Greetings and welcome to the Vuzix Third Quarter 2016 Financial Results Conference Call. At this time, all participants are in a listen-only mode. A brief question-and-answer session will follow the formal presentation. [Operator Instructions]. As a reminder, this call is being recorded. Now I would like to turn the call over to Andrew Haag, Managing Partner at IRTH Communications. Mr. Haag, you may begin.

Thank you, Operator. Good morning everyone. I would like to welcome you all to Vuzix's third quarter 2016 financial results conference call. With us today are CEO, Paul Travers and CFO, Grant Russell. Before I turn the call over to Paul, I would like to remind you that in this call, management's prepared remarks contain forward-looking statements which are subject to risks and uncertainties, and management may make additional forward-looking statements during the question-and-answer session. Therefore the company claims the protection of the Safe Harbor for forward-looking statements that are contained in the Private Securities Litigation Reform Act of 1995. Actual results could differ materially from those contemplated by any forward-looking statements as a result of certain factors not limited to general economic and business conditions, competitive factors, change in the business strategy or development plans, the ability to attract and retain qualified personnel, as well as changes in the legal and regulatory requirements. In addition, any projection as to the company's future performance represents management's estimates as of today, November 14, 2016. Vuzix assumes no obligation to update these projections as future market conditions change. This morning, the company filed its 10-Q with the SEC and issued a press release announcing financial results and business developments. So participants in this call who have not already done so may wish to look at those documents as the company will provide a summary of the results we discussed on today's call. Today's call may also include non-GAAP financial measures. When required, reconciliations to the most directly comparable financial measure calculated and presented in accordance with GAAP can be found in the Quarterly Filings at www.sec.gov and it's also available at www.vuzix.com. I will now turn the call over to Vuzix's CEO Paul Travers, who will give an overview of the company's business activities and developments during the third quarter 2016. I will then turn the call over to Grant Russell, Vuzix's CFO, who will provide an overview of the company's financial results and after that Paul will then talk more about the company's outlook technology and programs for growth. We will then open it up for Q&A after management's update. Paul?

Thank you, Andrew. Hello everyone and thank you all for joining our call today to discuss the company's third quarter 2016 financial results and our business outlook. As most of you know, the market potential for AR and VR devices is significant, with ADR Research projecting the overall market to reach $120 billion and technology are forecasting enterprise smart glasses to make up at least $6 billion in that market all by 2020. Addressing this market, Vuzix testing shipping is M100 smart glasses for several years now. Within a few weeks we expect to begin commercial shipments of our next generation M300 smart glasses. There is significant interest from the VIP members that we have announced and their customers as well as many other players we have yet to announce. For instance, as many of you know, in the third quarter DHL was one of the world's -- DHL is one of the world's leading logistics companies have expanded its global AR program and made the M300 a key component of this. So we're solidifying our strong position in this growing space. This is one of many great examples and I will share more here a bit later on the call. Our goal at Vuzix is to be at the forefront of this anticipated trend and in keeping with that leadership role, last Thursday night we announced that we won four CES 2017 awards for our new Blade 3000 smart sunglasses. The Blade 3000 is world's first and I think it's important to make the point that it represents a milestone for Vuzix that we believe no other company has been able to achieve thus far, companies that have billions of dollars for research and development even. Vuzix is going to be the first company to deliver smart glasses in…

Thanks, Paul. Good morning everyone. Before I begin, I would like to point out that I will be rounding many of the discussed numbers to 1000s, even though we currently report in dollars. I also encourage interested listeners to review our 10-Q for a more detailed explanation of some of the quarters, year-over-year differences as I would just be highlighting it to you. For the three months ending September 30, 2016, Vuzix reported $583,000 in total revenues as compared to $970,000 for the same period in 2015. Product sales of $583,000 were down 35% from $891,000 registered in the prior year's period. Decrease in total sales was primarily the result of lower M100 smart glass revenues caused by existing and new customers choosing to defer purchases until the new M300 smart glasses is available along with the fact that only conservative percentage of the M100 smart 300 migration package sales recognize this revenue, when the M100 portion first ships. Contributing to the overall decrease is the fact that we recognize no sales of engineering services during the quarter compared to $80,000 contributions in the prior year's quarter. Sales of our iWear video headphones which were not available in the same period in 2015 compared with 29% of the product revenues for the three months ending September 30, 2016. Revenues from this product line has remained constrained due to production yield difficulties, which as Paul mentioned, should be well behind us now. Lower seals resulted in net gross and negative gross profit for the three months ending September 30 as compared to the prior year. This would primarily the result of revenues not being high enough to absorb a relatively fixed amount of software royalties and software amortization costs. Additionally we paid $98,000 in increased manufacturing overheads and direct labor, all…

Thank you, Grant. I'd like to now get into some specifics around Q3 and the outlook for the rest of 2017. Let's start with the M100. Even with the M300s eminent release, we are seeing new and expanded Vuzix M100 deployments across several core industrial sectors including supply chain and warehousing, manufacturing, insurance, and inspection, and of course field service. Although this effort resulted in Q4 sales for Vuzix, our VIP partner XOI Technologies has again began deploying on the large scale Seattle-based MacDonald-Miller, a full service design/build contractor. Thus far over 150 of their technicians are now using the M100 for worksite reporting, safety compliance, remote expert video support and POV video collaboration with the business owners, architects et cetera. The potential use of smart glasses to produce immediate ROIs and effectively multiply the effectiveness of the scarce, expert technicians in the construction and service industries. A negative trend is projected to grow significantly over the next four years. Bradd Busick, MacDonald-Miller CIO commented, while there are incredible operational efficiencies that enable mobility and collaboration for MacDonald-Miller staff through telepresence and increased accountability, the real benefit of this technology is add our customers to now witness firsthand, the current state of the building through multimedia experience. The old outage a picture is worth thousand words brings to. SAP also recently acquired with an expanded offering of their AR ticker application at Besly, a major IT hardware provider in Europe. The M100 is now across the complete warehouse operation from receiving, product put away, picking, and packing. This allows Besly to leverage a single device to direct the employee in real time to the next best cast to perform based on where they are located in the warehouse and what is the highest priority. Previously they were single function either…

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

There is a couple of reasons.

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

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

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

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

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

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

And then finally --

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Well thank you for the clarification there.

Yes, no problem.

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

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

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

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

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

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

Yes.

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

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

Got and paid for.

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

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

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

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

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

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

And the 3000 is you rated above that?

Same electronics.

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Thank you.

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

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

Thank you everybody.

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