Vuzix Corporation (VUZI) Q1 2018 Earnings Report, Transcript and Summary

Greetings, and welcome to the Vuzix First Quarter 2018 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'd like to turn the call over to Andrew Haag, Managing Partner at IRTH Communications. Mr. Haag, you may begin.

Good morning, everyone. Welcome to the Vuzix's first quarter 2018 financial results and business update conference call. With us today are Vuzix's CEO, Paul Travers; and CFO, Grant Russell. Before I turn the call over to Paul, I'd like to remind you that on this call management's prepared remarks may contain forward-looking statements which are subject to risks and uncertainties, and management may make additional forward-looking statements during the question-and-answer session. Therefore, the company claims the protection of the Safe Harbor for forward-looking statements that are contained in the Private Securities Litigation Reform Act of 1995. Actual results could differ materially from those contemplated by any forward-looking statements as a result of certain factors not limited to general economic and business conditions, competitive factors, changes in business strategy or development plans, the ability to attract and retain qualified personnel, as well as changes in legal and regulatory requirements. In addition, any projections as to the company's future performance represents management's estimates as of today, May 10, 2018. Vuzix assumes no obligation to update these projections in the future as market conditions may change. After the market close today, the company issued a press release, announcing its financial results and filed its 10-K with the SEC. So participants on this call who may not have already done so, may wish to look at those documents as the company will provide a summary of the results discussed on today's call. Today's call may include non-GAAP financial measures. So when required, reconciliations to the most directly comparable financial measure, calculated and presented in accordance with Generally Accepted Accounting Principles can be found in the Company's Form 10-K, filings at www.sec.gov, which is also available at www.vuzix.com. I will now turn the call over to CEO, Paul Travers, who will give an overview of the company's first quarter 2018 financial results and business outlook for 2018. Paul will then turn the call over to Grant Russell, Vuzix's CFO, who will provide an overview of the company's first quarter operating results. Paul will then follow Mr. Russell and provide closing remarks, and we will open up the call up for Q&A after managements update is completed. Paul?

Thank you, Andrew. Hello everyone, and thank you all for joining our call today to discuss the company's first quarter 2018 financial results and business outlook for 2018. The industry awareness of Vuzix's leading AR Smart Glass technology in enterprise and the consumer sector has grown tremendously. Our ability to innovate and create differentiated and truly wearable Smart Glasses has opened many new strategic opportunities for Vuzix across our product portfolio. Our M300 customer base, continues to expand, with several new enterprise customers a day over the last quarter and existing customers continue to place follow-on orders. In short, there are lot of exciting developments going on at Vuzix. In 2017 our revenue was primarily comprised of M300 sales as well as our development agreement with Toshiba. In 2018, we not only expect an accelerating demand ramp for the M300 smart glasses but we also expect to see significant revenue contributions from multiple new sources including the Blade Smart Glasses the Toshiba smart glasses, Vuzix basics video software and further OEM development programs related to our waveguide optics technologies. With all of these in the revenue stream increasing or coming online this year we are confident that the company is nicely positioned to deliver substantial revenue growth in 2018. So I'd like to some time discussing each. We started the year with a successful unveiling and introduction of the Vuzix Blade Smart Glasses at the Consumer Electronics Show in January and at Mobile World Congress in February. At these events the Blade generated a tremendous of favorable views and mentions in the media, mostly from actual hands-on interviews and demonstrations. The true power of the Blade lies in our proprietary waveguide technology in quite frankly the overall experience that it offers to users. Showcasing the Blade and the underlying technology has opened up numerous new relationships for Vuzix with some of the most valuable technology brands in the world. These companies are very secretive with their internal development efforts but I will try to share further details, where I can a bit later. The Vuzix Blade is kicking into high gear. We have completed FDC and CD testing for the Blade and are on track to submit the final paper work within the next week or so. As much as the paper work has already being reviewed by the FCC, we expect the process to go smoothly. CE certification for the Vuzix Blade in Europe will come very shortly after that. Volume Manufacturing of the Blade is scheduled to commence at our West Henrietta, New York facility in the coming week and Vuzix has committed to its supply chain to build the first 10,000 Blades in 2018. We expect to produce our first 500 to a 1,000 pieces in this quarter and deliver against the existing bulk orders. Our Blade developer community, partners, and enterprise customers have been chomping at the bit for months and asking Vuzix to ship them their Blade orders as soon as possible. The team at Vuzix has been working diligently over the last eight months and the facility is in great shape to start rolling out product. We also have bolstered our manufacturing team with several seasoned manufacturing folks to help us manage our supply chain and QA in preparation for this rollout. Vuzix is thrilled that we'll begin shipping to the Blade Edge developer program beginning here in the second quarter. Our initial focus of these early deliveries is to our enterprise customers to develop our community, enterprise and consumer app developers and to strategic partners. We are also already commencing engagements with select channel partners to bring a lot of excitement, exposure and buzz surrounding the official launch of the Blade to the general public which is currently slated for the latter half of the year. The theme here at Vuzix is breaking through optical barriers that have challenged the industry for the last 20 years and have already accomplished something that no other company has achieved to-date. The Vuzix Blade is the first pair of truly wearable Smart Glasses with some fashion sense that people will not be embarrassed to wear. If you have followed the press since the beginning of the year you can easily see that the Blade has broken ground that no other wearable display has been able to achieve, not even from the largest companies in the market. Towards the end of the first quarter we began shipping products and units to Toshiba of the much anticipated and co-branded Toshiba AR 100 powered by Vuzix's Smart Glasses. We began delivering product against their initial $1.1 million purchase order. Toshiba appears to be very excited with the opportunities in front of them in the enterprise Smart Glasses space and for Vuzix we expect to continue to see growing revenue beginning here in the second quarter and with approximately $5 million worth of business over the next 12 months. Based on this success this business can also expand at above average accelerate [ph]. On the M100 front enterprise sales in the first quarter increased 101% year-over-year driven by increases in customer wins, follow on orders from existing customers and VIP partners, along with direct sales of Vuzix's basics video. It is important to note that many of our customers continue to come back and place follow-on orders. In fact dozens of customers and VIP partners have already surpassed their 2017 entry order totals during just the first four months of 2018 with many more expected to surpass 2017 order totals by June 2018. Our visibility into expected large enterprise deployments continues to improve and we currently have multiple large proposals in final stages of negotiation across various geographic areas and industries including aerospace, pharma, complex manufacturing and service. In addition to these, Vuzix has landed hundreds of new customers over the last two quarters. Many of these new customers are expected to expand their deployments over the second half of 2018. Vuzix also continues to broaden our global sales footprint with the additional M300 regulatory agency certifications in new geographic regions, including Eastern Europe, South America and Asia. In addition to geographic expansion Vuzix continues to expand the size of our external sales force with nearly a dozen new VIP partners as well as numerous value-added resellers to our networks in Europe, the Middle East and in Southeast Asia. Most recently Vuzix attended Hannover Messe in Germany, an event that tracks more than 220,000 visitors and is the world's leading trade show for industrial technology including Industry 4.0 and Logistics 4.0. Although Vuzix did not have a booth at the event there were more than 20 Vuzix partners that were showcasing the Vuzix M300 Glasses in the booths including Amazon Web Services, Up Skill, Ubimax, and clearly many more. Last month the Vuzix M300 Smart Glasses were also publicly showcased by two of the largest cloud-based analytics platforms in the world, Oracle Service Cloud and Amazon Web Services, IOT Analytics. At Hannover Messe Amazon announced the general availability of their AWS Analytics platform for enterprise and selected Vuzix and our M300 as the Smart Glasses hardware launch partner. At ModernCX Vuzix was selected by Oracle as an Oracle Service Cloud Smart Glasses partner. The team at Vuzix has worked extensively with Amazon and Oracle over the last few months to integrate their cloud based analytics platforms on the Vuzix M300 Smart Glasses. The Vuzix M300 Smart Glasses can now leverage the voice skills from Alexa in the IOT Analytics platform from AWS to provide real time information to users. For the operator in the field or on the 20th floor this means they can go to work and start troubleshooting or making adjustments on equipment with access to real-time connected data and analytics while operating completely hands free. We also partnered with Oracle Service Cloud and Yamaha with the M300 Smart Glasses to offer a demo that allow users to view IoT data sensor collected from a Yamaha motorcycle. Through the M300 Smart Glasses, users were able to receive real-time data such as the performance of the engine, [indiscernible] on the fuel, et cetera which would allow them to immediately began to diagnose any needed maintenance. An important takeaway here, Oracle or AWS could have selected any pair of Smart Glasses to showcase their IoT analytics platform but they chose Vuzix's. Just like within enterprise, where workers need a full day wearable consulting solution the Vuzix M300 provides a light weight and wearable pair of Smart Glasses. The feedback we see from Amazon and Oracle and their customers at the shows have been terrific and we look forward to broadening our relationship with those companies. As most of you know, Vuzix has developed and invested in establishing a significant technology position around the design and manufacture of Waveguide Optics for fashion based Smart Glasses, critical for the augmented reality mass market and our opinion. Our waveguide manufacturing facility is state of the art and closely resembles a semiconductor fab in some regards. Our customized equipment, technology, know-how metrology and automated waveguide manifests factoring process we believe are world-class. These efforts were done primarily for Vuzix's own products and we feel this technology helps to provide us a significant advantage over our competition. That said, optics are one of the biggest challenges to designing AR Smart Glasses. And we believe they will be a key enabler for the forecasted $100 billion plus mass market opportunity. As such you can imagine there are many companies searching for a solution and Vuzix is in a great position to provide it. Think about leisure [ph]. There are already over a 100 million mobile phones out in the market that support AR today, over a 100 million. Hold up your phone, pointed it at the real world and watch through the screen the augmented world while you are walking around. It's cool for about the first few minutes. Although this has already created a multibillion dollar market, this is not how it's going to work in the long run and all the major brands know it. The phone is ripe to sooner or later be replaced or at least augmented with a pair of smart glasses that seamlessly and naturally present the augmented world in a user's view. We believe the shift towards consumer AR Smart Glasses and away from mobile phones has already begun and that many companies are going to be impacted by the shift and need a strategy to adapt today. We believe Vuzix has the technology, IT, and know-how to be a leader and is also in a unique position to enable select partners and help make this happen. To that end, the commercialization efforts around Vuzix Waveguide Optics technology with certain OEMs continues to gain momentum. As I mentioned on our last call, seek the introduction of the Blade early this year, the company has had numerous increased from companies looking to solve these optics challenges for the own ultimate solutions. In this short period Vuzix has made great progress towards negotiating several new OEM engagements with some of the largest consumer brands on the planet. It's very clear they value Vuzix's leadership position and optics as well as our ability to manufacture our waveguides in volume. Many of these organizations are participating in the Vuzix Blade developer program and some have already received their Vuzix Blade engineering units during the first quarter. Let me take a moment to shed some light on what we have learned over the past four months from some of our new relationships related to Vuzix IP and expertise in optics technology. First, our discussion with these potential partners has validated that our optics technology is industry leading. As a result Vuzix is in a unique position to offer a solution that is not available elsewhere. Second, it has become even more apparent that our optics technology is highly differentiated from other offering in the market for a number of reasons, including quality, performance and such a small form factor, price. The cost of manufacturing Waveguide can be expensive but Vuzix has developed proprietary processes and custom automated manufacturing to do so very competitively. We believe our Waveguide's can sell within price point that makes economic sense to be integrated in to a pair of high volume consumer AR glasses and scalability. Vuzix is now apply to have manufacturing capability in the millions of units annually through the use of custom view it's develop Waveguide automation equipment Vuzix from new select partners through our operations here in Rochester have been very favorable by these new partners. And as they say the proof truly is in the pudding. Finally these advanced discussions are with leading technology firms that provide a lot of synergistic opportunities to users. More specifically, if you combine Vuzix leading optics technology with the right creative AR software content and package the technology inside a pair of truly wearable smart glasses, the combination can be a smart glasses platform that should allow the mass consumer market to experience augmented reality content the way it was designed, which is through a pair of smart glasses, or keeping your phone in your pocket. However the team at Vuzix is far from done as we continue to invest in R&D. In the short run we are working on next generation optics and display engines that will strength the size by a factor of two to three compared to where we are today and increase the resolution at the same time. We are also lowering the power consumption required and expect to significantly raise the fields of view. Ultimately we have a goal of getting to glasses that looks like those in the movie franchise, The Kinsman [ph] Yes, that's a lofty goal, but we are making great stride towards it. You can see that Vuzix has great opportunities in front it, not only in the enterprise space but also in consumer space as well. I'd like to now pass the call over to Grant.

Thank you, Paul. Before I begin, I'd like to encourage interested listeners to review our 10-Q that was filed this evening with the SEC, for a more detailed explanation on some of the year-over-year quarterly differences, as I will be highlighting just a few. For the three months ended March 31, 2018, Vuzix reported $1.5 million of total revenues, as compared to $1.2 million for the same period in 2017, an increase of 28% year-over-year. Overall quarterly revenues were up primarily the result of improved M300 smart glass sales, which increased by 101% over the 2017 comparable quarter, meaning more than offset the decline in our sales of our original M100 as most customers are now opting for the newer M300 model. Eyewear sales rose by 373%. We are on track to successfully to sell out this product during the remainder of 2018. Our gross profit from product sales for the first quarter of 2018 rose to $0.2 million versus a gross profit of $0.1 million in the 2017 period. The improvement was primarily as a result of higher total revenues that more fully absorbs our manufacturing overheads and higher direct product margins which were up 5% in the 2018 period as we realized the positive impact of our growing M300 manufacturing efficiencies. Overall research and development expenses increased for the first quarter of 2018 to $2.1 million as compared to $1.7 million for the 2017 period. The increase was primarily due to additions to R&D staff with the major hiring activities focused on software and engineers for various new and existing products. Selling and marketing expenses were $1.5 million for the three months ended March 31, 2018, versus $1 million for the comparable period in 2017. The increase was primarily the result of additions to our sales team, spending on enhancements to our Vuzix app store and website and increase freight costs. General and administrative expenses for the first quarter of 2018, were $1.7 million as compared to $1.3 million for the 2017 period, with the increase is primarily due to the hiring of new staff throughout last year. The net loss for the first quarter of 2018 was $5.4 million as compared to $4.2 million for the 2017 period. The loss per share after provision of accrued preferred dividends was $0.22 for Q1 2018 versus $0.23 for the 2017 period. Now for some balance sheet highlights, our cash position as of March 31, 2018 was $36 million. We have no long-term debt of any kind on our balance sheet. The net loss from operations after adding back non-cash income statement adjustments for the three months ended March 31, 2018 was $4.6 million as compared to $3.8 million in the comparable 2017 period. To conclude, we feel we are well positioned financially to support the growing demand, for existing and new products throughout 2018 and beyond. With that I would like to the turn the call back over to Paul Travers.

Thanks Grant. Vuzix has been developing the future of AR and smart glasses longer than any other company on the planet. We have invested heavily to solve some of the toughest technical challenges in this space and these investments we expect will soon pay-off significantly for our shareholders. In 2017, our product revenue growth was primarily driven by a single product, the M300. In 2018, the M300 will continue to expand, and as a result of all of our investments, Vuzix will add multiple commercial revenue streams including Toshiba, Vuzix's basics video, Vuzix Blade and a growing number of OEM engagements. All of these we expect would create significant revenue streams for Vuzix in 2018 resulting in sequential revenue growths quarter after quarters through the year including many new record quarterly sales beginning here in the second quarter. I'd like to end this portion of the call with a friendly reminder that the Vuzix annual shareholders meeting will be held here at our West Henrietta out of New York corporate office on June 13. All of our shareholders are welcome to visit to see some of our latest products, tour portions of the facility and hear about the latest corporate developments. We look forward to seeing you here. And let me pass the meeting to Andrew to begin the Q&A session. Andrew?

Thanks Paul. Operator, if you can please go ahead and open up the call for questions and remind participants how to get in the queue.

Sure. We will now be conducting a question and answer session. [Operator Instructions] Our first question comes from Christian Schwab with Craig-Hallum. Please go ahead.

Great start to the year, guys. As you look at the Blade can you just walk us through how you would anticipate the shipments of 10,000 shipments throughout the course of the year, how you kind of see that playing out? I know what you said for June but is that going to be all at December can you give us a little bit more clarity on how you would anticipate that?

It's going to build through year, Christian as you might imagine the showcase of the searching that's going out of the door is on our developer community. The developer community consists of really kind of two sorts. There's guys that want our apps that are consumer focused like getting golf balls, to do an AR thing. And then there's a bunch of folks that are dead serious about deploying these things in the enterprise space. So that's what will happen at the front end. When you get to the half year some of the guys at the enterprise space are talking about significant numbers just this fact they can get them. We know that it takes time to deploy so we're just not sure how quick that will happen but then in the following year we're also going to be opening it up to the rest of the consumer channel. There's a subset of software that's getting finalized, that runs in the phone, that makes you sing, really sing aloud together between the Blade and the phone and that will make the sort of mass market have more appeal. But that said, it is a $1,000 for this unit. So it's not - new [indiscernible] part of a consumer but there's a lot of consumers that want it. So you'll see it grow through the year and accelerate it into the phone. We're building the 10,000, I don't know if we'll get them out the door not this year but we'll get a significant number.

Okay, so fabulous and then my last question has to do with last quarter we talked about greater than 12 large potential engagements who were in evaluating the waveguide optics and some big Tier 1 consumer electronic needs. Can you give us an update on where we sit with that and any potential of recognizing any measurable revenue from any of those in 2018 or is that something that might be more 2018 and beyond opportunity?

2018 industry you will see revenues come from it. It will be in the form of NREs and engineering fees and those kinds of things and there is - we talked in the past about having three folks that were already engaged with Vuzix. There are more three folks now that are engaged with Vuzix. I will say that not everybody in that list is a little bit of potential option for use. We're being pretty selective on these guys and so I will tell you we won't engage all of them. But there's a fair number of them that, that I think are very synergistic to Vuzix and so you will see engineering staffing, primarily this year it will be a 29 team thing then it goes up volume.

Okay perfect fabulous, no other questions thank you.

Our next question comes from Jim McIlree with Chardan Capital. Please go ahead.

Yeah, thanks, and good afternoon. The Toshiba shipments that began at the end of Q1 on that $1.1 million order are those shipments complete in Q2 or did they extend in the Q3?

We see that shipment in Q2, that's already started.

And is it reasonable to expect that they would come back or in orders for delivery in Q3 or is this going to something where they wait and see how it's going or do you have any feeling on whey they reorder.

So, first of all I seem excited awfully right Jim. In fact just this evening they put a wonderful little You Tube video on how that works and promotional sort of a thing. We have an agreement with them that they have to take product at a certain rate if they want to keep their exclusive and I don't think they have honestly - following the product. So you should see consecutive quarters effectively of placing orders and Vuzix keeping on rolling. I can't guarantee that will go in the third quarter, fourth quarter, exactly what, that tends to take time to build and roll through the plant and all that sort of stuff. But yeah we are expecting it just will continue to enroll.

Okay, that's helpful. And so the pace for the year kind of looks like this is that this quarter we get Toshiba, maybe we get another Toshiba in Q3, or let's call it second half, we get a little bit of Blade NRV and then we get some - we get the deployment of the M300 that depending on the size can be either large and lumpy or small and kind of cumulative. Is that a fair enough characterization of how you are thinking of the year?

You missed there a little bit. Let me - regard M300, right. And we are expecting M300 to continue to accelerate. So you saw last year, you can kind of stamp in this year any one of a bunch of folks are working on significant orders for M300, so there is could be a lot icing on the cake on that. We have got the Toshiba product, which, on a quarterly basis, we are targeting those in the million kind of number. And we have got the Blade, not as engineering but the Blade as a product. This is - it's coming off the line like cookies. And so that's going to be a revenue contributor that will look like selling M300 but into a different market in some cases. But again it will continue to roll and it should open to the vast market by the latter half of the year. And then there is engineering in our VPs [ph] for OEM programs. So there is literally four new streams of reasonable revenues that you should see coming into Vuzix over the year.

Right, right, excuse me, when I said in already I meant the Blade Edge, not Blade. Excuse me. And so the initial Blade that are going out to the developers are those at a full price or those at kind of an introductory price for those guys.

It's full, it's full price.

Okay, great and Grant, the expenses for the rest of the year, is there any reason to believe that they are appreciably different than what we saw in Q1.

No, that really, reflects our current run rate. I mean I could see some creep in certainly the R&D as we continue to accelerate some work there. And some of our sales and marketing costs are somewhat step variable, because we do have things like commissions and advertise we do and the more success we are having and the more we do see it a little bit of more money out to assist in that acceleration. So but not materially different.

Right, so there is no significant increase in SG&A or R&D in order to accomplish the revenue goals that you have, you have kind of built that in and so what we're going to see going forward is just more like that variable component that you referred to.

Pretty much. Yes.

Okay. And I think that's it for me, thanks a lot guys and good luck with everything.

Yeah, thanks Jim.

Our next question comes from Brian Kinstlinger with Alliance Global Partners. Please go ahead.

Great, thanks so much. Hi guys. Can you talk about the difference in the mix in the fourth quarter, although I think I know it, versus this quarter that drove your gross profit? And then as you ramp throughout the year what's your reasonable exit point of view are we talking about 25% to 30% on your gross margin are talking higher in a blended as we see it on the income statement please.

Well, the end of Q1 we had our first shipments to Toshiba, so on a lower margin than we traditionally make on an M300 sales. In the past I have said gross margin on M300 products are with in excess of 50%. The margins on the Toshiba product are almost half, about half of that but of course we don't have the sales and marketing costs that go alongside it. The eye ware is still being effectively sold across and that's only less than 10% of our total revenues. Going forward in the Blade margins should be adequate there but as far as getting up to 30% gross margin by the end of the year we need sufficient revenues to absorb our manufacturing overheads and clearly with the right mix of M300s and Blades we can start. I would suggest we'll get north of 20%. Our goals for the long term but the business goal is to get 20% but I'm just probably…

So your 10,000 pieces-ish wouldn't quite get you to 30% you don't think?

Well we ship out 10,000 then yes but as Paul indicated that's the supply chain sign up for and it's a matter of sell through.

Yeah okay.

But that's not an impossible number but…

And then in the past I think clearly capital has been an initiative for you guys. It clearly is no longer. I think in the discussions we've had Paul is if you had capital you would put your foot on the pedal to drive growth but in the comments that Grant made it sounded like there aren't going to be significant incremental investments that we're going to see flow through the income statement. So first talk about your top priorities and then maybe reconcile those two statements?

So we have been putting the pedal to the metal which is why there is four revenues streams coming out this year. But the R&D dollars and stuff that we've been spending have been spent in the right places. I don't know how to answer that. We got one product last year to four products in revenue stream this year. That's a pretty big jump, head jump and we just now gotten the grease in capital. but that said it takes time to roll these things out and you can only discuss how fast through the production lines et cetera and so we think we're kind of at a good pace here to see a significant jump in business from 2017 to 2018. As this thing rolls out I'm sure you can imagine Brian that the dollars needed to build out more inventories and so really accelerate company. It's also coming in there too. So we put money into operations and into the supply chain et cetera also. So the…

That leads to my next question actually was as we go throughout this year should we see accelerated increase in inventory?

We like to take we're going to build it to the pace at which we need to sell at. So yeah the inventories will grow but they also will be going out of the door. But we're trying to balance that as best you can when you are making them in smaller volumes, sometimes you have to make commitments regardless.

And so then maybe talk about - I know you guys have internal goals in terms of pieces to sell. If that plays out I'm sure cash flows increase and inventories increase and maybe Grant talk about this is a heavy cash usage quarter but maybe going forward how do you see that with the increased revenue and little bit stronger gross margins, how do you see the rest of the year playing out that way?

Well, on working capital items I mean I think there'll be clearly some growth in math, for receivables and inventory as the level of business increases. I don't think it's going to be significant. We also get the payable side because we do get some credit from our suppliers. But I mean I wouldn't honestly expect that to be much more than a million or $1.5 million per quarter, that might end up in good receivables and inventory. As far as other costs and uses I mean in Q1 we expect to have a burn rate that's averaged $1.5 million per month, from an actual cash basis on operating results. We expect that to go down during 2018 as the business picks up.

I will add that on the R&D side, the manufacturing side, we are increasing the capacity of our waveguide production facilities, so there will be some dollars invested in that, and then titrated both on the….

The internal CapEx should be in line with what we spent in 2017. There is nothing significant on the short term horizon today. That doesn't mean we might take advantage of some opportunities if they make sense for us.

Okay, last question I have, just one customer, you have talked about a lot in the past. There was a news couple of months ago, that DHL was going to widely adopt your glasses. I think it was internationally for its logistics and warehouse picking. So where is that, is that going to be a major ramp this year, is that initiative something they are moving forward on quickly? Is it going to take a lot of time? I know its customer specific but since there was so much press about it.

Yes, DHL has to our knowledge at this point in time, they have like 9 to 12 facilities at this point in time. They just [indiscernible] last quite frankly. We believe they are still moving forward with activities but they are one of so many that we are looking forward to the point in time when they are ready to really got rolling beyond where they are right now which I believe they will. But like I said they are one-off a large number of folks that are in that same boat, where they are right on the edge of getting in or kick in the hole [ph] guys..

Great, thanks so much guys.

Yeah.

Our next question comes from Nehal Choksi with Maxim Group. Please go ahead.

Yes, thank you. So first off the cogs, positive to see that expansion there. Of the cogs you had $0.64 million in cost of sales. I was wondering if you could be willing to share what percent of that is associated with the manufacture of Waveguide.

No. I mean Waveguide is not in the house, it is a very unique piece of technology and a position that [indiscernible]. If you have to entail what their - those kinds of numbers were and there is just so many things they just won't share and it's just the same way with our Waveguide.

Sure understood. It did decrease though as percent of revenue which is positive right. Was that due to volume, yield or a mix of your end products.

I am sorry, could you rephrase that? I want to make sure I understand the question.

Yes, your product cost of sales as a percent of product revenue decreased year-over-year from 51% to 46%. So that's the positive. Right. And the question is what was the driver of that? Was that increased yield, increased volume or mix of your end products?

All three, to be perfectly frank. I mean clearly we are building more M300s, now than we used to and our costs have come down. We have more efficiencies and better yields. The product mix, last year we had the M100 which has a lower gross margin than the M300. So I mean it's just generally been improving as a result.

Okay, all right. Are you willing to share, as you think you can get better yields with your current Waveguide production.

We don't really share with anybody what the current yields are frankly. I can say we are good at making them. It's working really well.

Okay, all right. And then you have increased your warranty reserve from 4% product sales to 9% of product sales but the reasoning gave seems like that was the temporary driver. Is that right way to think of that or is that actually a permanent shift?

Yes, that was temporary we had some batch with the tables that we aren't quite up to the standard and some clarifications, and we have done pull backs of cables from the field and scrapped some materials and we get be the safe side we got the bigger allowance to cover any of those that are still on the field. We feel that should be all washed through the system, within a quarter or two.

Okay great. And then you did have a small amount of Waveguide sales this quarter, which is relative to year there was none. Two questions on that. One, have you had Waveguide sales, those sales in the past? And then the second is that in this particular quarter was that's more OEMs or just one OEM?

Yes, we have Waveguide sales in the past, I mean some of these what we classify as Waveguide sales include developer kits which include a protector engine and actual Waveguides at this stage. So primarily the development programs by some of the OEM that Paul talked about. And the prices are currently steep. We don't sell the things very cheaply because again limited quantities and it's still very early in the production ramp so…

Yeah, it's like buying a McLaren sci-fi run car. They cost a $1 million a piece. That's what some of the stuff is like. They are very easy things and they are designed and put together specifically for the partners that are related to some of these more advanced Tier 1 players.

Yes absolutely. All right and then can you go through the work what you're doing on next gen OpEx that sounds very attractive do you have a timeframe for the time to market on that?

We're not really sharing that kind of thing. There are so many reasons why, beside it's not known who is on this phone call. When you are selling products in the real world, telling people when your next one is coming is never good. So we just don't - I could tell you that it's really important piece. It's though we're on a treadmill and we know that and we're going to beat the other guys.

Okay, great and then I'll just leave that for later. Thank you very much.

Thank you. We have a follow up question with Jim McIlree with Chardan Capital. Please go ahead.

Yeah, thanks again. Hey Paul, on this call and I think in prior calls as well you've been talking about the technology behind the Waveguide, the manufacturing scale behind the Waveguide and I know it's a sensitive issue and you don't want to open up completely about it but I was just wondering if you could share maybe something that could give us something to hang out our hats on relative to what is so unique about that technology or that manufacturing capability?

Sure Jim that's actually a great question. If you visited Vuzix, you walk into our facility in our back, that has two class 1000 clean rooms in it. And you look through the windows that we've got, there's people that get lucky enough to actually get a view of that and they can see equipment that costs millions of dollars that are designed specifically just to make the tools, the tools for manufacturing waveguides on. That is just the first step in this process. The procedures associated with trapping those tools, the materials that we use, the nano-particle mixes that we build to make our own high-index polymers, all of these things have been developed at Vuzix and then you go out in our plant four, which is where the nano-replication happens and you see custom build equipments that also is in the million dollar kinds of numbers and the processes, procedures, the whole bit were developed here at Vuzix. So when we do share that to limited folks that come in and their jaw drops because you just don't see this anywhere on the planet today. You hand these robots a tray of product, and they spit out finished waveguides and they look beautiful. And the waveguides are designed to fill in form factors that heretofore not another company has been able to pull off. So you put all that together and a 100 plus patents and patents pending, many of them around all of that. There's all of this intellectual property like the secret sauce we don't put patents on specifically to keep in secrets and this stuff really only exists in Rochester, New York. It puts Vuzix far out in front of the competition today. We have competitors that are making waveguides that have to stack chunks of glass together, they glue them all up, it costs ton of money to make one and their yields are terrible. We stamp these things literally. I'm making it sound simple but we can do this very cost effectively, but produce something that's got the quality of a high end sports car. So it's very unique at Vuzix. I don't think very many people at all understand the value proposition of Vuzix as industry guard. There's some companies down in ,Florida one in particular that's got massive valuations as a private company and they finally came out with their product I believe and you know it, I'm not sure anybody wear it except for a gamer chip. Our optics, the systems that we build here are designed for what people would wear, again setting us apart from the competition and it all revolves, much of it revolves around that technology. Roll it forward just a little bit, it's not just of those waveguides, the display engines that drive them too. You might imagine you got a lens, some lens got to look at something. We do that too here at Vuzix and we have custom designs and we have done some really advanced stuff in this regard also which allows that stuff to shrink down in the temples, as we said we're trying to get to that kings man look and feel. So yes, Jim it's a really good question, it's hard to answer just in narrative. But it sets apart in so many ways.

That's helpful, thank you. And just to follow-on to that. So as you move forward with this part of your business, I am assuming that some customers will have a form factor that is either a little bit different or a lot bit different than what's in the Blade and the next customer will have a different form factor. How capable is your equipment of accommodating either significant changes in form factor or minor changes in form factor, that's a big expensive and time consuming thing or is it flexible anything at the de minimis to ask but let's call it a relatively simple task.

First of the technology has to be able to support the flexibility to be designed in the different form of factors. And as it happens our Waveguides are designed so that we can fix them back in that. If you see some of the competing products and the local 3D shutter glasses because they are flat across the front, you can just aside the display engines, burns in the side of your head and they look like literary you are watching a 3D through them. Our Waveguides are designed so that we can put at an angel which is tilt from the tip of your nose to your ears. So you can kind of mould these things and put them in fashionable looking form as opposed to as 90 degrees square off the face. They can also tilt at the bottoms. We can take the display engines and adjusted them where we want to. All of that stuff is flexible. Now yes you have to redesign the tool and completely redesign the wayguide itself, that's the process that you have to go through to customize it but you will see in future things like branded kinds of devices with all sorts of look and feel, so I believe and our technology supports that.

Okay, excellent, thank you very much. Appreciate the answer.

Thank you Jim. Those were two really good questions. Appreciate you asked.

Thank you. I would now like to turn the call over to Paul for closing comments.

I'd like to thank all of you shareholders for participation on today's call and their support of the company. This concludes the Vuzix's first quarter 2018 financial conference call. Thanks again everybody.

Thank you for your participation. You may disconnect your lines at this time.