it was done right for what these customers want. Now quickly for an iWear update, as a reminder the iWear is compatible with any device supporting HDMI output such as mobile phones, tablet devices, gaming consoles, PC, and Bluray players and provides an exciting entertainment experience equivalent to watching 125-inch home television screen from a distance of about 10 feet, with an integrated battery the iWear video headphones is completely portable, so you just can enjoy it at home or on the go. This is different than almost all of the competition and so as appeal in areas that VR systems simply can't supply. For example with partners in Europe using them in VR based routing training systems, dentists are using them for distraction devices for their patients, and there are pile of other medical distraction used cases that have be coming to Vuzix of late. And of course they are great for personal entertainment. With all this opportunity it is great that the sales team at Vuzix are now able to guarantee supply and open some of the channels that have been requesting products for the last year or so. We're also excited about our growing involvement in the drone racing sport including our partnership with Amimon. The drone industry is growing rapidly and our iWear is ideally positioned to be a headset of choice for HD FPV, HD first person view from racing. The drove FPV is not the only market that we have HMV or the iWear, most radio controlled vehicles today use five gigahertz radios to transmit a video feed for user to drive the vehicle with. These include low cost, consumer drones for just entertainment, the drones being used to record aerial videos to general remote control devices in vehicles like cars and boats. To address these opportunities Vuzix is planning the OEM of five gigahertz receiver that is compatible with the bulk of these five gigahertz radios and support HDMI out to the iWear. This will enable the iWear to work for just about any of the older analog style RC devices between now [indiscernible] more about that. Development. The development team at Vuzix has realized significant results over the last 24 months. We are being investing in the future and the results are starting to be seen at the shipping product level. The M300 represents the first major upgrade to our smart glasses alongside it, we have been completing development of its sister product the M3000, and as you all know, the blade. All of these products leverage off of each other and helps the bulk of the head external cost associated with engineer events as already been incurred. The M300 is in production and our commission is almost completed to allow shipping. The M300 design is 100% complete and tooling is expected to be T1 ready in just a few weeks. The blade, electronics, and software designers in hand in the Waveguide and colder tube projection engine it uses this coming from the M3000. We haven't talked much about the colder tube here but this is a display engine, that is absolutely unique, it is the smallest built display engine volumetrically the DIC for the DLP and its design with all of the features required to drive directly into our Waveguides produces an amazing image and the M3000 uses that same engine as does the V3000 and the series of products that will come down the road based around that. It is an expensive endeavor for Vuzix [indiscernible] and so is the Waveguides that works with you will be seeing videos from Vuzix over the next three weeks to CES showing how great it looks inside of Waveguides with this projection engine in our finished Waveguides very exciting. The Waveguides for both the M3000 and the Blade 3000 are complete and ready to be produced in volume. Vuzix custom Waveguide display engine which is used in all of our Waveguide products tool and effectively ready for production. Finally over the last year or so, Vuzix's patent portfolio have increased with six new patents and 17 new patents pending with a focus around our display engines and the critical objects required for AR devices. As mentioned earlier, Vuzix's Blade 3000 has won four awards at CES and the Blade 3000 is driven by our proprietary see-through related guide optics that allow for high resolution augmented reality experience and a small form factor that it can now replace on what looks like a pair of regular sun glasses which is so unique in the industry. It's like the Holy Grail and Vuzix is the first company to get there. Even firms like Magic Leap with billions of dollars to invest are long ways from achieving that success. We expect to be demonstrating the Blade at CES 2017 in early January and we'll hear and see much more about it leading up to the show. We've been working hard to bring this next generation of wearable display to technology to market leveraging our relationships in leading position in AR market. As we've communicated in the past Vuzix has several OEM partners who are working on projects with us. Those efforts are continuing and now that we have the Cobra 2 Waveguide display engines available and matching Waveguide ready for production, new relationships are being weekenders [ph] and others just starting up. Potential relationships include the development of specific product types, private labeling product already being developed by Vuzix and plans for supply relationships with Vuzix. We represent both enterprise and consumer market opportunities. It's amazing to me how many companies are knocking on our door these days. And the more we show this next generation technology, the more it seems people are exciting to moving part of it. Before we turn the call over for your questions, I'd like to reiterate that as revenues and margins ramp the leading pace of investments in fixed assets in R&D will be moderating. Our R&D cost will be going down as our need for external resources over the next three quarters is dropping significantly. The company believes we will begin to see significant improvements in our financial results in 2017 and beyond. We have nearly $3 million in inventories that we intend on turning into cash over the next several quarters. Our iWear are now rolling off the production line. Our M100 even now is signing new applications that will like to be price adjusted to maximize this. The M300 has begun production and will be shipping before the end of this month. And finally as we move forward we believe that would assume to be able to secure non-diluted operating lines to support production and sales growth. So clearly our need for capital is not condemning. Frankly things are looking good at Vuzix it's exciting to be here and as these new products come to market it's even going to be more from. Now I’d like to open up the call for questions.

[Operator Instructions]. Our first question comes from the line of Rob Stone with Cowen & Company. Please proceed with your question.

Good stuff going on. My first question is about pre-orders and deferred revenue. Can you provide some color on roughly how many units or how many customer programs are already in your pre-order Q?

In the Q I pointed out we got about 370,000 in deferred revenue, and our balance sheet there is a deposit number but it's pretty modest sales, due to some of these start-up issues has chosen not to, pursue straight deposits on M300 orders I mean instead focus on sales of migration packages for the customer get a M300 -- M100 for the end term. So Paul do you have anything more to add on that?

I mean we've not opened up the M300 for general sales because everybody asked when can I take this little bit, when can I take this little bit, which is why that focus is going on and yes people are going in the migration packages. There is list of companies that we will be opening our table order from now and we will be able to tell them when they will be able to get them. So, yes it's as I said the demand the level of interest in M300 is significant compared to the M100. And so everything that we can make in this fourth quarter and pretty much into the first quarter we'll not have gotten time and home.

So make sure I understood that correctly that the amount that can deferred is not necessary the total amount that you would be recognizing from those customers they've only -- you've only taken in a portion of what would be fluctuated with those unit sales?

And in -- in some cases yes, that's true.

Okay. My second question is on engineering services that they were no -- there was no services revenue this quarter versus the prior year. Do you foresee having ongoing engineering services revenue or not?

We're clearly expecting some more soon. To be frank, some of the customers have been waiting our new Cobra 2 just plans on the Waveguide because that was key to their -- some of the development program we've been working on. So we should see that -- we can those now we have the Cobra 2 in hand.

And there is new folks that will be adding to the tile here shortly.

Okay. With respect to operating expenses you mentioned several times in the prepared remarks that the big step-up in R&D is after comeback down over the next few quarters. Can you comment on directionally on the run rate for sales and marketing and G&A, have we reached a good level now to support the ramp going forward or how do you see those to line items trending?

We feel we got a good level, I mean on the G&A first off there might be a little bit of creep up regarding some of the SOX related implementation and auditing cost. But I think we're pretty good there. We got -- we brought on a Director of Financial Reporting. I think our staff is pretty good there. The sales and marketing and over the last year we built the team up but I think we're pretty good staffing wise to grow and be able to support a good complement of sales. Next year we're going to look at Trade Shows more strategically. I mean last year we attended five shows. We're thinking of cutting that in half next year because that is smaller presence we would rather invest the funds in some other areas which we think will provide a higher rate of return.

I think you will notice that our value-added reseller partners are also starting to increase their efforts around our products. There is many Trade Shows that we're starting to build through that Vuzix is there and we will support it often but cost will be borne out by these companies and it should be because it's their markets that they are going after. So the beautiful thing about the way we're going to be selling the M300 is through a channel of partners that are no related to sell the products. So we will be able to rely on a lot of those dollars coming from those profits probably why they get discounts and awards. So that activity is not just happening from Vuzix as we move forward.

The rough order of magnitude how many partners you mentioned a number of examples in the script but roughly how many partners are exhibiting Vuzix on their own Trade Show?

There is dozens of VIP partners that we have now and probably before the end of the first quarter there will be over 200.

Great. My final question is on thinking about milestones for 2017, obviously the year is going to be starting off strong at CES. Can you just give us any hints, Paul, on what might be the other milestones we should look for as the year progresses?

Sorry. Yes I mean in Mobile World Congress is also coming off right behind that. I think some of the things you should look forward to seeing from Vuzix is there is more OEM partners that's we will be announcing that I think our people will be excited to see. The M300 clearly will be rolling and there is a bunch of activities around it. New company announcements et cetera and rollouts that the Blade will be shown at CES fully functional, there is some cool relationships that are coming around the blade itself also and then by summer timeframe, the Blade and the M3000 both will be in the market.

Your next question comes from the line of Brian Kinstlinger with Maxim Group. Please proceed with your question.

So I wanted to start with the emission testing, can you just give us a little bit of more detail on what gives you confidence that that will be resolved in the next two to three weeks. Did you say that it was mostly a paper work issue and then I was confused there and then will you put out a press release when you do get regulatory approval?

Yes we will, a press release will go out and it will also be accompanied with users begin shipping. And this is a formulary extend really, it brings the unit to the test facility or you bring piles of units to the test facility and there is a checkbox of tests, check, check, check, check and check and then we report that following. And you can track this on a spreadsheet so easily and we're significantly through the bulk of it and so it's just coming down to the end run there. We're very confident that that should be deployed by the end of this month quite frankly. Now I will reiterate we're doing this in stages right there is different tests for the European Union and there is different test for the U.S., there is different tests for Japan and the biggest markets we have put first in the Q. We will be in testing for the end of the year and maybe even a little bit in New Year to cover that all of the places that we think are employed to ship into. But the most significant ones Europe and North America are the first.

And the timing for both the U.S. and Europe regulatory approval are both about the same, is that what you're saying?

There is a couple of reasons.

Okay. And then can you kind of compare the early demand signs in U.S. versus Europe is one can significantly outpace the other in your opinion?

I wouldn't say significantly, I think there is a lot of business in both. I think there is probably just a little bit more in North America right now but it's neck and neck same, I mean there is a lot in both.

And then can you just -- can you remind us on the pricing side given how differentiated glasses are, should we assume you won't need to adopt early discounts or early adopters?

We have our stand. Anybody who buys in volume, we do have a standard discount and I think you can tell everybody the average selling price that works better. And there is not going to need to be make sure there will be significant discounts coming out of our gates here. This slightly only product available quite frankly we have invested an awful lot here as you all know. So I think people realize they have to be fair users of the same time, so we can build our business. So we should not see significant discounts.

Great. And then just quickly on iWear. Can you share with us the revenue in this quarter and then with the production issues in the rear view mirror, how do you see demand over the next couple of quarters with your inventory?

Our expectations are that within the next couple of quarters all of the inventory that we have should be sold.

And then finally --

7,000 plus units in the -- either in the work-in-process or in components.

It's very helpful. Last question I have is just to be clear can you remind us of the timing you expect for the Blade and Waveguide shipments should begin at the summer of 2017?

It's going to be probably mid-summer, yes.

Our next question comes from the line of Rajvindra Gill with Needham & Company. Please proceed with your question.

Yes thanks for taking my questions. So guys on the M300, you talked about demand kind of rising from hundreds of units possibly to thousands. I was just wondering if you could maybe flushed out a little bit more in terms of the cadence of the ramp of M300 and where do you think you will see the fastest ramp. Are you factoring in a lot of big orders or as orders more spread out across other companies may be you could characterize that a bit for me?

Yes. We have, you guys would love to talk to Lance in detail about this. I probably wouldn't allow him to do that on a call like this. We have a sales funnel that is represented by a bunch of different groups of customers. We've our VIP programs right and these are companies that sell to an array of other companies. You got a firm like A&A that might have 30 or 40 accounts that they adjust, just now and that's growing for them and so we got a lot of feedback from the VIPs and we build that into the funnel. We have 3,000 plus developers that have their part of our M100 program and we've done some outreach there at a little bit and build back into the funnel. And then we have other firms like the larger firms that are talking about significant numbers but we don't include them in what our funnel looks like because we -- the rails and when they happen it could make a nice jump in our sales plans but it's really hard to build inventories in that sort of thing for a rollout there, of those kind of numbers, so we talk about some customers in the hundreds of units, there is some in the thousands, and then there is some guys finally who pursues rails that are in the tens of thousands of pieces.

And could you talk a little bit about the lead time, how long that is or even building capacity in order need to forecast and how is that being worked out with the M300?

We have 10,000 pieces that long-lived parts and stuff are committed to right now and it takes 12 to 14 weeks, if you are starting from ground zero and our facilities with our partners can produce upper to 50,000 pieces on a monthly basis. So we truly can support the run rate that need, we have inventories that are coming and committed to for the first 10,000 and then as the business rolls out next year we will be rolling -- we will ramp appropriately.

Our next question comes from the line of Kris Tuttle with SoundView Technology Group. Please proceed with your question.

Hey guys, thanks for taking my question. As you know we're very excited about the market opportunity and impressed by the products, particularly M300. However I'm a little -- I guess I wanted a little color on the M300 approval process because the last time we met in person was August and although we expected to be a little bit of slippage the feeling was that, can we actually see approvals would be a nominal effort not something that would delay the launch and it feels like it slipped for these reasons. And I'm a little; I guess I would like to understand better why the process seems to be taking longer than we would let to at least think it would back in August and September?

Hi, getting better. We have test on even set aside in the lab and we did but these guys want stepping on the paddle to the same schedule that we thought they were working to. After a couple of weeks, we came to terms with those guys, it did slip into couple of weeks but they took more folks on and they've been taking them [indiscernible]. But you're correct; we expect it to be done this process sooner.

And when you say they, are those guys would specifically who was that?

This is the lab that we use that's outside of the system, we -- our casting to do many of these test requires very unique equipment and Vuzix doesn't have that in-house. So we are hiring in a third-party to do that.

Okay. And is this third-party somebody that you guys want to rely upon in the future or is this something that kind of came is may be these guys aren't the right guys?

No actually they're a good shot, this was communication issues, they're a good shot, it will be good work.

Well thank you for the clarification there.

Yes, no problem.

Our next question comes from the line of Amit Dayal with Rodman & Renshaw. Please state your question.

Hi, thank you guys. Just digging into this iWear, we are producing at 250 per week, the 7,000 that's work-in-progress, should we assume most of this only starts hitting revenue recognition in the first quarter of 2017 now?

No we have -- we anticipate climbing sales through this quarter in that. It won't be just Q1 only.

And are we targeting the growing market with this offering or we looking at something else like could you clarify like who we're already going after with the iWear product in the beginning at least?

Yes I mean we -- so we have the channels around the world that we sell a product to in the consumer side. We're shipping to 50 different countries in EA region and that data in the UK has been like frustrated with anything because you can't go to the channel and offer them any level of guarantee that would be product events. So we're going to open up those channels like we've done in the past, one. Two, the iWear is unique and that it runs standard video and it's got its beautiful display on it. And so there is markets that you just can't use a VR product for, the conventional VR product with two separate good screens and lights and a package that has to plug into a PC work and so that's like dental distraction, guys like welding industry those training systems, and then there is the mass market drone side of it, which you will see more and more happening with Vuzix on that front, we are coming out with only entire and the analog to HDMI interface that even allows you record videos that you take, while you are flying the drone through this compact glass slabs. So that will also be a market that we move into. So it's expanding our current channels at least built over the years and it's through some of the specialty markets.

Are we considering any partnerships with drone manufacturers who do not have this type of video capability?

Yes.

Okay. And then just in regards to the M300, you spoke about timing, I think it looks like you start shipping hopefully by the end of November, initial volumes probably start ramping up, I mean geography wise is it more U.S. sales or Europe sales, we are looking at, it looks like you have a mix of initial sort of customers, VIP partners et cetera in both areas. Where do you think some of the traction comes from early on and what is sort of the working capital requirements that will come into play as the ramp for both the iWear and the M300 starts to take place and with where we are on the balance sheet right now, you'll find $6 million in cash, will that be sufficient to support at least the initial rollout et cetera?

You're still saying about where we're sitting for iWear is we've got inventories on the shelf we got and paid for.

Got and paid for.

So that's great, we just got to turn the claim on that. The same thing is true on the M100 and it continues to sell. And in fact in some cases picking up pace will be the special program that looks together around that here shortly. There is some commitment and effort already in place in the 300 which I'll let Grant talk to. And then there is about a split, there is fairly equal amount of business opportunity right now in Europe and in the USA. This would probably characterize a little bit differently in that probably bigger partners in some cases States side but there is probably more in Europe in quantity perspective. So if you can look at it being about 50:50 split between the two.

And while the M300 well as with sales ramp consume working capital we're expecting at this stage to bring down -- drawdown on the iWear and 100 inventories to fund a lot of that for the first period, it was nearly $4 million of inventory average three quarters is iWear and M100 related, it's that was converted ultimately in the M300 inventories to support that could support fairly healthy year revenue run rate per quarter. So we're ultimately when we start selling tens to thousands of these things a quarter. There could be a need for some additional working capital to support that. And that's hopefully, we have a proven product, it's well received and we can potentially look to some operating line financing.

Just more than one thing, we talk of units and ask if we would like to support in that regard, so.

Understood. And just may be one final question on your commentary around research and development. You said R&D expenses at least in the near-term are expected to decline. How should we take that comment in regards to next generation efforts broader upgrade efforts is 2017 going to be more of a sales execution strategy year versus more R&D and product development and when do you think you will start reenergize, if you will R&D effort on that part?

I would love to just keep the pedal through the metal quite frankly but we're going to be smart about how we do this. We said this all along it's important to put the capital to work and we've done that. So we're at point now where we also need to execute on the marketing and sales side. So there is a big push that's going to be happening on that side clearly and when it comes to new product, like the M300 is there, the M3000 its tools, the engines, the Waveguides, the stuff that goes into the blade in M3000 are very common to each other. So the development efforts that you see for the most part in 2017 revolve around blade. We don't have an iWear for development and manufacturing problem that we would of course do. We don't have an M300 that's gone; we don't have the M3000 to the most part. So we are still continuing to leave out Blade out there and we want the M3000 out there but many of that cost have been incurred already.

And a lot of those costs were external and so that means we're not going to be hacking away, it's a great R&D team we built up. I mean our payroll occupancy costs are less than $0.5 million per month, so a great twice that is being spent -- has been spent in the last quarter on another items. That's why we're saying a lot of the cost savings will become as more work will be done internally rather than externally and we think we've got a great team to make it happen and we've learned a lot through, bringing the M300 close to market effectively the market and it's being the most expensive product we've ever developed at Vuzix. But it's incredibly complex but the end results, we got pretty fantastic product.

And the 3000 is you rated above that?

Same electronics.

Our next question comes from the line of Jim McIlree with Chardan Capital. Please proceed with your question.

Yes, thanks good morning, what’s going to happen with the iWear as you sell out of the current inventory is there a follow on production run or is there new iteration?

So when it comes to new iteration Jim, Vuzix really looking to the future here and say if you can wear a pair of fashion glasses, why would you want to use the headset that's in this form. There is market for we clearly see that but we think there is going to be more margin and opportunity in the next generation smart sunglass devices and viewers that look like Sunglasses then look for the classic VR headsets. That said we don't sell these devices that it's clearly a product that we could make more off, if it makes sense we will. We may find a partner and let that partner be the one that goes the product down the road and Vuzix just takes a royalty stream of that, we haven't fully decided at this juncture.

And on the M300 the hardware is set and future software changes would just be a flash to the devices, is that -- am I understanding that correctly?

It's over the era updatable. Take the M300 given an Internet connection and is being updated.

Correct. And you have spoken out few times on the market size of the 300 versus the 100 but I was just hoping that maybe you could put some ranges around it, so if we -- when you look at the 300 to 300 is X times greater than the 100 the 3000 is Y times greater than the 300, the Blade is V times greater than the 3,000. Can you help kind of quantify the relative size of these markets?

The 300 is probably 10X at least with the M100 and in fact if the projections that AVI research and Technavio holds true and Vuzix really is the leading horse in the race there, it could be a lot more. I mean 2017 will proven off a lot in that regard that M3000 to begin with is a sister product to the 300 and I think it's going to enable newly different used cases. It should by all right ultimately overshadow the 300 but the pricing is going to be higher. The Blade, if the pricing can come in right at first is still everybody on the same page here, the blade is going to be pointed that pro so much and it's going to be point that, office enterprise kind of applications when you got people that are forward facing to the customer wherein a Blade 3000 is better than having an M300 on, look and feel is more comfortable of people. When you're in a warehouse it doesn’t matter or a construction site but the Blade get cost of goods on it is such that it could ultimately be offered as a consumer product and if the price point was right and the apps were right on it, which will give us some interesting things on the app side there too. It could be orders of magnitude bigger than the enterprise side.

Okay, great thank you and lastly on Intel, can you just give us some update on where you are in that relationship?

There are one of these partners that we talked about on the business front, it's a great relationship on product development size of Vuzix and we're making wake out for those folks and who knows what that goes in the long run.

Our next question comes from the line of John Heerdink with Vista Partners. Please proceed with your question.

Congratulations gentlemen, you continue to move Vuzix forward in a very positive manner and I’m very excited about all of your programs, what I would like you to do is just speak a couple of minutes on in regards to your VIP program, where you again announced another four new partners in that program on that, can you speak how you're developing that and how is it team that's continuing to embrace these, is it inbound, is it combination for ways that you're developing a program that that should be continuing to develop value that can continue to produce results in the future? Could you just give us a little more color on that?

Yes I mean we ship 10,000 M100s and develop this retail system of folks building businesses around smart glasses right and how did that grew our sales team, the internal sales team spending a fair amount of time working with the guys that are leading in that space and out of that 3,000 plus developers that are in that tile and often it's inbound to Vuzix, sometimes it's outbound because there are certain firms that we think are doing such a great job there, we really want them as part of the VIP program and it just continues to grow from that basis. I wouldn't say it's selective; it's not everybody right now because we had limited resources to support the VIP program. We are not in production, we're not shipping products just yet when we do the team will be able to again accelerate and grow the VIP program. But it still won't be for everybody, to be in the VIP program that you get stuff from Vuzix that that is working in this basement we just couldn’t support. So these are select folks that end up in this program and they're paying in play.

Interesting and did I hear you on the call today that you mentioned that you would look that to expand a number around 200 VIPs over the next year or did I hear you wrong?

You heard as well now – right now it's fundamentally made up of value added retailers people that are building software around other devices, it's planned and include folks that are developing software for other companies and service more other companies in the likes and in some cases based on the firms that are putting in energy and efforts like the own software they will be able to do the program also.

Exciting, I will jump back in the queue, again congratulations gentlemen, again congratulations on the CES Awards to adding to your collection.

Thank you.

Ladies and gentlemen that is all the time we have allotted for questions and answers. At this time, our question-and-answer session has concluded. I would now like to turn the call back over to management, Mr. Andrew Haag.

Thank you everyone for joining us on the Vuzix's third quarter financial results call and business update, if you didn't get a chance to have your questions answered, please reach out either me or Paul and Grant directly, thank you very much and again looking forward to a great 2017, congratulations guys.

Thank you everybody.

This concludes today's conference. Thank you for your participation. You may disconnect your lines at this time.