Greetings and welcome to the Vuzix Fourth 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, IRTH Communications. Mr. Haag, you may begin.

Good morning, everyone. I would like to welcome all of you to the Vuzix's fourth quarter 2016 financial results conference call. With us today are Vuzix's CEO, Paul Travers and the Company 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 the management may make additional forward-looking statements during the question-and-answer session. Therefore, the company claims the protection of the Safe Harbor for forward-looking statements that are contained in the Private Securities Litigation Reform Act of 1995. Actual results could differ materially from those contemplated by any forward-looking statements and as a result of certain factors not limited to general economic and business conditions, competitive factors, change in the business strategy or development plans, the ability to attract and retain qualified personnel, as well as changes in the legal and regulatory requirements. In addition, any projection as to the company's future performance represents management's estimates as of today, March 17, 2016. Vuzix assumes no obligation to update these projections in the future as market conditions may change. This morning, the company filed, actually last night the company filed its 10-K with the SEC and issued a press release announcing its financial results. So participants in this call who have not already done so may wish to look at those documents as the company provides a summary of the results we discussed on today's call. Today's call may include non-GAAP financial measures. When required, reconciliations to the most directly comparable financial measure calculated and presented in accordance with GAAP can be found in the Quarterly Filings at sec.gov which is also available at www.vuzix.com. I will now turn the call over to Paul Travers, who will give an overview of the company's business activities and developments during the fourth quarter of 2016. Paul will then turn the call over to Grant Russell, Vuzix's CFO, who will give an overview of the company's fourth quarter results and after that Paul will talk a bit more about the company's outlook, technology and programs as well as the growth plans. We will then open the call up for Q&A session. Go ahead, Paul

Thank you, Andrew. Hello everyone and thank you all for joining our call today to discuss the company's fourth quarter and 2016 financial results. I’m also going to give a bit of a business outlook for 2017. I’d like to start by reviewing some of the highlights for 2016 and how those efforts have set Vuzix up for the accelerating roll out of our smart glasses in the enterprise markets. I will also get into more detail on our technology advances where we have made great strides with our patent portfolio of growing to 90 plus patents advanced in 2016 and with the employment of our Waveguide optics technology in two new products that showcase that CES and Mobile World Congress to Blade 3000 smart sunglasses and the M3000 smart glasses. We would have talked of both shows winning multiple awards at both events and receiving strong coverage from industry international press. These new developments are cornerstone to Vuzix’s feature and as such I will spend some time here also. I’ll then pass the call back to Grant to go over the financials, and then finally will follow up with a more in-depth update. As most of, the market potential for AR and BR devices is significant with ADR research projecting the overall market to reach upwards of $120 billion by 2020, with augmented reality ultimately taking up the lion’s share with the market opportunity. In fact, just yesterday, a piece from [Variance] tuck [trader daily] titled virtual reality and AR about to hit break net growth says IDC. Variance paraphrased from new IDC report. Good news for fans of virtual reality and augmented reality. The market is about to hit a period of break neck growth according to the news release this morning for a research firm IDC continuing…

Thanks, Paul. Good morning, everybody. Before I begin, I’d like to point out that I will be rounding many of the discussed numbers to thousands, even though we current report in dollars, but hopefully that no much longer. I also encourage interested listeners to review our 10-K for a more detailed explanation on some of the years, year-over-year differences as I would just be highlighting a few in this discussion. For the three months ending December 31, 2016 Vuzix reported $620,000 in total revenues as compared to $543,000 for the same period of 2015. Overall product sales were up despite our smart glasses being constrained as customers continued to wait for the M300 and the commencement of its volume production. Sales of our iWear video headphones drove the increase in the quarterly sales as a result of its improved production yields. The negative gross profit margin for the three months ended December 31, 2016 was primarily the result of revenues not being high enough to absorb our relatively fixed software royalties, amortization costs and other overheads. Further, Q4 margins were driven lower as a result of the much lower gross margin we currently own on iWear, and such a lower gross margins on our original M100 smart glasses. As we begin to achieve higher sales, revenues are expected to absorb these overhead costs and should also contribute to significant levels of margin improvement. I will discuss this more when we get into the annual results regarding gross margins. There was a loss on inventory valuation for the fourth quarter of $1,124,000 as compared to $0 in the prior year. This write-down was the result of management's decision in early 2017 to reduce the suggested retail price of its iWear Video Eyewear inventory on hand to a price below its cost.…

Thank you, Grant. I'd like to now get into a bit more detailed update. First let us start with the M100. Despite earlier thoughts regarding M100 and even in the royal – shadow of the new Vuzix M300, the M100 have proven to be useful and deployable tool for selecting entire specimens. This is confirm by the modest yet now growing in 100 has continue to see through the end of 2016 and now into 2017. This demand is coming from a combination of slow but a continued amount of one to two unit orders for trial investing as well as the very successful M100 to M300 migration package for line put together. Also a few large M100 deployment orders and the fact that several of our VIP partner such as safety stock of the M100 could be sure that they can continue to support the current appointments with expansions second charge etcetera This demand coupled with inbound request from new customer deployments for larger orders for the M100 actually costs that Vuzix’s separated for the M100 on back order here in Q1. But with Vuzix’s ability to confirm a new build of the several thousand units we were able to schedule out M100 deliveries and confirm stock to take a product out back order. The several large M100 orders come in from all regions U.S. Europe and Asia, and customers from most of these are confidential but Vuzix should be able to share more details on some of these in the coming years. As a result of continuous customer demands on M100 we now the M100 sales will extend will into 2017. Moving now to the M300, in December certified M300 began to ship to Vuzix’s VIP partners in Europe followed by the North American VIP counterparts in February.…

Great. Thanks guys. Thanks for taking my questions and it seem like the storage value and inflection point now. Can you tell us how many M300 you ship quarter to-date and then I heard you Paul said, 1500 per month, is that a production rate and sold and is that by the third quarter or before, can you just sort of put some context around there?

Well, the easy one that 1500 is our plan production rate, it’s not actually our sales rate and we’re in the process of getting up to there. We’re expecting by April to be, one, it is that about space with our contract manufacturer. And as we’ve said previous we committed to our first 10,000 we’re going build the M300, so we should have a fair bit of product available for shipment and sale over the next few months and Paul maybe talk about the other.

Yes, Brian, we are shipping every single thing that comes in the door. We have VIPs that have placed orders for in the hundreds for M300 after they gotten the latest unit, they are shipping everything you can. You should have a reasonable good first quarter here. I don’t want to quote the exact numbers because every single day makes a difference at Vuzix today and we are pushing product every single day. So it just should be a reasonably good first quarter. Let me leave it at that. As far as the back order goes, in the pipeline we can identity a pipeline that is significant to this [growth] and it’s starting to unfold them higher orders are getting placed again that pipeline. So I would like to think that even going through the second quarter here we’re going to consume just about every single thing that comes off the line without question.

And when you exit the year where will capacity be on a monthly basis and is there an increased capital investment that you’ll need to make in order to get there assuming that 1500 a month won't be enough at one point and how does that impact making the M3000 and 100 do it, are they in different lines?

They are on different lines. As far as production capacity goes there’s already, we’re already in process of bringing up the China operation and very modest and anything really increases in capital require to do that. That 1500 units per month can be achieved with a single shift.

But it could easily be increased tenfold with the existing tooling and other things there, which case would be a few 220,000 for some additional tooling fixtures on the production line. So we’re got up to probably half a million units per year as far as the existing tooling and infrastructure there.

That’s part of the reason why we have some fixed cost the way they are, Vuzix were building in further volume.

Great. Two more and then I’ll jump back in the queue. First, can you talk about, Grant you mention 40% plus gross margins which we’ve heard for a while, can you talk about what kind of volume you need to reach that?

Well, for our smart glasses we clearly make our higher gross margin known as we do in our consumer product like our iWear. I mean, on the M300s and models the current pricing will be earning in excess of 50% gross margins, so if you look at our some of the fixed components in our cost you probably mean, to get the 40% gross margin you probably need to be selling effectively where the 1500 to 2000 M300s per month and that should allow us pricing to set out 40 plus percent on our gross margins.

Great. And then finally, you’d highlighted talking to a number of potential OEMs similar to Toshiba, how advanced our some of the discussions. Are they imminent? Are they early stages, can you maybe just go over time being for some of those?

In one case we’re actually always working with somebody and in other cases we are responding to RFPs.

Great. Thank you.

Our next question is from the line of Jim McIlree with Chardan Capital Markets. Please state your question.

I think you’re on mute, Jim.

You’re right. I was on mute. Sorry about that. Good morning. Brian asked about production of the M300 in this quarter and you kind of avoided it, but in a February press release you talk about at least 1000 M300s in the current fiscal quarter, is that still a deal let's call it a minimum of what you think you can do for the entire ahead of this quarter.

We’re looking at my smart glasses category in general, let’s say, okay. And the smart glasses category we believe a 1000, yes easily. And don't know the balance between M100 and M300.

I’m little confused then, so what happened between February and now it was 1000 of the M300s in February

Yes and it should be a thousand of the M300, but we are in a daily race as I said so and so if it ends up the M850 and I get crucified for that. But I am telling you that in general, we are now there’s a mix of product in smart glasses now that will continue and we should easily be in the [fasm] over a thousand. I’d like to think even more than that, but and I just don’t know the exact mix gentlemen, we might be a little bit shy only because of this ramp period. It’s all happening here just as we talk everyday accounts when you are shipping when you use 50 and 100 systems a day, it really matters.

Okay. You – at the end of the remarks you talked about, I think you said slow tracking the M300, did you mean the M3000 or were you talking about the M300?

Now there is too many words in my script, it’s the M3000. And so we are pushing it forward. We are getting it done, but if I need resources, so that we can make sure that Blade is out by the following year and we will pull them from the 3000 in favor of the Blade.

Okay. Great. Wouldn’t you face some potential cannibalization of the 300 from the 3000 anyway it doesn’t make sense just to delay the 3000 or to get that 300 for the life?

There are plenty of folks that the 300 is what they want and they want article featured systems and don’t need them for the jobs that they are doing. I said there are some 300 that would probably get -- by 3000, which is part of the reason why Vuzix doesn’t feel so bad about saying what’s potentially delayed with the later 3000 here, the M3000. One of the conundrums I have gentlemen in our conference call is there is upward of 300 people that joined these things and some of them are competitors and all that and if they are [hated] we are public, so we got a share with people what we are doing but there is awful lot of competitive information in our shares. But in any event, the M300 you got it correct, or 3000 you got it correct. If we are going to get something done this year we are going to push like how to make source the blade.

Okay. Can you talk a little bit....I’m sorry.

I didn’t mean to make that sandwich....

No, I understand.

Thank you.

Okay. As far as pricing goes, the 10-K you talked a little bit about the potential, a possible price cut on the M100 and if you would, can you just review again the pricing for the 100 and the 300 and that would be their realized prices that you get not the price that the end user is paying?

Well I’ll do both. Retail on the M100 is currently a 1000 the average pretty off so around 700 bucks. We are expecting potentially to decrease the price, when the future may be 20 or 30 points everything will go down accordingly. But we still the demand, that that’s not the case. So we’d still be making over 50% on gross margin we expect on M100 even with the upward the price reduction. M300s, $1,500 retail average wholesales or 1,100 bucks we anticipate that holding that equates to around 2017.

Great. That’s very helpful. And my last question is Paul you talked about the Waveguide products in the middle of the year. Can you discuss the design time, the length of the design time in order to get a Waveguide product into an OEMs final product, are we talking months or years in terms of design time for those lines?

Sure, now it’s a lot different than three years ago. Three years ago the stuff was really hard to do by anybody even Vuzix. But we have now off the shelf solutions Jim. So to take a Waveguide engine, Cobra display engine, tack in with it and get that into a design it can be done in a reasonable amount of time. We are still talking about 12 month’s kind of cycle times. Almost any consumer electronic product takes some time to get through the ground; well it’s a ground off design. And like I said these are off the shelf solutions. They just hope its interacting and it works in a really cool form factor. So it’s quicker now.

Great. That’s very helpful. Appreciate it. Thanks a lot. And good luck with everything.

Thanks Jim.

Thank you. Your next question comes from the line of Rob Stone with Cowen & Company. Please state your question.

Hi guys. Paul, I wanted to ask about Toshiba first, clearly a pivotal opportunity for you. I know you got other things going on that are on a not named basis. What kind of milestones should we be looking for in terms of the development part of this deal and so what’s the trigger to get into a manufacturing agreement for the second half?

Yes between now and summer you are going to hear a whole lot more about what this product is even in the market is going after her. And so you will begin to see even our friends start to share with the rest of the world. They are obeying company rights, so they have a tendency to try to time these things just perfectly for the production side of it. You will see the development often happens between now and mid-summer and knock on wood, Jim we are on a pass right now the early fall productization.

You say that this is one of...

Sorry, Rob. This is one of those products that is kind of kicked on in a much faster track than a ground of design because its’ based upon a lot of stuff that already exists at Vuzix. So this isn’t a year and a half 12 months or a year and a half development cycle, it can get done and it will be done much quicker. There is other pieces in the parts that go with this that are already done. So yes, I don’t know if I had answered it very well for you, but the....

You picked up my follow up relative to the design cycle perfectly, thanks. I wanted to ask Grant about the OpEx runrate. If we take out the inventory charge from Q4 you were running in the second half for $4.5 or $4.6 million in the quarter for OpEx and you mentioned that there was a big push to get M300 certified so forth external consultants etcetera. How should we think about the run rate for expenses now that that work is done, is it going to stay at this elevated level because now you are on to working on Blade and other things or were there some onetime items that will give you a little bit of a pause on the expense growth?

We’d like to think there was some onetime items a slowing any further growth. I mean, that said I would expect the OpEx maybe average down $500,000 maybe even as low as a million. But it depends on how hard we push on some of these new items, but the cost related to the M300 are slowly behind us and for the future products, we are going to do the DVT and EVT and in runs and development in house I mean do the final assembly because it’s much easier than slowing on engineers back and forth, and days slipped into weeks. So that’s proving to be more costly than we thought it would be and I think we are pretty good at doing that and so we are fairly confident that you should not see a big increase in the OpEx in 2017.

Okay. And then with respect to the roll off of the remaining iWear inventory, can you just help us be clear on how that’s going to look and have you essentially valued the remaining inventory at the selling price, so that’s going to flow out at zero margin, but less whatever a factor is of unabsorbed manufacturing overhead or what’s going to be the impact and roughly how many iWear units are left, I’m assuming this is the seldom cover gone and then that’s over.

That’s okay -- and you have it correct. We brought them down to our expected net selling price. When you do these things that requires effectively write it down and all of a sudden, they received demand and we ask the price we have to make an adjustment back the other way, but we’ve written it down to our net expected selling price, less allowance for freight and other matters. So we have about a maximum of 6000 more we would build over the next year in the south. And we have – we’ll see I mean, there is maybe we’ll go we could half way or we could go all the way. I mean the price is looking attractive.

So some of the inventory value that you described is work in process and components they are not finished goods, right?

It’s a combination of finished goods and a [bit of west] and components.

Okay. Last question is with respect to Toshiba NRE, you mentioned a fairly sizeable number for the first half, I assume that’s triggered by milestones and how should we think about that being spread over this quarter and Q2?

Well, the plan total’s $1,148,000 milestones and a lot of those milestones are primarily delivery or the product prototypes and first EVT engineering verification units. We are all marching to a targeted plan where the process would be done by the end of August fall. If you see the plants, I mean that’s what they really want. And clearly if we could pull it in, they would be happy to do so. So I mean for realistically so that’s over the next six, seven months you’d probably if you were to have almost spread it equally that’s not far from what t he rate of revenues could be recognized. We have milestones payments along the way.

So it’s going to spread over out into Q3 there?

Yes, and then actually Q3 will probably be 60% of the controllable project is that we make the bulk of the sort of deliverables to [Indiscernible] well in place.

And then you probably mentioned but that’s something that should show in Q1?

Yes the first stage in Q1 and then there will be another Q2 and I think that the next big milestone payments are all in Q3.

Okay. Thanks very much for taking my question.

Okay.

Thank you. And our next question comes from the line of Amit Dayal with Rodman & Renshaw. Please state your question.

Thank you. Good morning guys. With regards to the M300 and M100 shipments, are we receiving payments in advance, how are we sort of managing the build out and revenue recognition for these units that’s soon to be ramping up pretty quickly now?

Amit, a lot of it is on a predated basis. There is very few people that we give met 30 credit terms to this year. There are some companies we are working with but certainly our – their viable folks easily and they couldn’t support on that 30 but generally speaking we are not doing a lot of that right now.

So, I’m just trying to get a sense of will we be able to see revenue recognized either or shipped out just to from a sort of an annual perspective?

It’s for the most part when we ship we recognize the revenue.

Yes – a very small component that’s related to the software that we and we recognize over 24 months, but that’s less than 5% of the selling price.

Got it. Most of my other questions have been asked. Just one question around the development community. Now it’s at 4000, what role is Vuzix playing to bring all the work in terms of application etcetera that the development community is building for these glasses and putting these in front of the end customers, can you just give us some color on that aspect of the business model?

So we have the support team here of folks that currently talk about for thousand but the value added resellers, the more key guys, all the VIPs but we are involved with them very often. We support these guys at trade shows etcetera even in many cases, you are going to see more active stuff website regarding helping these guys in etcetera to attain more business. We have an app store but today it is not a paid app store Amit. That’s going to change ourself. It will be a paid app stores. You are going to see Vuzix start to get more involved in the services side of some of this because we have folks that want us to build out an M300 with a certain flavor of software there are builds on it by way of example, and we are building some infrastructure and putting that in place so that we can offer that as a service to people so that it ships from Vuzix configured for XYZ company.

Got it. So that is the potential monetization opportunity for the company as well now?

Yes.

Understood. That’s all I have guys, thank you so much.

Thanks Amit.

Thank you. Our next question comes from the line of Mark Drucker with B. Riley. Please state your question.

Thank you. Building on the question that another analyst posed, just to be clear what base level of OpEx are you able to support for the revenue growth and scale has achieved at what level of revenue and when that scale did you state that you expected 40% contribution margin?

Yes, 40% contribution margins. We will not have to impress much at all to grow M300 sales, the facilities exist, the tooling exists, everything is there. In fact there maybe just modest $10,000 or $20,000 kinds of numbers for a few more text pictures and those kinds of things. So, for us to crank to 10 to 30,000 even on a monthly basis we will not have to put a lot more into OpEx

Okay, so are you implying that you are at scale with your current level of revenue?

Multiple shifts, the tools themselves already support that kind of volume, I’m not saying we are at scale yet, but we are getting better, the yields are improving significantly, the number of units that get on a built on a daily basis is climbing and by the first month in the second quarter we should be right around the 1,500 unit ramp rate.

Clearly if you follow the example if you are selling 20 or 30,000 a month, it means some additional infrastructure from the standpoint of sales and marketing, customer support etcetera. But from a manufacturing standpoint that’s in place. Do you think where we use contract manufacturers that are world class and they can [Indiscernible] as much as we’d ever dream ourselves.

Thank you. Last one from me. How do you deal with product issues when you share your products with enterprise customers and they provide suggestions for improvement, how does that input make its way into production and into the end product?

We – every sales guide we have it’s framed to listen to our customers, collect the information that they need and come back and share it with our engineering team. We have weekly meetings where we go over what’s working and what’s not working. The improvements that we need to make, it’s there. So there is a closed loop between our customers and the engineering teams to make sure that what we have in the field now is meeting their needs and what our next generation stuff does meets their needs. We even make proto type sometimes, share them with our customers to get feedback and then take that feedback and roll it into our the next end products that we are building. So we really believe in that relationship between the customer and what we are building. After all you make something that people can’t use you are out to launch you’ve failed.

That’s correct. Thank you.

Thank you.

Thank you. Ladies and gentlemen, that does conclude our question and answer session. At this time I’ll turn the floor back over to Mr. Andrew Haag for closing comments.

Paul, Grant and everyone at Vuzix want to just say congratulations on the launch and sales ramp of the M300 and I’m sure everyone here is looking forward to for the disclosures of some of the business developments you mentioned on this call coming to close. And those developments, some being represented in the market place. I’d like to thank all of Vuzix shareholders for their participation on today’s call and our support for the company. This concludes the fourth quarter 2016 financial conference call. Thank you.

Thank you everybody. Bye.