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

Greetings, everyone and welcome again to the Vuzix's fourth quarter and full year 2017 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 Travers, I'd like to remind you that on this call management's prepared remarks may contain forward-looking statements which are subject to risks and uncertainties, and management may make additional forward-looking statements during the question-and-answer session. Therefore, the company claims the protection of the Safe Harbor for forward-looking statements that are contained in the Private Securities Litigation Reform Act of 1995. Actual results could differ materially from those contemplated by any forward-looking statements as a result of certain factors not limited to general economic and business conditions, competitive factors, changes in the business strategy or development plans, the ability to attract and retain qualified personnel, as well as changes in legal and regulatory requirements. In addition, any projections as to the Company's future performance represents management's estimates as of today, March 19, 2018. Vuzix assumes no obligation to update these projections in the future as market conditions may change. Yesterday afternoon, the company issued a press release containing its financial results and the company filed its 10-Q with the SEC. So, participants in this call who may not have already done so, may wish to look at those documents as the company will provide a summary of the results discussed on today’s call. After the market closed on Friday, March 16, 2018, the company issued a press release announcing it's financial results and filed it's 10-K with the SEC. So participants in this call, who may not have already done so, may wish to look at those documents as the Company will provide a summary of the results 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 Company's Form 10-K, annual filings at www.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 fourth quarter 2017 financial results and business outlook for 2018. Paul Travers will then turn the call over to Grant Russell, Vuzix's CFO, who will provide an overview of the Company's fourth quarter and annual operating results. Paul Travers will follow Grant Russell and provide closing remarks. And we will open up the call up for Q&A after managements update. Paul?

Thank you, Andrew. Hello everyone, and thank you all for joining our call today to discuss the Company's fourth quarter financial results and business outlook for 2018. I have a lot to share during the call and will start with our activities around our Waveguide Optics and the Vuzix Blade. This is a technology that we feel ultimately will drive much of the future of what we do with Vuzix. After Grant discusses the fourth quarter and year-end results, I will then provide an update on our efforts in the enterprise space and outlook for 2018. CES 2018 marked the beginnings of one of the more significant events in our Company's history for a number of reasons; so I'd like to start the overview here. Vuzix Blade; we asked folks the blade does as a matter of fact truly support Amazon Alexa was showcased to over 4,000 industry professionals at CES 2018 and the related Pepcom President there. And, then in late February it was shown publicly again at Mobile World Congress in Barcelona, Spain with the Pepcom and Showstoppers President in recently at South By Southwest. In mostly all cases that was received by almost everyone with general amazement, as folks felt they were truly "viewing the future." The Vuzix Blade is differentiated from anything in the market and that delivers a highly useful Smart Glasses experience and a form factor that people would actually want to wear; by most measures Vuzix's Witness Blade offering has done what no other company has been able to achieve thus far. These events drew much attention to Vuzix, that by way of example grew Vuzix's product article page views at January 2019 to 4.1 million views versus 400,000 in January 2017, that's a 900% increase in industry media exposure, all of our…

Thank you, Paul. Before I begin, I'd like to encourage interested listeners to review our 10-K that we filed late Friday with the SEC for more detailed explanation on some of the annual year-over-year variances as I will be highlighting just a few. And as everybody knows, we do file our financial reports in dollars but I'm going to comment on the operating results in millions this time. For the three months ended December 31, 2017 Vuzix reported $1.6 million in total revenues as compared to $0.6 million for the same period in 2016, an increase of 168% year-over-year. Quarterly sales have now increased 7 consecutive quarter stating back to Q2 2016. The year ended December 31, 2017 Vuzix reported $5.5 million in total revenue as compared to $2.1 million for the prior year, an increase of 160% year-over-year. Overall, quarterly and annual revenues were up primarily as a result of much stronger M300 smart glasses sales, sales of engineering services related to the work we did for Toshiba, and finally a much stronger waveguide component revenues due to increased development activities with our existing OEM engagements. We reduced our gross loss from sales in 2017 to $0.7 million versus a gross loss of $1.2 million in 2016. The improvement was primarily a result of higher revenues to absorb the overheads and improve the direct product margins which actually improved 5%, and that's even with the fact that we're selling our eye-wear at zero margin currently due to prior rate downs. Overall, research and development expenses for the 2017 year decreased to $6.7 million as compared to $6.9 million for the 2016 period. This decrease was mainly due to the reclass of internal salary costs from R&D operating costs to engineering services cost of sales related to the Toshiba engineering…

Thank you very much, Grant. Our enterprise business continues to grow at Vuzix, M300 sales continue to increase in Q4 and we expect the level of business activities around the M300 spend to expand throughout 2018 and beyond delivering enterprise-class smart glasses to businesses increasing their efficiencies, knowledge, capture and service levels. Between Q4 in this call, the underlying market for Vuzix smart glasses has picked up steam and it is represented by an increase with some of our key sales metrics and activities which is a strong indicator for future sales growth. We made further investments in our enterprise business in Q4 including adding top level sales talent and adding to our CRM and marketing tools and enhancing our ERP and supply chain software system, as well as investing in pre-sales and technical support. We invested in and launched the Vuzix's basics application platform to help accelerate the customer pilot phase and to reach the previous [indiscernible] small business market who couldn't afford a custom solution just yet. We increased our active pilot programs by approximately 150 pilots since the last conference call, an increase of about 40%. We have increased our VIP partner network by 35% and furthered our global reseller network. We have also qualified more sales leads in the last 4 months than we did in all of 2017. Our Top Tier VIPs have been ordering with a significantly higher frequency and in larger quantities. Orders directly between Vuzix and large enterprise organizations are also increasing including a large order that we delivered to a Top 5 life sciences company for a global deployment. We are in final stages with a large aviation services company for what we expect will be Vuzix's largest deployment of M300's to-date. And our inbound RFPs have also accelerated in 2018…

Operator, we will now open the call for question-and-answers, and if you can remind everyone how to prompt for questions, that would be great.

[Operator Instructions] Our first question comes from the line of Christian Schwab with Craig-Hallum Capital Group. Please proceed with your question.

Can you give us an idea of a multi-year timeframe -- what you're kind of thinking in the thousands of units that you anticipate being able to sell in the Blade versus the M300 and categorize which one of those two you think would be bigger than the other?

Grant, you want to take the numbers part of that one to start?

Sure. At this stage, I mean -- we're not -- let's go in providing unit sales guidance but I can tell you that we do have the supply chain running to build M300 and 1,000 to 2,000 per month range and we have our planning all the way out for the next 25,000 pieces and that will take -- either take -- could take a year or could take two years. And then for the Blade, we -- our current production plan is for a minimum of 10,000 pieces in 2018 and hopefully that could be a multiple but component lead times for some of the new tactics in these things that can be fairly long. So in the short-term, clearly, we believe the M300 is going to be the leader and but the Blade should rise and the indications as Paul mentioned. Enterprise to the consumer side is looking pretty solid, so we could be pleasantly surprised and see that match or maybe even exceed the M300.

And my last question has to do with the waveguide optics and potentially selling those to others. Can you give us an idea in a multi-year timeframe with greater than already a dozen partners -- the opportunity of that product?

When we first say that Vuzix to be clear is going to be in this business selling finished products. There are select partners that we're talking with right now that would be very synergistic with what Vuzix does and it would be good for Vuzix to be in their products and in those cases, these guys are -- some of them have been in development for a bit now and some of them has sounded consciously, publicly, but odds are this is going to be a 2019 kind of deployment for most of these guys, a lot of them are just getting started although I have to say some of them are really pushing fast into their development programs. And the kinds of numbers, I mean this is -- the guys that we would enable are in sectors of the consumer electronic market that could represent millions of units for Vuzix. So I would suggest that you hear about development efforts more or so in 2018 from an OEM perspective, and then deployments in 2019.

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

With 1Q almost done, Grant, can you tell us how many pieces have shipped thus far in the first quarter excluding Toshiba?

Brian as I said, we don't disclose or unit sales currently at this time. So we're tracking ahead of last year's quarter, I can tell you that.

I would hope so, right.

I mean, I really am not prepared to answer that.

How about the Toshiba relationship -- you've made an announcement on that one, can you talk about how you expect that to ramp through this year?

Well, they like I see -- there is going to be sometime between first deliveries to a customer and rollout deployments with their Windows-based product. They are targeting some very large enterprises; so the speed of that -- I mean, we will see but I mean it should be a nice steady increase this year and we -- I can't share forecast with you but it could be a pleasant surprise, we did indicate in the contract there is the $5 million of required purchases for them to maintain their one-year exclusive. We expect that will be achieved and they've shown us indications of multiples of that but time will tell.

And do you recognize revenue from Toshiba when you shipped them product or when they ship their product to users?

When we ship to them because they've brought it and taken title of the product.

So will there be revenue in this first quarter?

It's going to be tight, we picked up production and it can take 2 to 4 weeks to get the product flowing off at the end of the line; if they can do it in a shorter period than yes, otherwise that will be Q2.

And then we saw -- as you discussed, negative gross margins, it decreased obviously this year but can you talk about when you'll see a normalized margin? And then, can you talk about how much fixed cost is in gross margin versus the product margin?

If you refer to the Q, there's -- I mean the K, on -- there is a table we have quarterly and annual tables regarding our composition of cost of goods and you'll see there some of the fixed items are clearly, the manufacturing overhead freight are fairly variable, we have warranty and we've had been having amortization of software development costs and royalties. The amortization of software development cost that was completed at the end of September and that related to the original smart glass OS; now we're investing in software development costs related to Vuzix Basics, so that will start flowing back through cost to sales when we feel all that software is completed. But as I briefly mentioned, the eye wear is currently being sold at cost because we've written that till sums down. We've got about another $120,000 worth of cost of goods for that -- the flow through the income statement but thereafter then, we should be getting to more normal -- on more normalized basis but the first $1.5 million of gross margin pretty well gets eaten up by our fixed overhead costs. Then after that we have the contribution from the product sales and that's strictly a matter of volume. We would expect -- clearly in 2018 to start going back to a positive overall gross margin.

And that's in the first quarter?

No, I said in 2018, it's not going to be in the first quarter.

And then in terms of the M300, can you talk about how many -- what the product margin is? You said it's gone up and then I didn't take a look at the K. And then, can you talk about how many were shipped in the first quarter? I mean, sorry in the fourth quarter, sorry about that.

As I said previously, we don't really see unit sales; I mean, our average sales price, we've disclosed some of the revenue numbers, you can work back from that. I mean we're still not shipping clearly thousands per quarter but the average selling price is around $1,100 so you can do some math backwards. The margins are improving; as I stated in for the year, they improved by 5%, even with the eyewear. We're expecting those numbers should grow into the mid-50's with our -- once the eyewear is out of the game, so I hope from a product standpoint we still feel we'll be achieving in the mid-50's on the actual smart glass sales.

And is that timeframe and by mid-2018 to mid-50s or is that…

Yes, we should be there by mid-2018 for sure.

And then, can you talk about the priorities with the increased capital -- what are your top couple of priorities? And then with that money, how many shares now outstanding and then, options and warrants in addition?

The front of the 10-K has got our number of shares and I think -- what we've got here -- I think we've got $27.3 million is our current share count. There's about warrants that were issued in the last two financings, so I think they're about a little over $2 million, and then stock options about $1.5 million. Clearly, we still have the Intel-preferred shares outstanding which are convertible, and there is about $25 million worth of those and they converted $5 million to shares; so potentially there is another 5 million shares worth of dilution there. What was the balance of that question?

The priorities of your capital; I think you've been capital constrained for a long time now that you're not…

Yes, I mean -- I see, clearly, general working capital but we do not have any direct plans for any acquisitions or major expenditures other than we want to expand the capacity of our waveguide production, we have some new products where -- that are coming along, we want to do a little more and go faster on R&D because we feel we have some new technology we want to capitalize and get the market a little quicker, and make some strategic hires within the organization to complement all that. But I mean, at this stage we don't expect it to keep it on the balance sheet, invest in the short-term money and have it on-hand when we need it.

I'd like to add just a little bit of color on the Toshiba effort. So Toshiba actually has been in the market with select accounts for some time now, they're in very short number of units, maybe like -- I can't tell you the exact numbers but 50 to 150 kinds of numbers where they have been sharing already and letting people use and using their software, and they've gotten a great response from those firms and so there has been some seeding already happening.

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

Can you share with us how many eyewear units you have in inventory; i.e. how much we still have to sell before we get those?

We've got about 1,700 units.

And you think -- if I understood the answer to a previous question correctly, you think you can get rid of them by the middle of the year; did I hear that right or…

That's our intention, yes.

And R&D in Q4, I know there is -- you had some things going on there, $2.3 million, is that a good level going forward or is or that -- they're going to go up or down?

It probably is going to be at least that level going through 2018 or maybe one at couple of $100,000 markets; there still was some modest re-class of some internal labor from -- on the Toshiba project.

And then I was just hoping that I could -- you guys could explain a little more detail on the M300 timeline; pilots -- are they paid pilots, kind of like what the size of these pilots are to-date either -- let's call in terms of units per pilot, just kind of a general number there. And then, what you think the rollouts might look like -- so let's say if a pilot has 10 units, the rollout is going to have -- to make up the number 10x of that. And is there enough experience yet to talk about adoption rates from pilots to production rollouts?

The pilots really vary; some firms are significant numbers, north of 50 pieces actually; some are 2 or 3 just to get the tests drive going. The rollouts in some cases -- we're talking with folks that are in the thousands of pieces; in other cases it's just smaller, 100 to 500 kinds of numbers. And it really depends a lot upon the form whether using it. In some cases, I mentioned on the call that there is as many as 16 different vertical areas within the firm that they're using these glasses, and these firms are massive, they have hundreds of thousands of employees, not every one of them clearly would be using the glasses but they could get deployed in a pretty significant way. There are other firms that have outlets around the world to the tunes of 4,000 or 5,000 outlets they need to have one or two systems. So really is very, very broad -- the number of units a pilot could turn into. Folks here in the sales team have a funnel and they work that funnel backwards and there is [indiscernible] in a bunch of different buckets as to where they could end up.

And it's obviously very encouraging and bullish that you've increased the number of pilots; I'm just trying to translate that into pilots for a month turns into rollouts 6 months down the road, 9 months down the road; do we have experience yet to really have a firm estimate on timing from pilot to rollout?

Again, that also is pretty broad because it depends upon -- again, the smaller pilots with smaller firms have a tendency to be in the work faster, the bigger guys take longer and it can take anywhere from several months to almost [indiscernible] 15 to 20 pieces, the best of size of the business in the small firm and then it's a rollout, right on through the many months, 10 or 12 months, even sometimes a 1.5 year plus kind of numbers.

I'd say 6 to 9 months for the big companies.

And then on the Blade; it sounds to me like -- well, I'm confused as to what your initial focus is going to be; is it going to consumer or enterprise? And on the enterprise market, I'm assuming that you're targeting or your channeled market is similar to M300? But if it's consumer, what channel are you contemplating using?

It's focused first on enterprise, we have very clear requests in business opportunities there. It's in the mix of M300 activities that we already are doing, the developer community already knows Vuzix, we're in the process of building out an ecosystem around the Blade that ultimately the average Joe [ph] is going to love, but it's going to take more time to get there but there is a plenty of business on the consumer or on the enterprise side right now that we're seeing. Again, as I said in the call -- my comments; there are folks now that are saying I want to use this across -- Vuzix's products across our used cases, so there is places where folks are B2C oriented where they've got an outlet -- where -- kind of like in Amazon where they would have brick-and-mortar store, they need folks in that brick-and-mortar store stacking shelves in the light and smart glasses, although were efficient, you look kind of off wearing them and they really like the Blade for those used cases and due to big opportunities on that side of the house in enterprise. So that's where the initial focus is but we do have activities happening on the consumer side, the south where the applications that are running, we're building out an ecosystem that is also pointed at the consumer side of the space.

And just to clarify on the answer you just gave Paul; you're talking about enterprises potentially deploying the M300 and the Blade but in different used cases. So maybe for some particular users, the Blade would be appropriate but for other users in a different part of the organization maybe the M300 would be appropriate. Is that -- did I understand your answer correctly there?

You nailed it, that's exactly correct.

And I just wanted to again to make sure the channel that you're using for the Blade to the enterprise market, it's similar to the channel for the M300; so you're not recreating denovo a new path market?

No, that's correct. Although I have to say there's a lot of end customers come into Vuzix surrounding the Blade; so we do use the VIPs of course and they are excited about it also but there's folks that are in large organizations that -- they're willing to put their own effort in around the Blade because it's sees -- they finally have a way to impact a part of their business with a change that could be significant that they haven't before.

Our next question comes from [indiscernible]. Please proceed with your question. I'm sorry, our next question comes from Christian Schwab with Craig-Hallum Capital Group. Please proceed with your question.

I just want to make sure I understand correctly; we don't expect any cannibalization of the M300 and enterprise work cases versus the Blade, right? So the Blade -- we're kind of thinking about -- if I'm correct, correct me if I'm wrong; in retail stocking and picking and light hands free mobile applications type of things versus the M300 workload cases which have typically been warehousing and field services; is that correct?

100% correct. They are still -- it kind of works across the organization and in certain areas it makes great sense for an M300 and then there's other areas where the blade is a better choice.

I just wanted to make sure that I understood that correctly. What do you believe would be a fair price to sell the waveguide optics for?

We're still working through that detail. We've heard that alternatives -- waveguide is just a few of them out there quite frankly, but some of them are in the $100 an eye kinds of costs; others I think are even more than that because it's so difficult to produce them. So there's a benchmark there, a baseline out there that says they're fairly expensive, it does not cost Vuzix anywhere near that. That said, this is a value proposition, we're bringing something to the table that you can't get elsewhere. We can produce them in volume, so there is a number -- it's less than $100 a piece because it doesn't -- we just don't need to have it that high and that -- that makes it so you can't sell in mass market products. So it will be a mass market price point for the overall system, Vuzix's contribution is not going to be a trivial piece, to get waveguides, it's not -- it's not about $1 a piece, that's for darn sure; it will be in the -- probably less than $50 but we don't go beyond saying stuff like that, but at the end we're not really settled on the final price yet.

What type of gross margin are we targeting though?

It really is a function of volume by the way, if you -- to get that kind of price points that you need for mass market you got to be buying mass market volumes. And Grant, you want to talk to the margin side of it?

Sure. Well, clearly it will be as much as we can reasonably get but we do understand the sensitivity. The large OEMs, they're going to be pretty demanding; so I would think if we're selling them by the millions to two accounts we would -- we probably wouldn't be achieving 40% margin, so it will be probably closer to mid to high 20s in big, big volumes. That's more of a typical OEM margin, we're not going to get the 40-plus that would normally come from taking a product directly to market, a finished product.

By the way why we're not enabling everybody, it's only selected accounts that will have the opportunity to work with Vuzix.

Our next question comes from [indiscernible]. Please proceed with your question.

Just wanted to ask a question about the 10-K which again mentioned going back to 2016 of November, a loss of a strategic relationship. I know that Grant has said that Intel still has their preferred; was that just a reiteration specific to or can you say whether that was in reference to Intel -- has Intel in anyway shape or form communicated their desire to either convert or otherwise -- and can you made any mention the current ongoing relationship with -- between Vuzix and Intel? Thank you.

The Intel relationship is just like it was a year or two ago. They still own their preferred shares in Vuzix, we haven't slipped any of them into at this point in time. And what can I say, we buy parts from them and we use them in our products and the relationship status quo effectively.

Again, they are still a strategic relationship and that they are still providing parts to Vuzix; and -- so there's no certainly animosity or negative to the relationship. I assume a reiteration of that exact release from November 16.

Yes, it's in our risk factor section and we believe it's prudent to continue on with that. I mean there's other risk factors saying that their preferred shares if converted can't be sold because there's an effective registration statement and so on. It's just making sure that people are potentially aware.

Thank you. This concludes our question-and-answer session. I would like to turn the call back over to Mr. Travers for any closing remarks.