Vuzix Corporation (VUZI) Q1 2017 Earnings Report, Transcript and Summary

Greetings and welcome to the Vuzix First Quarter 2017 Financial Results and Business Update Conference Call. At this time, all participants are in a listen-only mode. A brief question-and-answer session will follow the formal presentation. [Operator Instructions]. As a reminder, this call is being recorded. Now I would like to turn the conference over to Robert Haag, Managing Director at IRTH Communications. Mr. Haag, you may begin.

Thank you. Good morning, everyone. I would like to welcome all of you to Vuzix's first quarter 2017 financial results and business update conference call. With us today are Vuzix's CEO, Paul Travers; CFO, Grant Russell and the company's new COO, Paul Boris. Before I turn the call over to Paul Travers, 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 the 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 and 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, May 10, 2016. Vuzix assumes no obligation to update these projections in the future as market conditions change. This morning, the company filed it's 10-Q with the SEC and issued a press release announcing its financial results. So, participants in this call who have not already done so may -- who may not have already done so may wish to look at those documents as we provide a summary of the results we discussed today on this call. Today's call may 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 sec.gov which is 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 first quarter of 2017. Paul will then turn the call over to Grant Russell, Vuzix's CFO, who will give an overview of the company's first quarter results. And after that Paul will talk more about the company's outlook, technology and programs for growth. Following Paul Travers will be Paul Boris, Vuzix's new COO, who will provide a brief introduction and share his thoughts on where things stand at Vuzix. We will then open the call up for Q&A after management update. Paul, go ahead.

Thank you, Robert. Hello everyone and thank you all for joining our call today to discuss the company's first quarter 2017 financial results and business outlook for 2017. 2017 is off to a tremendous start in Vuzix as evidenced by our first $1 million plus revenue quarters since we sold our defense division in 2012. Our brand and positioning as a leading supplier of smart glasses and enterprise continues to gain steam to our direct customers and to other leading enterprise players as evidenced by Vuzix's strategic agreement with leading PC electronics firm Toshiba and with another -- a number of other active OEM engagements. Our primary objective this year is to execute to our business plan, grow revenue, increase our M300 production, broaden our distribution channels and prioritize support and actively engage interest received from select OEMs. To help support this effort we've named Paul Morris former Vice President of Manufacturing Industries of GE Digital as our Chief Operating Officer. Paul has been a pioneer in wearable hands-free manufacturing for several years and look forward to his input and impact on our manufacturing, engineering and software development and business development efforts in general to help drive the commercial adoption of our smart glasses product lines. The opportunity at hand with the enterprise space is to outfit mobile workers with smart glasses in the United States alone is enormous and if you age of the potential market size more than doubles. Forester research estimates that nearly 14.4 million US workers will use smart glasses in 2025 with net new sales eclipsing replacement sales until 2021. Having aggregate a $1000 dollars per unit, this represents a $14 for billion market for hardware sales in the US alone. To get a feel for some of these numbers come from in the U.S. we believe our current addressable market in manufacturing consists of approximately 12.3 million workers, field service another five million workers, quality control inspector over 0.5 million, warehousing and logistics 250,000 workers that are in direct material handling and over 100,000 construction and field service inspectors. The advantage of smart glasses over conventional methods is clear and have been highlighted in several recent videos put out by some of Vuzix’s leading VIP value-added resellers and end customers. For example, Vuzix’s smart glasses were highlighted in an Accenture cabin assembly video inside an Airbus 330 Aircraft, which demonstrated incredible time saving efficiencies and reduction of errors. The handsfree manufacturing process leveraged contextual marking instructions and voice recognition to confirm the completion of each task using Accenture’s application and Vuzix’s smart glasses operators can improve productivity 500% and reduce errors to zero. That’s an amazing improvement in production. Upscale, one of our VIP partners recently highlighted advantages of smart glasses in the field in two comparative side-by-side videos using the Skylight software. The first video was a GE renewable energy field service technician working on a patch panel with smart glasses versus a paper-based instruction manual. The result was that the patch panel work order was performed 34% faster by completing the job in 34 minutes with the smart glasses versus 51 minutes with conventional paper instruction, again an amazing improvement. The second comparative side-by-side video of a warehouse worker picking parts at a GE healthcare's MRI factory the worker equipped smart glasses completed the task in 15 minutes, while the paper worker completed the task in 27 minutes, resulting an immediate improvement of 46% upon first time use of the augmented reality smart glasses. These are just a few examples in a small sampling of the many value-added resellers and VIPs that Vuzix’s externally working less and repeat times of ROIs it is inevitable and clear that the migration towards hand free wearable smart glasses and manufacturing, warehouse and logistics as well as remote field service and many other vertical markets is underway. I have much more to say on all of these fronts as well the recent development of Vuzix. But first let me turn the call over to Grant for review of the financials and then I'll provide a more detail update on the first quarter of 2017 and going forward expectations. Grant?

Thanks Paul. Good afternoon, everybody. Before I begin I’d like to point out that I'll be rounding many of the discussed numbers to thousands it might be forward dollars. I also encourage interested listeners to review our 10-Q for more detailed explanation and some of the quarter’s year-over-year variances as I will be highlighting just a few. On the revenue side for the three months ending March 31, 2017 we reported $1,211,012 revenues as compared to $364,000 for the same period in 2016, an increase of over 233% year-over-year. Overall sales were up primarily the result of the volume production release and commencement of sales related to our M300 smart glasses and the sales of engineering services for specialty version of our smart glasses for Toshiba. We achieved a positive overall net gross margin for the three months ended March 31 of $149,000 as compared to a gross loss of $239,000 for the same period last year. The improvement was primarily the result of increased product revenues which allowed for the pull of all our relatively fixed overhead costs such as facilities, software royalties and amortization. Further Q1 margin improvement was driven by our engineering services, which contributed materially to our overall gross margin improvement from the 2017 quarter. As we continued to achieve higher sales, the absorption of all these overhead costs could be leveraged further and contribute to significant levels of margin improvement pretty quickly. Additionally, the greater maturity of our production processes and the transfer of the M300 manufacturing product line offshore will result in lower manufacturing costs resulting ultimately in additional margin improvement. Q1 2017 gross profit was hampered by zero gross profit earned on the iWear video headphones sales due to its prior write-down to its net expected realizable value at the end of December last year. And in fact, they're being sold to cost now so there is no gross profit. Further reducing our gross -- our expected gross profit for the quarter with the higher than expected M300 product cost as we transitioned into volume manufacturing during the first quarter. Our external contract manufacturer like annual operation has fixed overhead labor cost that need to be observed. So, when the production volumes are less target than target that still needs to be paid by the client namely Vuzix. With the move of the M300 to is assembly to China net higher production rates, we expect our M300 product costs will ultimately be decreased by over 33%. This should be achieved by early this summer and to give you an idea of its impact and based on our first quarter actual M300 builds and shipments, such cost reductions if they have been realized in Q1 would have improved the gross margins by approximately $200,000 for the quarter. R&D cost for the three months ended March 31, 2017 were $1,669,000 as compared to $1,275,000 for the same period in 2016. Currently over the last year we made lots of additions in R&D as we continue our investment in new technology and upcoming products. Spending increases resulted from transitioning the M300 smart glasses into volume production with our outside contractor. Please note that R&D spending is actually track down from the prior quarter namely Q4 2016 whereas $1,826,000 and we expect to see further reductions in our overall R&D over the next few quarters. Selling and marketing cost decreased for the three months ended March 31, 2017. They were $1,031,000 as compared to $1,126,000 in 2016. The decrease was primarily related to the reduction of use of external marking services firm. G&A expenses for the three months ended 2017 were $1,235,000 as compared to $886,000 for 2016 and this increase was primarily due to increase SOX compliance cost of $211,000 and now referred consultants and external auditor related work as well as the hiring of new accounting personnel and an individual to focus on referrals and IR communications. And while not reflected in the Q of 1/2017 results we recently added further two staffing accounting and financial reporting this April and now have a total of four CPAs including ourselves on staff. Going forward we expect to see some of the SOX related costs moderate with more use of our new internal staff to accomplish some of the work and it will be spread more evenly across the quarters, now that we have the systems, processes and review procedures in place. Tunnel and operating expenses were $156,000 for the three months ended March 31, 2017, as compared to an expense of $80,000 in the same period in 2016. The net change was driven by the reduction in the gain on the mark-to-market revaluation of the derivative liabilities which was $23,000 in 2017 versus $102,000 in 2016. Overall the company reported a net loss of $4,182,000 for the first quarter of 2017 versus a net loss of $3,776,000 for the corresponding 2016 quarter. This equates to a loss after provision of approved preferred dividends of $0.23 per share versus a net loss of $0.26 per share for the same period in 2016. And moving to the balance sheet as of March 31, 2017 we had cash and short-term marketable securities totaling $10.4 million this was a decrease of 4.1 million from the chassis had on hand at December 31. Adding back non-cash charges are net cash use for operation in the first quarter of 2017 was $3,833,000 person $3,213,000 use for operations during the first quarter of 2016. On a trailing quarter basis which is the more important than the comparison the cash use to fund operating losses in Q4 2016 was 4,761,000. So we're making good progress in reducing our quarterly burn. With growing demand for and shipments of the M300 we expect to see cash flows improve as we ramp up to meet demands. We had a positive breaking capital position of just over $11 million as of March 31 you’re seeing the ongoing conversion of the remainder of the convertible debt that is due in 2017 so far in the second quarter of 2017 we've had $260,000 in principal and accrued interest converted and there's as of today there is around $293,000 that needs to be converted before the notes mature that's considering they are convertible at $2.25 per share we expect that is likely to happen. In conclusion, we believe our existing cash and cash equivalent balances along with some successful execution of management's operating plan should be sufficient to meet our working capital, the capital expenditure needs and operational needs for at least the next 12 months. With that I’d like to turn it back over to Paul.

Thank you, Grant. Let’s start with an update on the M300 again we had a solid start in the first quarter of 2017 despite Q1 2017 being such a big jump over Q1 2016 our financial results were constrained by manufacturing ramp and yields. As such we shipped all the M300 inventory that was available, we shipped to our customers in Q1 and we clearly could have shipped much more based on demand. Our manufacturing and rollout strategy for the M300 was to begin initial production in the United States and to work with our VIP partners to improve the features, software and manufacturing details as well as giving our VIPs a head start on their software efforts. At the same time this has helped us lockdown the manufacturing process with the planned move to manufacturing in China with our partner as soon as possible to reduce cost and improve yield numbers. Starting production in United States allowed us to leverage shorter shipment lead times to cast and optimize the M300 and respond quickly to necessary tweaks during the initial manufacturing process. We began ramping production of the M300 in mid-February and assembly of the first 1,000 units readily target for Q1 2017 was completed by mid-April from our partners U.S. manufacturing facility. As the M300 units were received they were flat software direction tested an immediately shifted out to door of the customers. The process of transferring the M300 manufacturing lines from the U.S. to China is well underway in the current quarter. Manufacturing the M300 in China will lower our cost profile, improve our yields and expand production levels. Our existing partner is tracking the production line in China for manufacturing the M300 and we expect to be up running over the next few weeks because of everything were in stateside we expect manufacturing yields to ramp very quickly to targeted 1500 units per month level as we move through the second quarter and we’re forecasting no products drought. The addition of Paul Boris as Chief Operating Officer of Vuzix should have an immediate impact on the day-to-day oversight of the manufacturing process. Paul Boris has industry-leading manufacturing experience which is centered around productivity and operations and SAP in general [indiscernible] will provide Vuzix with tremendous insight and support especially if the company transforms into a high-volume manufacturing of smart glasses for our customers and key partners Concurrent with our transition of the M300 manufacturing from the US to China we also prepping our website and staff for the broader of prerelease of the M300 smart glasses next month. Additionally, as with new product as conflict as the M300 we continue to rollout software updates to further optimize the performance of the M300 so that they perform up to specification for our customers. As per our shared plans with everyone the initial deployments of the M300 had gone out to our VIP partners and we have fulfilled some migration packages and other M300 VIP preorders. The broader release of the M300 next month will open the sales channel to the general public and our development community which today exceeds 4,000 registered developers and their customers. Moving on to the M100 demand for certain applications built around our M100 smart glasses platform remains strong and we're working with our partners to cultivate growing business opportunities to balance 2017 and into 2018. An additional production of the M100 was initiated in Q1 and as these opportunities firm up we may have to kick off further production batches. Quick update on the iWear here Vuzix’s stated goal remains to move away from bulky HMVs focused on beyond market in favor of AR based solution and glasses that are much more user-friendly form factors. That said as we move through this transition we are optimistic that the new $299 retail price point we have placed in the iWear should increase our sales and inventories around. In Europe and the U.S. new channels are being opened and there is good sale and already starting to happen. As you all know the VR market cloudy with all the players out there and some of the very low price point of phone-based systems. But the iWear has weak advantages over the competition as such we are feeling good about our strategy and the repositioning of the iWear at these new price points. From an OEM perspective, there has been a lot happening at Vuzix in fact it's been pretty amazing to me. There has been a lot of media attention focused on augmented reality and smart glasses from the like of Apple, Facebook, Snap to name a few and it's almost every major company out there today that's talking about this being the next thing right. The desire to develop an augmented reality smart glasses roadmap by the leading technology companies in the world, we feel is good for the industry and good for Vuzix on the LM Front as we have had initial and continuing discussions with many of these players. Our project with Toshiba to develop Toshiba smart glasses powered by Vuzix is progressing well as we received over $240,000 in an NRE revenues during the first quarter based on key milestones and we're on track to begin volume production for Toshiba as early as Q4 2017. We're very optimistic about the project roadmap here at Toshiba and seeing an opportunity to generate a significant piece of new business for the company. As we get closer to rollout and with the introduction of EVT preproduction units by Toshiba, to select accounts, we expect we'll be able to share more on this in the coming months. There continues to be a growing appetite for wearable display solutions in the marketplace and with Vuzix technology becoming more visible it has resulted in an influx of new OEM opportunities for the company. As a result of this demand, in our market-leading wearable display solutions Vuzix now has multiple active OEM engagements, one of course of Toshiba and several more engagements with unnamed peer one consumer electronic companies. Vuzix expects to receive further NRE revenues from these OEM engagements during the second quarter. In addition to these existing OEM programs, Vuzix continues to field new requests across a variety of industries. We expect that as 2017 unfolds, we'll be able to share much more on this growing area at Vuzix. We've always told everybody that the plan here was in many cases in the consumer space especially and some other verticals that were not directly Vuzix. We were going to partner with folks and you're going to be seeing that in a bigger and bigger way as the year unfolds here at Vuzix. On the development front, let me start with the Blade 3000, as everyone knows in January at CES 2017, we introduced to the world Blade 3000 smart glasses, weighing in at less than 2.0 ounces -- 2.8 ounces and having a look and feel of normal sunglasses, Blade smart glasses stand out in the field. Let me just give you an example here. These guys look like always daily 2.8 ounces, which is around 79 grams and competitors admittedly with a very interesting set of capabilities like hollow lens are literally 160 grams. It's almost in order of magnitude more weight and they look bizarre yet the Blade 3000 is looking like something that people would really wear has turned heads in a big way, so much so that they receive four innovation awards at the show, which was followed up by Showstoppers Best Of Innovation Awards for the Best Smart Phone Accessory in the World Congress in Barcelona Spain and attention that Vuzix has received has been tremendous and almost always puts Vuzix at ahead of the AR smart glasses pack. We view the Blade 3000 truly is a device that seems year's ahead of the competition. I'll also add that it's putting holds true here too as the showing of working Blade 3000 over the last three months to select OEM and partners has also been a big driver for the growing flow of OEM relationships that Vuzix is seeing. On the production front, we've also made good progress in the first quarter. The Blade 3000 has now moved to DSM and tool and we're on track for EVT and DVT releases in the second half of the year. The M300 -- 3000 excuse me, we said before that there was some strategic thinking around this M3000 especially as it relates to amazing and overwhelming interest that blade 3000 has had and so we've decided to focus more on the Blade 3000 and the rollout of the M300 on those efforts and we're pushing the M3000 out a little bit to a 2018 rollout and we'll share more here as the year unfolds in that regards. The M3000 is a cool product that the blade can and with so much happening around the M300, we just felt it was better placement of our resources to kind of shift things around a little bit. On the Waveguide front, the Waveguide designs for both the M3000 and the Blade 3000 are complete and ready to be produce in volume. Our Waveguide automation equipment is now operational and is expected to be installed at Vuzix facility in the next couple weeks. This is a little behind schedule but well in time for the volume production requirements we expect to see starting this fall and as you all know, the prospects for additional OEM deals with major players around our proprietary Waveguide technology is high and the state and capability of our own processing facility is helping to reassure this business. The projection engine which is a very unique small display engine that uses a point from our partners at T.I, is used with all of these waveguide products and it's tool and ready to ramp into volume production to meet the internal and OEM partner's needs to the company. In summation, 2017 is already proving to be a pivotal year for Vuzix and the entire smart glasses industry quite frankly. We’re highly committed to the enterprise space as we have solid leadership position here with leading Fortune 100 and 500 companies, seated with our products some with initial rollouts and process, our case studies and with VIP members. I don’t know how to say this strongly enough. There are a lot of competitors out there that are making big bulky crazy devices that when you actually try to use them on the plant floor, they become just not usable. And it's time after time, folks are coming to Vuzix because of our lightweight device that can easily place information where it needs to and be used in an eight-hour shift and there’s not probably any competitors that can do. So Vuzix is leading here in a market that is estimated to be nearly 14.4 million workers alone by 2025 in the US., improving Vuzix again is the lead player here. Yes, it’s in a sense but the winds are back and as you can see we have been preparing to take advantage of it. We have strengthened the management team at Vuzix with the recent addition of Paul Bores, as Chief Operating Officer. The manufacturing of the M300 is being transitioned from U.S. to China which will lower our cost profile, improve yields and increase production levels during the current quarter and as offered in the past, we’re not just doing this on our own. Our active OEM engagements are very focused effort happening right now, and we expect NRE revenues from all of these engagements during the current quarter. And finally, Vuzix continues to be a leader in the technology innovation in this space with over 90 patents and patents pending, our advance waveguide optics and display engine and the coming release of several new AR smart glasses solutions from Vuzix along with multiple OEM partners product that we’ll be employing this technology. The first quarter shows Vuzix is off to a strong start and we expect each quarter to build on this towards a record 2017 and even stronger 2018. Finally, I just want to reiterate as Grant mentioned earlier, we believe our current cash position and the successful execution of our operating plan will have sufficient capital to meet our working capital and capital spend needs for at least the next 12 months. I’d like to now turn the call over to Paul Boris, Vuzix’s Chief Operating Officer, so he can introduce himself to everyone and give his thoughts on the future here at Vuzix. Paul?

Thanks, Paul, and good afternoon, everyone. So, let me start by sharing how excited I am to join the Vuzix’s team. We’ve got impressive technology and we’re at a time in history where the ability to expose, move and store business-critical data seamlessly across the value chain is intersecting with our ability to use machine learning and our efficient intelligence to make sense of it in new ways. This manifest itself in things like prescriptive analytics, digital thread, digital twin, all of this is really great for people, and it's great for business unless, of course, you can't render the results in a simple consumable way on demand and in context. And that's where the rubber meets the road for all this cool new tech and precisely where we fit in the solutions stack. We’ve a critical component to the success of trends like smart manufacturing service, industry 4.0, and whatever name the companies use for the data connected enterprise. As an introduction, I’m a manufacturing and operations guy. I’ve got over 30 years in the space either running operations or developing selling and deploying technologies to enable rapid sustainable outcomes for industry. A few years ago, I joined GE as the CIO of advanced manufacturing strategy after nine years or so at SAP. Based on the successes that we drove early on for GE's own manufacturing sites, I was asked to take a role as the vice president of manufacturing industries with the newly formed GE digital organization. In short, I was asked to take the successes we drove internally and move them into a broader market. I got to see firsthand what this technology will do for industry, and more importantly how quickly the right solutions properly positioned will be adopted. I say I am excited about where Vuzix is headed. That puts it lightly. Beyond that, I have a legacy of delivering systematic improvement scalability, all infused with a right dose of technical innovation. I love tech but it's only when you deliver real measurable outcomes both internally and externally that you can really claim the value from it. Again, I’m excited at where we’re headed, and equally excited about the tools and teams we have that will take us there. So, thanks for letting me introduce myself, and I'll turn it back over to you.

Thanks, Paul. I’d like to add that Vuzix is equally excited to have an individual of your stature, realize the journey, and see the value proposition that Vuzix is on the cusp on of delivering on. And we’re thrilled that you’ve decided to join our team to help make it happen. It's says an awful lot. To close out our meeting, I would like to let everyone know that Vuzix will be hosting an open house during our annual shareholders meeting on June 13 here in Rochester, New York, our corporate headquarters. We will be letting everyone know more details for the event shortly, but please save the date if you’re interested in seeing the latest from Vuzix and some our VIPs and application in person. Now, let me pass the meeting to Robert.

Thanks, Paul. That's all amazing stuff and we’re all very impressed. We would like to now open the call for questions. So, operator, if you can open the call for questions, that’d be great. Thank you.

At this time, we'll be conducting a question-and-answer session. [Operator Instructions] Our first question is from Jim McIlree of Chardan Capital. Please go ahead.

Thank you, good evening. I think, Paul, you said that you shipped 1,000 of the M300's through April. So, did you book revenue on all 1,000 so far? And approximately how much wasn't booked in revenue in Q1?

Jim, I’m going to let Grant answer that.

We’ve booked in Q1 what we could -- what we shipped. That said, at the end of the quarter, we’d only been able to fill about little over 50% of our migration orders and we fulfilled none of our preorders. But that said, we did not ship those 1,000 units in the year. I thought we said some production, continued production startup issues in the yield were there. We are unable to do so. We could have easily solved them all but that’s why you see in our balance sheet at March 31, differed revenues and customer deposits.

Right. So, for Q2 -- well on the production side, all of those issues have been solved or you're still solving them?

We can make product now, Jim. We’ll stay where we are in the middle of a week to two here transition as we bring up the China facility. So, we’re producing, as we said in our talk here just a minute ago, we don’t expect to see a drought. We actually don't have much in the line of inventory because we continue to ship as the inventories come on board.

And so, all of the migration orders have been fulfilled and right now you're working on the preorders. Is that correct?

No, Jim. As of today, we still got unfulfilled migration orders, and we shipped zero against our customer deposit.

There's a lot of demand still, Jim.

And strategically, there might be a little bit of line jumping here and there, but it’s needed.

Are you expecting to fulfill? Are you expecting to complete all the migration orders this quarter?

We expect to fulfil all the migration orders, but there’s a ton of other stuff that's in the queue that’s right behind it.

Okay, and I'm a little bit confused about the M100. Last quarter on the call you said that you were going to place another order. I think you might even said you have placed another order and this time around, it sounds like you're still uncertain.

I'm sorry. Maybe I wasn't clear. We have placed another order already in the first quarter.

And maybe indicating because of the continued demand for the product, we might be placing another order.

Another one after the one you -- okay great that.

Expecting delivery in the next 30 days the one coming thereafter well we’ll see.

Right. Okay. That clarify it thank you so much. All right thanks a lot good luck everything.

Thank you, John.

The next question comes from Brian Kinstlinger of Maxim Group. Please go ahead.

Great congratulations, I think you definitely demonstrated you have a significant head start versus your peers.

Thank you, Brian.

What I wanted to talk about I thought it was interesting comment you mentioned you have several OEMs. other than Toshiba I am wondering will you be able to announce them soon or provide any other detail and maybe how many you have in total?

The answer there definitely will be announcements coming from those OEMs I don't know the timeframe it should be definitely in 2017 because things are rolling with these folks but the answer is yes, I just don’t know the timing Brian.

And can you compare them in size to Toshiba?

They’re their tier consumer electronics firms.

Maybe equal or bigger.

Yeah great.

In electronic and they’re price based.

Yeah and then when you finally are in China, which sounds like soon and you’re at scale so the economy is at scale for your suppliers are where you want them to be what is your target gross margin for the M300 what does that look like?

Look with current expected wholesale selling prices it’s going to be around 55%.

Right, but that 55% will be reached at what volume not a couple of quarters or do you think by the second half of the year you'll see something like that?

It will be during Q3 and the 55% is pretty an overhead allocation, that’s the product cost. So obviously we need enough total revenues to absorb all the manufacturing cost.

The product gross margin will be 55% but the overall gross margin won't be something that looks like that for probably another year is that right?

And sort of how fast we ramp but for sure on mature basis we hope to be north of we think we can get north of 40%.

Great and then just a follow-up on one of Jim’s question can you actually supply us the number of M100 and M300s that you delivered in the quarter?

For competitive reasons, even Brian we don’t want to start breaking this thing down into market areas and which products went where and those kind of things.

Okay. I think one of the differentiation and we’ve seen companies fail in the past due to lack of software applications and you’ve obviously highlighted that in other calls and some of your press releases, can you talk about how many software apps you have right now working on the M300?

We have over 50 VIPs if you look at the press release and we haven’t announced all of them. Each one of those guys represent between one and three or four applications. Some of these guys are building significant businesses around smart glasses so they have picking applications, they have manufacturing applications, they have quality applications. Other companies are value added resells are focused just on field service. So, they might just have one. I will add that there is upwards of 4.000 developers in all of that other group we could probably point to over 250 value added resellers in total that are writing applications around it.

And by year end how long does it take to build some of these apps on average? Will you have 100s by year-end do you think? Will you have much more?

The beautiful things about where Vuzix is in that today is we’ve been doing this with smart glasses for a fair number of years already. So, there is a big head start and our whole VIP program in early access was about making sure that some of the bigger more important I shouldn’t say more important, every one of our customers is important, but the guys that are more driven with the guys that made it into our VIP program. So, we're off to a really good start here, but I expect it just keep accelerating. I will say that Vuzix is also looking for ways to be able to make it even easier down the road for folks to develop around our products?

Yeah and then you had mentioned 1500 per month is your planned capacity pretty soon. If I assume for four collateral start maybe in the third quarter, maybe a little bit after, do you think you have demand right now for that or that begin to build a little bit of inventory in the second-half of the year?

I am not sure that we’re going to be able to build inventory through the fall of the year based upon how fast some of our VIPs will start cracking up.

So that leads to my last question when Toshiba and other start to sell these glasses where will the additional capacity come from? Will you have to open a much larger facility or will you be able to build that capacity with your current supplier to meet those other OEMs demand?

Yeah, we’ll not need to sell new tools. The system that we have in place, the part of the reason why the overheads are there is because it’s capable of delivering significantly more than that number.

Great very exciting results thanks.

Thank you.

The next question is from James Medvedev of Cowen & Company. Please go ahead.

Hi guys thanks for taking my questions, a lot of them have been answered but let me just ask a little bit about the expense categories, the expense lines. So, the R&D is up pretty sharply year-over-year, it’s a little bit more or less flat with the fourth quarter, what’s the outlook there?

A lot of it is related to the M300 and going through the final regulatory approvals around the world as well as -- we had to do some finetuning and we have yields issues and made some last-minute changes. So that cost us money for us. We probably added -- we’ve gone from maybe around 18-20 people a year ago and we're closer to the 30 people on R&D. So, when you add and you like that out, you end up with the larger increase, but I did say that it has ticked down from Q4 because we had a lot of resources targeted at the M300 and it should moderate a little. But we have as Paul highlighted we got a Blade 3000 in development. We got M3000 and right after some AR3000. So, we have a pretty good schedule laid out by using more of our internal personnel and we can somebody to do offer him a job for a third or a quarter of the price of somebody external contractor. So, we're going to try to make better use of our own internal team.

Okay. Great and can you characterize how sales and marketing should unfold for the next few quarters?

Well Q1 at least for us we’ve always been historically a little bit of the peak and that's primarily because we have a big presence at CEF each year. We do Mobile World Congress and we did a EMA Conference and we are signed up for the game developers conference this March and we decided not to go as part of our -- we have to deliver M100. There is some -- there's nothing planned too much in the next couple of quarters. There's no new major product roll out releases. We’re going to continue to make some improvements in our website and marketing literature and some other activities. So, I think you shouldn’t be seeing much in the way of increases over the next couple of quarters at least in sales and marketing.

Okay. And then you said you added some headcount in G&A. So how does move you into the next few quarters?

It's probably going to add well we’re going to save a little on -- against the high SOX cost because it is deferred to [indiscernible] audit and some other things I would think we’ll clearly won't go back there where we were at the prior year. But I don't think you’re going to see any absolutely dollar increases in G&A over the next few quarters I mean the addition of staff might add and extra costs 60,000, 75,000 a quarter and most so there shouldn’t be any big shocks there.

Okay. Great. Thank you so much.

Okay.

The next question is from Amit Dayal of Rodman & Renshaw. Please go ahead.

Thank you. Good evening guys. Just a question on Toshiba, it looks like you still have plans moving forward continuing on the agreement you announced, but in the background, we’re seeing some bankruptcies related issue prop up in the news recently can you talk a little bit about that?

Yeah, we don't know what all of Toshiba's plans are around that. I can tell you that they have assets that can seaming easily take care of that issue. The groups that we're working with inside of Toshiba have nothing to do with the power plant issues that other associates was going on at Toshiba. They're a massive company. It's just impossible for me to believe despite the fact that they have to put out filings that are so cautious about where they may end up, its impossible for me to believe that that's going to impact what we’re doing with Toshiba. In fact, everything that we’re doing with Toshiba is related to the future of where Toshiba could be going. So, I think they perceive views as a very important part of where they’re at. I was visiting Toshiba just two weeks ago plus on the West Coast and meeting with some of the very, very senior people and they're just really motivated to work this program with Vuzix and the future with Vuzix.

Understood. And can you talk a little bit about what these engineering solutions comprise of and is this going to be sort of consistent revenue stream for the company going forward?

Yes, there is an engineering component to this Amit because we’re taking amazing technology that Vuzix developed over the years and we are forming in into a version of a device that is needed that's unique for what Toshiba is going to offer to world. And what they are offering is really synergistic to Vuzix, but it does not in any way impact the revenue streams that we see our current products making. So, it's a great relationship between two of us there and those engineering dollars are only beginning their relationship. We’ll be in production knock on wood in the fall of the year and this is where things get fun between us and Toshiba. They are going to be rolling this unique solution out into the enterprise marketplace and buying in volume from Vuzix, which is another complete different effort at revenue stream that will be recurring and recurring between us and Toshiba.

And that will be product revenues, but the NREs are purely for engineering services situation or prototypes designs maybe some custom tooling because it’s not for our product and they're helping to pay for that leveraging all the part work we did -- we report that as engineering revenues.

Understood. And from a revenue growth perspective, can you talk about whether we could potentially see sequential revenue growth with all of these production issues being resolved right now or will the second quarter maybe flat maybe a little softer and then you resume growth in the third and fourth quarters any color on how the revenues will probably play out over the next few quarters?

Amit, we’re really excited about where we’re at. I will say that we’re just get rolled and hick-ups happen along the way, but if they’re just modest hiccups, we should see continued revenue growth -- that's reasonably substantial and I am cautious just like I was in the last conference call, are you going sell exactly a 1,000 or not? There is always that there is a haze when you are a company with Vuzix is just getting through all of this. But we continue revenue growth throughout the year and if it really worked well, it should be pretty significant.

Understood.

It’s an exciting time really on that.

And this decision to move or push out M3000, are you looking to bring this back a year from now look any color on what you're planning to do with the rollout of the M3000 now and whether in terms…

I am sorry.

No go ahead.

It’s a very important product for Vuzix. If you want to talk about a really big differentiation of the competition, that is a huge step and the M300 is in a solid place right now. It has great opportunities, but right behind it, it's going to be the one, two times with the M3000 because it opens up even more amazing opportunities. So, it's high on our list, it's just amazing amount of attention to B3000 the blade and we have limited resources and we said where should we put in the best optimized revenue for the year and the opportunities for Vuzix for the year, the blade clearly was a better place. There is less competition for the M300 first and there is a lot of folks that are partners that would rather see us not have such a competitive device. So, it just made more sense. Now it's not going to be the last latter half of 2018 you'll see it. I don't know exactly when, but you'll see it in the earlier part of 2018.

And additionally, when we made a decision to take on the Toshiba project requested them to modify one of our smart glasses and we gave them a higher priority for the M3000 just because it's good revenue paying and it could have a very potential quick ramp and into volume production. So, if we had another eight or 10 engineers then we're still recruiting people smartly, things could change but we could only do so much so fast, so that's the other reason why it slipped a little bit.

Understood. That's all I have guys. Thank you so much.

Thanks Amit.

Ladies and gentlemen, we have reached the end of the question-and-answer session and I would like to turn the call back to Paul Travers for closing remarks.