Ladies and gentlemen, greetings and welcome to the Vuzix Third 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 would like to turn the call over to Andrew Haag, Managing Partner at IRTH Communications. Mr. Haag, you may begin.

Good afternoon everyone. Welcome again to the Vuzix's third 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 would like to remind you that on this call management's prepared remarks may contain forward-looking statements which are subject to risks and uncertainties, and management may make additional forward-looking statements during the question-and-answer session. Therefore, the Company claims the protection of the Safe Harbor for forward-looking statements that are contained in the Private Securities Litigation Reform Act of 1995. Actual results could differ materially from those contemplated by any forward-looking statements as a result of certain factors not limited to general economic and business conditions, competitive factors, changes in business strategy or development plans, the ability to attract and retain qualified personnel, as well as changes in legal and regulatory requirements. In addition, any projections as to the Company's future performance represent management's estimates as of today, November 8, 2018. Vuzix assumes no obligation to update these projections in the future as market conditions change. After the market close today, the Company issued a press release announcing its financial results and filed a 10-Q with the SEC. So participants on 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 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 Company's Form 10-Q, quarterly filings at sec.gov, which is also available at vuzix.com. I will now turn the call over to CEO, Paul Travers, who will give an overview of the Company's third 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 third quarter operating results. Paul Travers will follow Mr. Russell by providing closing remarks. We will then open the call for Q&A after managements' updates. Paul?

Thank you, Andrew. Hello everyone and thank you all for joining our call today to discuss the Company's third quarter 2018 financial results and business outlook for 2018. It is a very exciting time at Vuzix more so than at any point in our history. Customer adoption and large scale deployment of smart glasses in enterprise are gaining momentum and we expect this trend to continue to grow and frankly accelerate. The timing for each new broader deployment is not here to just yet but without doubt they are occurring more and more often. The enterprise shift towards using smart glasses as a productivity tool of choice has made good strides to 2018 and Vuzix is well positioned to continue writing and leading this way. The buzz on consumer AR glasses also continues to build as more and more industry leaders top up the space. It is interesting to note that there are several new players that have entered the consumer market and yet to the form factor high pricing and other technical issues, no one player has captured the eyes of the future user like Vuzix has. Finally, optical waveguides are becoming the technology of choice for most diverse AR applications. And here again, Vuzix is well positioned to lead. Our addressable market for our technology and products has expanded over the past year and now encompasses enterprise B2B with M300 Smart Glasses in enterprise B2C with M300 and primarily Blade Smart Glasses. Consumer side with the Blade Smart Glasses and OEM waveguide-based opportunities in white labels and following the recent amendment of our non-compete agreement with Six15, we can include major defense suppliers, primarily around waveguide-based systems from HUDs and aircraft to humvees, first responders, homeland security and police. The amendment of our agreement with Six15 opens up…

Thank you, Paul, before I begin, I would like to encourage interested listeners to review our 10-Q that we filed this afternoon with the SEC for a more detailed explanation on some of the quarterly and year-over-year differences, and so I’d be highlighting just a few here. For the three months ended September 30, 2018 Vuzix reported 1.9 million in total revenues as compared to 1.4 million for the same period in 2017, a 37% increase year-over-year. The overall increase in total sales was a result of stronger smart glass sales in the third quarter of 2018 as compared to the same period in 2017. Sales of smart glasses primarily M300 were 1.7 million in third quarter of 2018 as compared to 1 million in the 2017 period, a 67% total increase, and included in our 2018 third quarter smart glasses revenue where sales of a new Blade Smart Glasses which accounted for 11% of this revenue category. And on a year-to-date basis, smart glass revenues are up 73% over the prior year's nine months results. For the quarter ended September 30, 2018 we reported an overall gross profit from product sales of 575,000, compared to 49,000 in the prior year’s period. The product gross profit for the 2018 over the 2017 periods reflects an improved average selling price of our smart glass products and higher total revenues on which to absorb the generally fixed manufacturing overhead costs. On a product cost to sales basis only, product direct costs were 36% of sales in the 2018 period as compared to 46% in the prior year period, representing improved average selling prices of smart glasses. Manufacturing overhead costs for the 2018 period as a percentage of total product sales, declined to 12% for the 2018 period from 19% in the 2017…

Thanks Grant. Before I close on our prepared remarks I want to take some time to address the topic that I'm sure frustrates many of you, the ongoing short and distort campaign being orchestrated by some shorts against Vuzix. For those of you that are familiar with the lawsuit, we brought against Pearson you will already know that the agenda arguments made by him are outright lies and that they are the basis for the recent class action lawsuit and derivatives. The claims made by Pearson in these plaintiffs firms are 100% baseless and without merit. Vuzix has made it clear that the Pearson lies in both Mask report and Seeking Alpha article are exactly that. In response, we are aggressively pursuing Pearson with an $80 million defamation lawsuit, and we intend to defend vigorously against the class-action lawsuits that are based on his lies and misrepresentations. Enough said here. Vuzix is well on our way to establishing ourselves as the leader in what is expected to be a multibillion dollar industry. We believe that this is the reason certain people who have declared they are short our stock are taking these drastic measures. In September, the Securities and Exchange Commission took action against a short seller for similar actions in our hopes are that not only will the courts see our claims against Pearson as a valid, but also that the regulators will take action against these and other bad actors that prey on investors through short and distort campaign such as this. So back to our laser focus on the future in building a great company that provides new cutting edge valuable solutions to this new market for augmented reality products, a market that many leading players see as the future of computing technology. The seeds for the…

Thank you. Operator will you please start queue for the questions and answer session of the call.

Ladies and gentlemen, we will now be conducting our question-and-answer session. [Operator Instructions] Our first question comes from line of Christian Schwab with Craig Hallum Capital Group. You're now live.

As we look to Q4. Can you give us a little bit more granularity on growth and given some of the push outs? Can you give us a kind of range or potential revenue outcome that you might be thinking for Q4 playing that?

So, some of the business that we were expecting that happened in Q3 impact has moved into Q4, a little bit of business that will follow on into Q4 from stuff that should happened at Q3 will get delayed a little bit. That said, we’re expecting Q4 to be a fantastic quarter for Vuzix, it should have a record revenues in the quarter. We don’t give our guidance on quarter-to-quarter. I can't say that, 2019, our expectations have not gone down all. And we're not exactly sure we’re trying to regroup just little bit on exactly where we think Q4 is going to land but it still will be a great quarter.

And as we looking to 2018 and enthusiasm for that, can you give us a range of outcomes either shipments of the different products the M300 Blade, et cetera? Or revenue expectation that you would assume is possible in 2019 quarter to quarter but just so people can get an idea of customer adoption in 19 versus 18?

If you look at the growth rates that Vuzix let just say, over the last couple years. Two years ago, a couple million of revenues. Last year, it was 5 million-ish in revenue. This year, it's going to be a big jump over last year. We’re already over last year's numbers and we are now closing like I said eight figure transactions when it comes to unit volumes -- excuse me, 15,000 plus kind of unit numbers on M300, single accounts so you can imagine that 2019 is really should be a significant jump over what 2018 is. I would suggest it could easily be more than the triple.

Thank you. Our next question comes from the line of Jim McIlree from Chardan Capital. You are now live.

Can you talk a little bit towards the delays in Blade what was going on there and what's been done to fix it?

Jim, the Blade is a brand-new product for Vuzix, but I got to say that the technology that’s in Blade is probably brand-new for almost any company on the planet today, and we have all kinds of vendors that we work with and some of them deliver to Vuzix critical components along the way. And we’re going -- we’ve been going through a lot of learning curves in bringing this product out. I will say that it is completely different than some people may remember the M300 was couple 2.5 years back. This thing is coming up like the Toshiba M300C where the issues associated with bringing up the line for the first time have being resolved and have been resolved actually quickly. We’re cranking up. Now, we’re duplicating certain capabilities so that we can even run faster. So it feels really good, number one. And number two, I made the point earlier, we had one ticket discount, and there’re a couple of other companies out there like Magic Leap and like HoloLens that ship products with waveguides in them. We don’t want to be compared in a negative fashion to anybody even though I look at those products as if they’re different solutions. When people put on our products, the waveguides and the Blade, we want them to say wow this is amazing, nasty answers that we’re getting, and it's because we are being so critical on ourselves on the plan forward. That said it’s cranking up and we expect that in the first quarter of next year we will easily be at the 2,000 to 3,000 run rate on monthly basis. I was only going to make the point about software. We also think that as you get more units in the field and the customers kind of broaden a little bit on the expectations because they're not the hard-core guy their expectations on software grow. And so, we’ve been working really hard to make sure that the software package that goes with it is commensurate with the customer base that’s getting the product and that's what this most recent release is about, it is really amazing. Again, I don’t -- I try to describe it in words, I can only say put the glasses on, try it, connect to your phone, it's outstanding.

I appreciate the need to have a fully developed product into market and I have no argument with that, I am just trying to understand if you’ve solved all of the vendor issues that led to the delay and so or if you even discovered all the vendor issues…

We’re making great product today and some of the vendor issues that we have for what it's worth are issues that we think are not easily fixed by that vendor. So, we change our processes and procedures to adopt to it and it's actually made some of our processes amazingly much more robust. So, we feel really good with where we’re at. We’re replicating some of those processes so we can go little faster, and as I said Jim, in the first quarter of the year would be at a 3,000 unit per month run rate.

Grant, the inventory that went up I think you attributed that at least partly the blade is that almost all blades the increase in inventory?

It was a lion share of it in my September 30 numbers probably just a little under 2 million of it was blade related and the supply chain got a little constipated because with up we had to run a little flicker, but install a little, but we want to get the product ready and right.

I got it okay.

As I said draw down, so over the next couple of quarters.

Yes, understood. And then on the M300, again I appreciate that this is a long sales cycle and it's lumpy as ,well but we had three quarters now actually two quarters and just kind of at the same level. And I'm wondering, these million dollar orders that you bought sort of you're working on when we start seeing those in the 15,000 unit deployment. Is that something that's -- is that like a two year deployment or 12 month deployment? And is that just a singular example or there a few of them out there like that we closed on?

Sure, Jim. We work with some really good VIPs in the space and these are companies that, although they are private companies with hundred plus employees that are driving to own this space and they are coming to us, telling us that some of the business that we’re quoting at today is one of many, many kinds of examples based upon the customer. And so there's more than one. Number two cost that we’re putting out our over a period of 12 months, kind of the same sort of thing and they will start. They should start in 2019 timeframe. Probably in the first half as what they have asked for.

Okay and just last one. So Toshiba is back. Is that correct? And so would be reasonable to expect from Toshiba revenue in Q4?

Let me clarified that wording just a little bit. Toshiba actually never gone away, just we did expect Toshiba to ship more in the third quarter, that's for sure, but they've gone through some changes internally which is what it is but they also got feedback from the customers that they came to us and said can you help us make some of these changes. So, we did a lot of that in the third quarter from them. So in the sense that yes we didn't ship them in the third quarter and by the way the third quarter would have been significantly greater than what it was and made earlier comments about success and growth quarter-to-quarter, a different answer. Like we said, this is lumpy and one guy can make a difference in time. But in any event, they are not really back, they always been there. It's just now we're cranking up again.

Thank you. Our next question comes from the line of Brian Kinstlinger, a private investor. You're now live.

Some similar questions to Jim. On the Toshiba supply, I think I read in the Q that you’ve done 766,000 in the first nine months of the year. So, I guess I'm curious assuming they’re not going to meet their 2018 commitment. Will it be a catch up period? Is it going to be a forgiving of the agreement for this year? And then what’s the 2019 minimum commitment?

So, there isn’t, there you could look at it as if it’s a bit of a catch up. I mean correct me if I'm wrong here Brian, but the trend -- the agreement is about keeping exclusive minimum requirements over 12 month period time. They started taking product from us really in the second quarter. They got to the second quarter to remain in that exclusive…

Of 2019.

Of 2019, so they’re not necessarily out-of-the-box right now. That said, we had a plan for when we thought they would be taking more products and they kind of like that plan at the same time, but there's been some say bumps in the road a little bit. Our expectations are that that we will crank back up we will roll in more product out and it's just going to accelerate. It appears that the new partnership that they formed that this change is very excited about the future of the space and as I said we’re open to not just continue with this business but to grow it with them even bigger.

And what is the second year commitment out of that relationship, number grows significantly?

The current agreement is only in place for 12 month period time, right?

Well, it’s a multiyear agreement, but we only gave only option of 12 month of exclusive. That does not mean that when that’s getting close to the end that we might not see that and negotiate a new bogey for the second year.

If we look at smart glass sales in the second quarter there were 1.9 million like you said and 1.7 million in the third quarter. And then if I even back out the Blade which was almost 200,000 based on your comments, we had a huge decline I think actually second quarter to third quarter, and I guess I'm surprised given the M300 is into such early stages with all the discussion of great demand. So what happened that declined that it declined so significantly on a sequential basis?

Well, we’ve a large -- order that went out at the end of Q2 which was for almost a $1 million of product and accessories. So that did skew some of the results. I mean if you pull them out across the board of general M300 sales were all higher. In Q3, we just had SATS and they just decided to take the first 400. And they have more on orders that just not ready for some more those right now, but it was -- when you’ve large customers that come in and buy a $1 million plus of the M300 and that’s -- and we only have basket currently one a quarter they can be somewhat spotty.

Barren, you might not abandon the first part of the call where we…

Always was not, they put me in a Cryoport call. I waited.

Sorry about that.

No worries.

There are times when customers come and may say look I want more right now and you could have them for XYZ reason and there are times when they come in and say you know what can we delay that XYZ timeframe. And in the second quarter we had a few folks who came to us and said I got to have it, I got to have it. So the second quarter was actually slightly larger than it might have been. And the third quarter of course suffered from the other inside of the seesaw just a little bit. It’s got nothing to do with month after month after month of growth, I mean year-over-year we are seeing this growth in general, every single year. The Company is doubling plus on the revenue ramp rates. I think you will see 2019 will be even more than that. Every 90 days, 90 days for a company like Vuzix is not enough time to measure the real trends on how this is going. I believe as more and more these guys role 90 days will be a reasonably good gauge, but you know right now it's difficult to snuff in needle for 90 day run.

You mentioned twice I think in January, you will be at 2,000 to 3,000 monthly for the blade. Is that 2,000 to 3,000, how many will be building our how many you think you will be shipping?

The production facility will be able to handle that kind of volume.

Yes, but you're not saying you're actually selling 3,000 glasses in January or even February necessary is that right.

That's correct. That was in the answer to the question has been solved your manufacturing problems and the facilities will be at that point where they can run that way pretty handling. If you think about the numbers, if that's what we were saying that would mean that next year alone would be 36 million in revenues, or thereabouts, just off Blade.

Well, that's right. That's why was making sure I understood that and from a demand perspective. How do you see early adoption? How do you engage early adoption from the consumer right now?

Well, it's not really the consumer that was selling to just we’re selling into a lot of the same commercial customers that was selling today. We get consumers come to our website and they place orders regardless because they think it's the coolest thing. But it's mostly the commercial players it's the enterprise market that is the ones that are buying and writing software and deploying of the Blade and example at AW conference our partners Ubmax announced the full suite of software was released and running on the Blade at that environment. So it's the commercial marketplace today that's going first, the general release does not happen until sometime in the New Year early in the New Year test but in fact makes it much easier for the average. So I will say though even the release that’s available that we just put out yesterday. This release is amazing the average with the bonus. And again we're getting great feedback from everybody were behind manufacturing, we got a huge backorder display in time compared to what we been shipping. So right now we just got to go make more.

With that, the last question I have, so you mentioned with Ubmax. Is your entire software-based your partners? Do their software mostly work on the blade as well? I mean 75% maybe 90% of those applications, are they going to be working in the blade from January?

Grant, this was making point and I agree with them. It's not everybody yet. Most of them are just getting their units. Actually, we have a fair number of folks that are in the enterprise spaces. You know that VIPs and value-added resellers, some of them have the gain and they've already got ported and running and others are just getting to it. But we expect a reasonable number of our current enterprise customers at our value added resellers inviting software for setting up for these devices to port this up fully. I mean no customers are coming to them saying hey, we would like to use the Blade and XYZ application. So it's making the pull through happen.

Our next question comes from the line of Orin Hirschman from AIGH Investment Partners. You are now live.

To follow up with two questions on the Blade, you mentioned in the last series of questions that you were basically had lots of units that you put in shift. Can you give us a taste, I know it's only developers at this point in the north of I don’t know 1,000 units of that one ship through something like that?

Yes, it's something like that. I can't give you an exact number or we don’t really post those kinds of numbers. I mean I can't say that, the number of folks that we have entertained even getting orders from has been very limited because we weren't a developer-centric order right now. When you go to our website, it's -- if you are a developer, tell us what you're doing and we prequalify in everything to see that you fit in that bucket, so it's been pre-filtered primarily to developers and it's in the kind of number that you mentioned.

Does that mean though that there is 100s of developer because you are limiting them one or two or three units or something like that?

That’s correct.

And just in terms of -- you mentioned Alexa, the nature of items that’s still need to have a general at least for Blade. Are there any other major pieces that still need to be at least on Blade in terms of the first release? Obviously, there will be fine tuning of all the releases, but is there any other missing, giant missing piece here or that those are the pieces that were missing?

Right now, Oren, if you were to take this software and install on a blade, get the companion app and go through the process of just in the simple set of you would say, wow. This thing is amazing, and if there is amazing things forming right now as a user, even as an end user. That said, there is another series of releases that we will happen. And in fact, 2019, there is a campaign that Vuzix is putting together on, the marketing and the release of just a pile of really cool things around the Blade, they aren’t all core or less related, but they are related to experiences and something that will happen for the Blade. And each one of those opens up greater and greater opportunities for the average and in some cases the commercials side of the space. So, it's really good release today. What you will see by the very early part of next year is even another nice step forward and it would grow through the year.

I'm curious on that note when you do a commercial release for consumer. Will it be already be on your web store dozens or hundreds apps or some meaningful number of apps already if people can get a taste?

I wouldn’t say necessarily hundreds. I don't really know where that number is going to be. I will say some of the developers that have signed up to buy blades right now are developers they are making applications for the end user the consumer. Examples are like the Golf Ball concept that we talked about in the past and all those that are just resident on the glasses themselves and some of them are cloud-based applications around the glasses. So to us the most important thing is that there is a number of apps out there that are compelling and exciting to use, not so much quantity. I mean if you go to Google's app store today there are millions of applications and most of them are garbage not many of them are garbage let me clear to be fair to Google with regard, right. We fully expect that to our apps score to top relate more and more we know, there is guys that are sitting in the queue right now waiting even for at least that to do final approval on them. And so, the absolute grow more and more and enticing and exciting for that average job.

And finally just last question on the military part of the business, is there going to be some levels and NRE involved as well where they are putting skin in the game?

Yes, in fact there is one partner that we talk about that is engineering fees, NRE fees, upfront requires in one of the mates. The particular version of what they are looking for, there is a few folks actually that's fit in that same boat right now in that space. At the same time, well, these products are very, very useful for first responders. I mean just as they are first responders, namely into pair and overhaul and those kinds of things in the defense space. And so, 615 and Vuzix will be working towards gaining that kind of business with just costs off the shelf stuff, so you will NRE cost.

Our next question comes from the line of Dave Kanen from Kanen Wealth Management. You are now live.

I'm kind of knew to the story, so if you could help me out. How would you define currently your total addressable markets, the size of it? And then 2 to 3 years out, what percentage of the market do you think you guys can capture?

So, there's multiple markets to look at here. Let's talk about two of them. First, is the enterprise space, if you look at guys like Gartner and the research firms that look out into the future, 2025 they talk about as many as 30 million smart glasses on an annual basis that would be sold into enterprise. And if you think about Vuzix having orders to the tune of 15,000 to 18,000 units for a given customer and that's just one customer in 20 19, if Vuzix would have the 10% market share even if what that the stuff is, would be fairly multibillion company. It's in assets. So I don’t know where we are going deeply in the size of this market place. I can't say that it's going to be really large and Vuzix right now is one of the leading players. We hear it from our customers all the time that their customers want the Vuzix product over most everybody else that's out there. So, you could see us taking a reasonable chunk out of a very large marketplace. We're a bit more conservative than that. We are so excited to see that it could become that for Vuzix, but we are pushing through that sort of shovel here to get to where that marketplace is finally where do we go, but that's that bake in. I have to say looking at their RFPs that we are responding, we can see it happening and that's in the enterprise space. In the consumer space, the mass market, I mean, there's billions of phones. So they estimate a hundred and let's say a 100 billion dollars market opportunity for augmented reality in that space over the next five years. Google and Apple lately it's almost or they talk about anymore. It's not really even about phone anymore, it's about augmented reality in this complete change in the way people do things, and so that market is massive. And you know if Vuzix took a small piece of that like the BMW size of the car marketplace. Again, it would huge for Vuzix and we do down on ourselves. We are going to be doing those kinds of opportunities in the OEM side of our business more so, although Vuzix is going to have a brand in out there.

And then in regards to the quarter, it sounded like there was a shortfall in revenue despite the 37% growth and I was just kind of looking at your commentary in the 8-K for the second quarter. What was primarily responsible for the shortfall in revenue? And then when I look at the Q2 commentary, you said something like you have a sizable backlog that the Company expects to be fulfilled beginning in the third quarter of this year, obviously that didn't happen? But do you expect Q4 for that revenue to just shift into Q4, if you could just explain what was the shortfall what was the reason for it and then do you expect a significant revenue jump in Q4 as per that commentary?

The Q4 without doubt is going to be a big. It’s going to be a big quarter for Vuzix, which is like I said earlier it’s going to be a record quarter for Vuzix. The shortfall in Q3 is easy to identify. We expected to be shipping a higher volume of blades than we did, and we purposely said we’re not going to superior, inferior product. It was way more important to us to keep the name of the brand the product itself and the feelings that people have about when they get the product high, as opposed to just getting the revenue number. So, Blade was purposely put on let’s just get it right tracked. And then, the businesses like Toshiba and I could be going through a couple of a little along the way here that we expected would be in the Q3 are just now moving to Q4. So, there’s a shift in some of our business and some of that we chose to be more conscious on the rollout to make sure that we were getting things right.

So, there’s a significant build of inventory I see ending Q3, I forgot the exact numbers, I forgot from my notes but I think it was like north of $6 million. So, is that in preparation for this big ramp in Q4?

It’s in preparation not just for Q4 but also some of it going out into next year I mean if you don't have inventories you can't sell the demand, inventories take time to convert from pieces and parts into finished goods and so you have to build some of that it is true that we are also anticipating this rollout of products So we are putting inventories on the shelf in preparation for it all. There’s some in M300 also; products are being built to satisfy the demand of customers as they rollout in the higher volumes.

So, how much of the inventory, I'm sorry I just wanted to stick to like the things that are super important to us, so how much of your inventory is for fresh new product laid versus legacy, if you can quantify of the 6 million or so in inventory and then is there risk on the older stuff of writing that down because it speaks of the volume…

Certainly, the only legacy product that I would put in a legacy product both right now is the eyewear that we’ve completely sold out on now. The M300 inventories we have, we’re seeing nothing but people saying when can I get more when you get more its part of our growing business into 2019 as we said were responding to seven and eight figure RFP that will take this product, so we need that inventory to run our business. And the Blade of course is a brand-new product so that inventory is shinny, I don’t know how to describe that 6.8 million of inventory, 2 million is related with the Blade there is about little over 3 million and anything finished goods on the M300 and the rest is just component there is, no allowance or no expected losses to be incurred on the bulk of that 99% of that inventory.

Some of those components are long lead items and if you don't buy them in advance you can’t get them when you need them in times.

That color is extremely helpful. Thank you for that. And then long-term as you ramp up you know, let's say 15 million or so quarter where should I model gross margins, I see you were just north of 30% ultimately as you ramp up and I'm sure there's probably some pricing compression you know as people by higher unit, unit volumes and so forth. But what is the long-term model for gross profit just so I can calculate a breakeven point?

If you’re running at $15 million quarter revenue, we expect the gross profit to be in the low 40s mean we do, currently had most of our products price on the direct product spaces, we make 55% better after manufacturing overheads and other costs and like to get some 40. But today we are running at $50 million quarter, we'd be north of 40% gross margin and what we tended to advice folks is for the foreseeable future the volume get’s up, that 40% should be a comfortable member to that.

Okay so that tells me implicitly at 15 million I'm sure there's some creep up in R&D, SG&A as revenues grow 750% but at that level, you should be breakeven, at least. So that being said I think you ended the quarter with 23.5 million in cash. What’s kind your hard number that you just won't go below and in other words, like because of your customers obviously getting skittish balance sheet is that weak and so forth. What's the number that you know corporately you decided we will not go below?

So let me start, I’m sure Grant will have some extra to add. Vuzix has a lot of levers that compos around our business and so it's not really just about this hard number we get below XYZ Vuzix is going to go raise capital. We don’t look at it that way right now. We look at it as if we’re effectively running this business. You made the point that you expected SG&A to roll up and etcetera. Vuzix has built a business and infrastructure here so that we can manage and grow those 30 million annual revenue kinds of numbers without meeting a lot of extra. We do have a fair amount of money going into R&D and I would love even be able to do more because of the future of this company, but we're also being fiscally responsible at the same time. So we are building shareholder value growing the business and really looking for the Company to appreciate in value before we would consider the concept of raising capital. We are not at that point at all today.

What I'm driving at just to be transparent as I mean you're using almost $6 million a quarter so hopefully with...

Last quarter cash used for operating activities was 3.9 million and our capital investment activity was about 600,000.

Well, I'm going the way I'm defining it is cash ending balance at the end of the previous quarter cash ending balance at the end of this quarter and I see that you are capitalizing some R&D and then there's purchase of patents to me that's all cost of doing business. So when you throw in CapEx the patents the capitalized R&D, the all in number is close to 6 million plus or minus, let's not fret over $100,000 there. But my point is I don't want to own a company that is going to be out of cash in four quarters, and I'm hoping that the Company is going to be proactive that's really what I'm looking for. Are you guys proactive in that regard in making sure that, you don't go down to an unsustainable level?

We are not capitalizing R&D anything internal. We have to receive some licensees about capitalized but that’s GAAP requires us to do that. As far as being prudent I mean we have been in business 20 plus years and we are pretty good at doing what we need to do at the right time. We are going to continue to grow the Company and we're shareholders ourselves, and we want to do with best for the shareholders. And that’s raise the money at smart times and clearly we are not going to go to the edge of the cost but we are pretty prudent and smart based on our prior experience. Many went through this it's what we are ready to grow ourselves internally.

The last question is just a simple one. Are you going to be at the Craig Hallum Conference next week in New York City?

Yes, we are.

Our next question comes from the line of Nehal Chokshi from Maxim Group. You are now live.

Did the backlog go up Q-o-Q you or can you just post that?

I'm sorry can you say it again.

Did your backlog go up Q-o-Q quarter-over-quarter?

It all depends upon how you add that up. The fact is it has, yes for sure it has.

Since there was a marketing that chopped the half a million quarter-over-quarter, Grant, you described it on a year-over-year basis but can you give the narrative on the Q-on-Q basis?

You mean referring to sales and marketing expenses I mean..

Yes.

They did come down for the quarter and we made some changes towards the end Q2, where chains are some of our focus and personnel related to sales and marketing and were investing more in looking after existing customers and just to rate customer traction of putting people inside the funnel and hoping things slows out. We've got literally 1,000 people that are working with our products outcome we want to make sure to they are successful and doing so can be stay off and bigger dividends in those is less expensive than spending a lot of many and extensive customer acquisitions.

The reality of it is we have a ton of customers today and helping them with conversions is where the volume business comes from when people first gets started with this stuff they take time to get through the whole install it if the application is running there's a whole slew of stuff and that kind of imager that kind of customer acquisition is happening at Vuzix. More importantly, Vuzix management felt that we should be supporting and driving towards getting what was needed to help these guys convert. And so, we have now three-tier support programs that Vuzix and our sales guys now have sales engineers that help them in the field, etcetera. So, we change the focus what's also how just one linear and more effectively on the sell side of our business.

And I guess one more point is some of our sales and marketing expenses are somewhat feasible from the standpoint of there's a lot of tradeshows that big trade shows that happened in Q1 of the year and then summer is generally is less busy and then in Q1 we have CES and Mobile World Congress there has been the 0.5 million in those shows that's something that doesn’t occur in the summer.

Mainly it's seasonally down Q2 to Q3?

Well, I'm talking about sales and marketing expenses.

Yes, I mean the conference expenses are seasonally down Q-over-Q from Q2 to Q3?

It's a mix of the common stock, but the Grant was just making that.

I mean I think it's more appropriate to look at 9 months averages, if you look at our 9 months total, you will see that the and divide that by 3 that are Q3. Those marketing expenses are less than the first two quarters.

What's sales and marketing expense for the December quarter and if you were to look at the next 12 months what's your expectation on that. Do you expect to ramp that significantly or do you expect to keep that flat?

Our Q4 this year, it would be pretty close to flat December and Q3 and next year that would be some level of increase but were not anticipating anything dramatic you are talking 10% to 15% increases. We think at our annual spend.

And what is the sales cycle time that you're seeing on average and I recognize there is a distribution of sales cycle times but average. What's that sales cycle time?

I mean in some cases, it can be fairly quick and in some cases you can take a couple of years. Bigger companies typically take longer because they go through a process. I will say now that the software is maturing with companies like upscale and guys like you Ubmax, they have plug-and-play solutions now. So it's much, much easier to get up and running, solving the problems and rolling. So, the time it takes to go from, I'm just getting started to rollout now is less than that was to be two years. The whole industry is getting better at what we do. So, those kinds of things are being shorted cut.

So but on average would be two years then or on average it’s less than that?

Two years is an extended amount of time, it's much less than that. We have got some folks that have gone -- six weeks after, they’ve gotten it they’re up and using it. With our Vuzix Basics Video which is the streaming video services, we have folks that installed it. They're using it quite stable. So, it’s such a broad answer, that said there’re really longer deployments now. Those are becoming less and less than more things are happening much, much quicker, example SATS, all customs took them a year.

And then product cost of sales as a percent of product revenue that declined quarter-over-quarter from 48% to 36%. So that's actually a positive, significant positive, and yet you're volume was down significantly, but I guess what should be just simply your marginal costs but that's pretty positive. What’s the narrative behind that?

Well, we’ve average higher selling prices. Some of the large orders are went out of the in Q2, we had a solid bigger discounts applied, Blade revenues they’re all at full retail. And to be honest we -- there’s a lot of new people buying our products and they pay for retail. So it’s seemed to drag u pour average selling prices nicely. And we have the sale of Walmart significant but of the eyewear and it seems everybody wants the product once the price is down at the right point. And we’re actually selling it for more than we originally contemplated but it’s just a blend of effectively higher prices.

And then because you have basically health products on the floor because it didn't fit Europe quality standards. Was -- is this -- does it mean that you did rework? Or did you scrap and therefore we should expect a significant head on gross margin going into Q4?

We have very little scrap. It's at the very most it’s a rework but you usually what -- there’s certain portions of the process that can be challenging to get right and so it takes more time, and that more time affects the total throughput, there are some yield issues but with those yield issues, it’s with those subcomponents. Once subcomponents go yields are very high, you make a Blade the Blade works.

And then the 15,000 plus case RFPs that you talked about, I would hope that those RFPs are going to be -- there’ll be multiple companies that come in with some sort of offer right and so and hopefully you’ve some intelligence on what the competition is going to be looking like and 15,000 is a lot right and so I would imagine that there could be some non-augmented reality glasses type solution that might be being offered is that correct characterization or is it all AR?

We can’t say that there’s no competition, but I can say that there really is not a lot of competition for Vuzix. Our price points are not the issue for deployment the product bodes really-really well. One, the ROIs are decent, I mean they’re really good so it's not so much about -- there’s no doubt that these guys like to shop around and play the game but -- and I am not trying to look and say we have no competition here because that's not the case but we feel really confident with our pricing, with the volume discounts that we give and the fact that the folks that were working with really like our products and in this case even...

We've done several successful pilots with our products. And more earlier in the game, there might be more competition, more competitive products involved, and they really narrowed it down. Yes, I agree with Paul there is rebound to the competition, but we think these guys are definitely for real, they are not just kicking the tires they are ready to do something in a big way.

I guess what I’m trying to allude to that, the RFP, the scope of the RFP is probably broad. So such different solutions other than AR glasses could potentially answer that supply?

No, for eyes, they said we want your product, how much is 15,000 plus. There is not a 60 page. I want this type of software I want any big time throughout last year and half.

It's fairly direct. It's pretty real at this stage.

Understood. And then.

I’m sorry to cut you off, but we really do need to end the Q&A session at this point. I would like to turn the call back to management for closing remarks.

This is Paul. Give us a call back later, we can continue the discussion, if you like, Sorry. Thanks again everybody for joining the conference call. We look forward to share with you guys more as our business gross, can have some exciting time. Have a good evening everybody.

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