Vuzix's (VUZI) CEO Paul Travers on Q4 2015 Results - Earnings Call Transcript

| About: Vuzix Corp (VUZI)

Vuzix Corp (NASDAQ:VUZI)

Q4 2015 Earnings Conference Call

March 30, 2016, 16:30 ET

Executives

Andrew Haag - Managing Partner, IRTH Communications

Paul Travers - CEO

Grant Russell - CFO

Analysts

Jim McIlree - Chardan Capital

Rick Elkin - Oppenheimer

Matt Margolis - Wall Street Forensics

Ross Silver - Vista Partners

Operator

Welcome to the Vuzix 2015 Financial Results Conference Call. [Operator Instructions]. I now would like to turn the conference over to your host Mr. Andrew Haag, Managing Partner at IRTH Communications. Thank you, you may now begin.

Andrew Haag

Good morning, everyone. I would like to welcome all of you to Vuzix’s 2015 financial results conference call. With us today on the call are Vuzix’s CEO, Paul Travers; and the Company’s CFO, Grant Russell.

Before I turn the call over to Paul, I would like to remind you all on this call that 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 is contained in the Private Securities Litigation Reform Act of 1995. Actual results could differ materially from those contemplated by the 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, changes in the legal and regulatory requirements. In addition, any projections as to the Company’s future performance represent management’s estimates as of today, March 30, 2016. Vuzix assumes no obligations to update these projections in the future as market conditions may change.

This afternoon, the Company filed its 10-Q with the SEC and issued a press release announcing its financial results. 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 have included non-GAAP financial measures when required a reconciliation to the most directly comparable financial measure calculated and presented in accordance with GAAP can be found in today's press release which is also at www.vuzix.com.

I would like to 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 2015. Paul will then turn the call over Grant Russell, Vuzix's CFO who will provide an overview of the Company’s key financial performance and metrics and then we will open the call for Q&A. Paul?

Paul Travers

Thank you very much, Andrew. We're actually going to do this a little bit different I'm going to give a bit of an intro. I'm going to then turn it over to Grant and then I'd like to finish with a more detailed analysis of where we're going. So again thank you Andrew and hello everyone and thank you all for joining in our call today to discuss the company's 2015 financial results and our outlook for 2016. 2015 was an exciting year for Vuzix with many milestones being reached that I'm looking forward to share with everyone during this call. To our knowledge Vuzix deployed more smart glasses over a wider range of enterprise accounts than any other company in the marketplace. This clearly makes Vuzix the leader in enterprise smart glasses and enterprise smart glasses and augmented reality. As we continue to advance our penetration in the marketplace and release new products like the soon to be released M300 we are confident that we will be able to maintain its position as market leader and also further advance our position as a dominant player in the enterprise smart glasses.

I would like to begin by reminding everyone of Vuzix started the year as an OTC company that had little cash resources on the books to execute to our plans. In the first month of the year we closed on $24.8 million financing with Intel Corporation and shortly thereafter we moved up to the NASDAQ. This marks the beginning of a significant shift for Vuzix in our ability to execute on our plans and mark the beginning of a foundation building year for the company. With this great start we're optimistic about the [indiscernible] we're beginning to see in our business right now. And I'd like to convey a sense of the many important milestones we achieved over 2015 and some of the upcoming catalysts that we're looking forward to 2016.

Again 2015 was a good year for Vuzix overall. Financially this is evidenced in the improvement of our balance sheet as compared to 2014 and as we shift into our next generation products we expect to become evident in our growth. In early 2015 we begin to phase out our RAD [ph] products in military engineering services. And move towards the launch of our new next generation products. Unfortunately our iWear video headphones which was planned as a growth driver for the second half of 2015 was delayed due to production issues from its originally planned ship date of the end of summer. 2015 until 2016. The reason for this delay included mass production issues, vendor quality issues and production yields. However after a couple of fault starts we believe we have made all the required improvements and fixes and also have had our R&D teams in China working with our subcontractor to raise volume manufacturing to levels we need.

Based on the quantity that we've shipped so far customer reception has been strong and we're finally in a position to begin more active marketing of the product. With this behind us and with the new products we're preparing to launch in 2016. We are experiencing strong momentum as we move into 2016. We are also seeing our enterprise smart glasses products grow in demand with many new use cases and we are confident that our progress will be more apparent in our financial results as we move through 2016.

Now before I share with you some of the many positive developments of the company in 2015 and plan roll outs for 2016 I would like to turn the call over to Grant Russell our CFO for an overview of the financial results. Grant?

Grant Russell

Thanks, Paul. Good afternoon everybody. Before jumping in I'd like to point out that I will be rounding many of the discussed numbers to either thousands and in some cases millions even though we currently report in dollars. So for the year ending December 31, 2015 Vuzix generated total revenues of 2.749 million down from 3.32 million for the 12 months December 31, 2014. Overall product revenues were up by 3% in 2015 driven mainly by a 13% increase in our M100 smart glass revenues which heavily offset the phase out of the company's wrap video iWear product lines in Q1 of 2015 as Paul mentioned.

Sales of the video iWear AR and VR product category decreased as a result of that phase out by 65% over the comparative period in 2014 and represented just 8% of revenues for 2015 as compared to 20% in the 2004 period. Smart glass sales and driven and represented by the M100 represented 67% of product revenues as compared to 54% in the 2014 period. Waveguide display engine shipments were 14% of revenues for 2015 versus nail [ph] in the comparative period of 2014. Sales from engineering services for the year ended December 31, 2015 were 206,000 as compared to 558,000 in 2014. The decrease was primarily a result of the completion of U.S. military engineering services programs in early 2015. In 2014 56% of our engineering services revenues were to the U.S. military. Currently the company has no follow on engineering programs with the military and is now focusing on commercial accounts only for engineering.

Gross margin for the 2015 period decreased to 21% as compared to 31% for the year ended 12/31/2014. The actual average gross margin on products actually increased but they were all negatively affected by approximate 12% due to the impact of a full year's amortization of software development costs that are included in cost of sales for the 2015 year as compared to 2014 when we just had one month or one quarter's amortization as well as higher minimum software royalty payments in 2015 versus 2014 due to new software we added to the M100 smart glass products.

Overall R&D cost expense for 2015 were up 105% over the amounts we spent in 2014. And the result the increase was primarily the result of increased salaries and staff additions and spending on new product development for the iWear video headphones and waveguide research. General and administrative cost expenses increased to 6.1 million from 2.6 million in 2014 primarily due to higher stock compensation costs, external director's fees and increased investor relation activities in 2015 as compared to 2014. Of this overall $3.5 million increase approximately 80% of these costs are 2.8 million were non-cash share options, stock awards and warrant compensation expense leaving an actual net increase in G&A of 722,000.

Total other expenses for 2014 were 2.86 million as compared to expense of 2.837 million in 2014. The largest expense in the 2015 period was a loss of just under 1.1 million on a derivative liability valuation versus a loss of just under 2.2 million in 2014. As you know this number is driven by a function of our stock price however with only 45,100 warrants now driving this derivative valuation we expect any future net gains or losses on the revaluation will be much smaller until the [indiscernible] all expire on August 2018.

The next largest component of the other expenses were 798,000 related to the amortization of term debt discounts related to our 2014 June convertible note offering. It was just 393,000 in the prior period and that was due to the fact that it was issued halfway during the year. So in total known cash expenses for the year ending December 31, 2015 were just under 5.9 million versus 3.7 million in 2014. These non-cash cost were approximately 42% of all of our operating and other expenses for the 2015 year and reduced our net cash burn accordingly against the overall -- as compared to the overall net loss. The company reported a net loss for the 2015 period of 13.427 million or $0.97 per share versus net loss of 7.869 million or $0.75 per share for 2014.

Just quickly go into the balance sheet, we had $11.9 million in cash as of 12/31/15. We feel this amount should be more than adequate for us to exercise on a current operating plan throughout 2016. We had a positive working capital position of 14 million on 12/31/15 versus a deficit the prior year of 1.4 million. Aside from cash inventories, were the second largest component of our current assets at 2015 and they rose approximately 2.4 million over the 12/31/14 period. And while we had forecast this increase for early fall 2015. The delays in the production of the iWear video headphones resulted in higher year-end inventory balances than planned. These amount should work themselves down as volume production ramps up and our component inventories get more properly balanced.

Of course with our new product introductions beginning this summer we expect inventory will remain a significant item in our current assets. As Paul mentioned earlier the close of our $24.8 million Series A financing last January not only greatly improved our cash position but are also positively impacted stockholders equity and reduce the derivative liabilities where it now only stands at 241,000 as compared to just under 13.5 million as of 12/31/14.

Looking forward we expect to see significant revenue growth in the second half of 2016 with our new smart glass products and volume shipments of our iWear. Overall we do not currently expect to achieve a positive net income for 2016 fiscal year. However we expect thanks to new products and increased revenues that our operating losses will be significantly less than we incurred in our 2015 fiscal year.

With that I would like to turn back to call to Paul.

Paul Travers

Thank you, Grant. Now I would like to share with you just some of the many positive developments as a company in 2015. As a reminder the bulk of Vuzix's product revenues in 2015 came from just one product our M100 smart glasses. The M100 is a flagship wearable device in the enterprise space and ahead of all of its competitors. We made solid inroads over the last two years with the M100 with literally thousands of units being sold. In late 2015 we announced and began prepping for its successors the M300 and the M3000. The M100 has been the focus for expanding and exit the existing user base pilots and roll out production systems in 2015 with some examples being and some of these I'm sure you folks have heard there's a bunch of them in here that are new that will be interesting I think. Airbus and Accenture using Vuzix's M100 has become the first excuse me, the M100 has become the first and only certified smart glasses hardware to be used within the Airbus manufacturing facilities reducing layout times inside the airframe by a factor of six with practically zero errors. DHL, Ricoh and Ubimax had a very successful trial with vision picking at our Ricoh facility with proven efficiency increases of 25% and now DHL is expanding their program to two sites in Columbus, Ohio and expanded pilots in the Netherlands in 2016.

SAP and Bechtle now have productive warehouse picking running with Vuzix and SAP AR picker with multiple other SAP customers and process. SAP is now also piloting AR technician at several major manufacturing companies. XOEye technology has deployed hundreds of M100s with lead company. They are probably one of the largest deployments for remote maintenance program. The results surpass the original our expectations significantly. Their use case study video and six month quantifiable results will follow shortly this spring.

Companies like GE, Boeing, Volkswagen, Bosh and many others continue to expand pilots into new use cases, roll out production models to certain lines or departments and drive the maturity of a consulting mobile device management integration in other businesses services that are required for industrial roll outs of large scale smart glasses projects. Long term Vuzix application partners have increased their funding, they have expanded their client base and they have rolled out second and third generation smart glasses to software platforms based on production experience and client feedback and in many cases these are primarily around Vuzix M100 smart glasses. For example, Pristine Labs has refocused their eyesight platform and is gaining significant traction with its smart glasses offering with over 70% of all users opting for Vuzix hardware. APX Labs released new versions of their skylight platform significantly improving the customer UI and providing a fluid platform allowing for multiple smart classes applications and data sharing across the clients entire organization.

[Indiscernible] has expanded their simplifier platform and are seeing growth in the warehouse in smart laboratory verticals again mainly deploying Vuzix hardware. We have also added Vuzix partners to our application ecosystem in increasing numbers with firms like AMA, a telemedicine company offering a full platform of smart glasses applications including remote support and warehouse applications headquartered in France with recent offices open in Boston, USA and Australia. Remote Eye added to Vuzix's app store with out of the box high quality remote support platforms reaching the underserved smaller user market.

Apprentice FS is a new Vuzix partner offering applications to the pharmaceutical companies calling on the majority of the top five pharma companies calling the majority of the top five pharma companies of their clients. Atheer Labs extended their AR suite to run Vuzix M100 hardware including an intuitive workflow creator, hand gesture controls and quality remote communications platform. The suite is also available off of Vuzix apps store. You do the download and you have access to the application and you're signed up for monthly fees to Atheer Labs for using it.

[Indiscernible] headquarters in Germany provides a cloud based remote service solution for PLC controls and large machinery including their client, Max Automation who went live with a large M100 rollout in early 2016. NTT Data one of the world's largest telecommunications and IT services company developed a remote field service system using Vuzix smart glasses. CTDI [ph], R&D Labs developed a remote support system enabled for Vuzix M100 smart glasses. We've also been adding a stable of out of the box smart glasses solutions using Vuzix's M100s for major players like HP in their HP MyRoom and video and Blip AR. Nippon Steel Solutions, again Atheer Labs and others. This support is a nod to Vuzix and our smart glasses as it shows that these organizations believe smart glasses adoption will drive significant revenue expansion for their existing client base and help them penetrate the client base of their competitors with this technology. Vuzix has focused on growing partners with business service skill sets to enable large deployments also with consultants like Accenture and others focused on the business services necessary to roll out smart glasses in large organizations, change management, key performance indicators, ramp up or rewriting process documents, HR etcetera. The relationships with integration partners like Accenture specialize in effective implementation of large scale mobile technology deployments. This is an important role in the smart glasses ecosystem. As the realities are rolling out hundreds or thousands of units into an existing operation can require significant management and manpower which these companies have.

Mobile device management is also key, Vuzix first certified smart glasses for Sony, Augmate, AirWatch and soon IBM shows the industry acknowledgment of impending large volume production rollouts. These are not companies that Vuzix had to go out and solicit to make happen, they typically came to Vuzix and said hey we'd like to support your platform.

MVM [ph] allows M100s to be secured and managed under the same IT MVM systems as phones, tablets, laptops etcetera. The much anticipated Vuzix entry into smart glasses prototypes were unveiled at CES in Las Vegas and Mobile World Congress with positive reactions from experienced smart glasses users. After getting a chance to experience the M300 we often get phrases like, you guys nailed it. This solves the problem and our favorite, wow, when can I get these to my clients was heard over and over. This is satisfying but no surprises, the M300 design is the culmination of over two years in the field, experience and feedback from M100. This is what sets Vuzix apart from all other smart glasses manufactures, our length of time with production quality hardware and our openness to solicit feedback from our partners and users. This was baked into the design of the M300 and the response to date has shown that the bulk of the hurdles that the hardware was responsible for have been eliminated with this new product.

On the design front Vuzix is very far along on this product and in fact we will be announcing the availability of the SDK within the next week. Finally, February 26 after winning multiple CES awards for M300 and M3000 smart glasses we introduced a migration package and preorder programs specifically for the M100 to M300 transition.

The M3000, the M3000 is a sister product to the M300 but based on their new waveguide technology. It was also announced in 2015 and was a focus at CES with several awards. We are now publicly showing our new waveguides. And the M3000 will be our first product to use them. Although we have been very reserved on the marketing side here on purpose because of this transition from M100 to the M300 and the M3000 all happening at the same time. There were response from AR focus enterprise customers has been as positive if not more so than for the M300. Interestingly we have also seen customers with retail facing use cases. These are folks that are actually having retail customers in their facilities. These guys have shown a significant interest in the M3000 because of the very cool look the waveguide has more so than the functional advantages even.

We expect to be in production of the M3000 by late summer production. It is important to note that for the M300 and the M3000 Vuzix is working with a new tier one production partner with U.S. and Asian operations. The design as of today is affectively complete and tooling is well underway. In fact we're expecting production parts out of our T1 tools by the end of early April/ early May that's a short four to five weeks away. We are really ahead of the game on this one.

We're right on track here for summer shipments. We're not expecting any kind of delays, any of the kind of delays we experience with iWear for either of these products, the iWear itself. Vuzix iWear video headphones are the ultimate mobile video entertainment and gaming system. They are compatible with any device in supporting HDMI and they are 3D HDMI compliant.

With the release of the latest virtual reality VR manager which includes native support, OS VR support and legacy solutions the roster of game titles available for the iWear video headphones is now at 120 titles and this less continues to grow. It includes games based on well-known properties such as Assassin's Creed, Avatar, Call of Duty, Halo, Microsoft Flight Simulator, it also includes Steam VR compatibility like OSVR with additional classic titles like Half Life 2, Team Fortress 2, Live for Speed and many more. Users can sort and review supported software by 12 genre types on our website as well as those supporting for 3D video and VR head tracking on the iWear etcetera. To watch an iWear product overview video I encourage you all to visit our website or to better yet visit us at our next event in order to experience and demonstration.

You will not believe how beautiful imagery is and engaging virtual reality can be with Vuzix. Now that we’re finally through with our production hurdles we’re finally in a position to take advantage of all this effort and the rest of 2016 should show the results.

iWear wireless, the iWear wireless won four awards with one being the best of innovations at CES with only 20 companies graced with this the best of innovations kind of award at this show, it was a big deal for Vuzix. The iWear wireless is a standalone version of the iWear video headphones with built in Android, a way to think about it is effectively just like having a smart TV that you wear. Despite the large interest at CES we’re taking a cautious step forward on this product. We will be finishing it's preproduction development but we will be postponing an actual production commitment until we see how the regular iWear sells in the general market conditions for such a product. We're balancing this against our waveguide based products which have much greater market potential we feel which brings us to our waveguides. The importance of Vuzix waveguide is estimated that the AR market is going to be $120 billion by 2020, four times the size of the virtual reality market. That said for AR wearable displays to be successful in a broad commercial and consumer markets it cannot look odd. It absolutely must be fashionable and the technology needs to disappear. There are just a few companies today that are working towards this kind of solution and this is where Vuzix really intense to excel and has made great progress in 2015.

Most people have no idea how difficult this is to achieve. It is not as simple as a small display in conventional lenses and almost every competing approach out there today needs bay optics and complex display engines to make them work. Even alternative waveguide optics that are talked about competitors have the same problems, this is where Vuzix's years of efforts on waveguides and display engine puts us ahead of the competition in our opinion because of our unique IP around the way we move light inside our waveguides we have recently been able to shrink our display engines to about the diameter of a large pencil and it's getting smaller and our optics are now as thin as a reading glasses. This is an almost impossible combination to have especially with a large field of view and full color images. To this end as many of you know in 2015 we opened a new wave guide manufacturing facility and research and design center here in Rochester and it is focused on delivering the dream of fashion based augmented realities smart glasses. The results are waveguides that present images that look as good as the heads up display in a luxury car but that fit in sunglasses form factors. Now that we're actively sharing our new waveguides and display engine publicly we have started to also actively pursue strategic relationships to bring our waveguides to market in ways that complement our own product plans as well as our potential customers.

While we can't comment on specifics here we are in discussion and working with multiple tier one customers to support this effort. Our goal is to remain the best in class from a technology standpoint through continuous innovation of our products. So in 2015 we made significant advances improving our processes and manufacturing technology around our nano imprinting and waveguides. We also advanced our micro display engine technology and finally grew our patent portfolio with the addition of 10 new patents or patent applications in 2015. We now have a current portfolio of 40 patents and 23 additional patents pending.

As you can see, 2015 was a foundation building year for Vuzix and this set us up for what should be a much improved 2016 and beyond. We are now moving from a single product into as many as five products shipping in 2016. This is a big shift remember the bulk of our revenues in 2015 were M100 related and this year there will be as many as five new products in the market on Vuzix technology. So it's a big shift for us. The M100 continue shipping now with consistent sales despite the M300 being on the horizon.

The iWear will finally star ramping up as we crank up our production and marketing efforts. The M300 will start shipping in late Q2 and the M3000 will start shipping right behind it in late summer. Finally our first binocular waveguide product the B3000 smart glasses we anticipate will be shipping before the end of 2016. We will be sharing more about this over the coming months. This new line of products and OEM relationships that we're building around our advance waveguides should add significantly to the top line and move us towards a positive bottom line as 2016 unfolds.

Finally it is important to note that the Vuzix does not need new capital in 2016 to bring this all together. I would like to conclude by again thanking you all for your support and now I would like to open up the call for questions.

Question-and-Answer Session

Operator

[Operator Instructions]. Our first question comes from Jim McIlree from Chardan Capital. Please go ahead.

Jim McIlree

Can you talk a little bit about the confidence you have in the iWear production issues being resolved?

Paul Travers

Over the last couple of weeks we've been receiving volume production. Well it's purposely a little at modest on what I mean by volume but the yields have been greater than 90% on what we're getting out of China now. So assuming that this continues that way which it should, we feel pretty good.

Jim McIlree

Okay. And a little bit on the M100, M300 transition. You make it sound like the customers even though you're offering this upgrade program my preferred way of the 300 anyway. Is there any truth to that speculation on my part?

Paul Travers

On the volume roll outs the guys were committing to putting product in the field for a period of time that’s longer than just some test programs. We get that same kind of feedback, people really want to move to the M300. I would suggest that some of our partners though in this regard they are going with M100s because they don't want to wait. That said the lower volume numbers sort of the rate that we've been selling M100 in the [indiscernible] in the early adoptions and the smaller programs, they still continue. So yes it does a lot of folks want the M300s there is no doubt about it, it's a big jump and people know that it's getting close. So there is an impact there. It hasn’t stopped M100 sales.

Jim McIlree

And do you think that the customers are going to want to do the same type of testing trials pilots for the M300 that they did with the M100, so you have to go through that entire process again.

Paul Travers

No this is a really easy upgrade. The software that they are rolling on M100 typically would just drop right on M300 and it's just a significantly improved device. So it's almost a drop in replacement. Now you can do more things with M300 and it's four times the processing speed and now it's got 13 megapixel cameras with image stabilization and auto focus and so it's going to be a significantly improved experience. So there might be a small amount of yes let's make sure we're still good to go here but generally speaking this should be a drop in and the significant improvement.

Jim McIlree

Near the end of your commentary you talked about new partnerships with waveguides. Are you contemplating selling the waveguides as a standalone product is being incorporated in somebody else's end product or am I misunderstanding what you’re referring to?

Paul Travers

Yes. There are certain markets that we are contemplating doing exactly that waveguide and display engines would sort of being like Vuzix solution.

Jim McIlree

And is that something that might occur this year or are we still too early in that process?

Paul Travers

Some of folks that are coming to Vuzix right now take a step back for a minute. The whole wearable display marketplace is really starting to heat up and I'm sure you guys have noticed that the virtual reality headset are all starting to ship and there's such a buzz around all of this and you know wearable tech in general is on this path and a lot of companies feel like there's a race to try to go as fast as they can to be the first players and so some of the folks we're talking to are trying to work fairly aggressive timelines. I can't comment if it'll be a 2016 kind of a thing. I just know that some of these folks they want to move aggressively.

Jim McIlree

Okay. I'm not trying to pin you down to something where you don't have that much control. I'm just trying to understand kind of the stage of the conversations and that's a helpful answer. And just lastly in order to support all of these upcoming product launches and the new facility as well as the continuing R&D are we going to see a significant step up in operating expenses over the Q4 levels?

Grant Russell

Our R&D will certainly be up from 2015 because we will have a full year of our current run rate but other areas you shouldn't see significant increases but R&D would expect to be up at least 50% to 75% over 2015 and sales because you know we made some additions and folks and hired some PR firms, it's probably going to be up close to 50% over 2015.

Jim McIlree

The sales and marketing will be up.

Grant Russell

Yes, on an annualized basis.

Jim McIlree

Let me make sure I understand now that you're putting it that way. In 2015 you did about 3.6 million in R&D. You're saying that that can be 6 million or so?

Paul Travers

Yes it could be that high. It'll be in the five to six range.

Jim McIlree

And then for sales and marketing it can be to 2.5 million to 3 million sounds like that, that's what you're driving towards.

Paul Travers

Yes.

Jim McIlree

Was there an unusual expense in G&A in 2015? I think you had something unusual in Q1.

Paul Travers

In Q1 there was $1.3 million worth of stock awards granted to our directors and senior officers and -- no that was -- no I mean there is additional director's fees and there is stock awards given to our external directors which effectively come up every June, July put those other costs were -- I'm not expecting them to be repeated each and every year.

Jim McIlree

Okay. So the G&A should just be more of a normal inflation plus kind of increases is that right, or is there something special going on there?

Paul Travers

Well we are going to be trying to have successfully get closer implement full [indiscernible] compliance before the end of the year. So there will be some additions in the finance component of G&A and perhaps the IT department, I mean last year we had an increase of I think around 750,000 when you pull out all the non-cash charges. So I don't think you will have to see an increase much greater than that over the year.

Operator

Our next question comes from Rick Elkin from Oppenheimer. Please go ahead.

Rick Elkin

So I have actually few questions. As I understand it right now you're producing the iWear wireless, the video headphones and I guess the M100s, is that right?

Paul Travers

We’re producing currently the M100 and the iWear video headphones. However the iWear video headphones really is just getting started because of the challenges we've had with some of the OpEx. So those are the really the two products Vuzix has in production at the moment. By mid-summer and towards the back end of summer we'll have two more products entering the market, the M300 and the M3000. The iWear wireless that you brought up, it's basically designed but we’re on hold at the moment as far as doing the production roll out on as we kind of assessed the market a bit more and look at our resources and kind of balance that off to B3000 which we think is -- it has just significant more opportunities in the marketplace.

Rick Elkin

So can you say what the production rate is now for the two products that you are producing say how many units a months or a week or something of that sort?

Paul Travers

We don't publish those numbers right now from competitive perspective even.

Grant Russell

But we can say things like the M100 we build in batches. So we tend to do everything in economic order batches. So I mean we have the capacity to go pretty quick but I mean we're -- for this we're in our final 3000 of the M100 units in the first half of this year and then the M100, I mean the iWear we told folks last year we're planning on building the first batch with 10,000 pieces and we've just gone through a fraction of that due to production delays. So we would expect that the balance of that build out will be completed successfully with good yields during 2016.

Rick Elkin

Okay. So I guess what you're saying is on the iWear you’re expecting to build in the vicinity of maybe 9950 pieces in '16?

Grant Russell

Yes in total, yes. Minimum, I mean clearly we can build more if demand is there. Well as Paul said we might swing it all over to the B3000 if you think that could potentially be an even stronger product.

Rick Elkin

Okay. And have you solved all the production issues for these two products?

Grant Russell

The M100 doesn't really have, we can just make those guys, no problem. The iWear we believe we solved them. I mean as I said earlier we were getting like 90% yields out of what's coming out of China today. So it feels a whole lot better than it did it towards the end of the last year. The M300 and the M3000 although they are new products the M300 is very similar to the M100, we’ve a lot of experience there and we have a great Tier 1 partner at the same time that's -- they're good at making these things. So we feel fairly confident there too that we're not going to have any kind of issues.

Rick Elkin

I mean have you run like trial production runs for the iWear wireless and the M3000?

Paul Travers

The M300 and the M3000 we've made prototypes. They're very, very simple to go together and literally it's like it's an order of magnitude simpler to manufacture than the iWear product is. So yes we know exactly what we're getting into there. It's just a much simpler problem. You know the issue with the iWear, just so everybody might have a feel for this. We're taking a little tiny point 0.24 inch display so it's smaller than your pinky finger nail and we're turning it into a one 125 inch screen as you [indiscernible] 10 feet away. So there's a huge magnification difference on the starting display to where you're going and doing that if there's any component that's in that optics chain that has a problem with it, it shows up in the finished image and that's where do we run into problems. We’ve run into problems with poorly coded beam splitters. We’ve run into problems with these micro-lens [ph] little rays that we build with that gets dirt on them or pinholes in them -- there is a list of those things and we've addressed them all now. It's a bigger challenge to make then the M300 is.

Rick Elkin

Okay. Are you actively taking orders for the M3000 yet?

Paul Travers

Not the M3000 but we’re for the M300. There are a plenty of people that would like to be placing orders for the 3000 and we're going to start a program soon around that but we’re placing a bigger focus on the 300 right now because it's a drop in replacement for the 100.

Rick Elkin

All right. You mentioned something about the new products have solved just about all of the hardware hurdles for users. So what is still left in terms of hardware hurdles?

Paul Travers

We honestly speaking the M300 for the bulk of the use cases we've identified and actually there are any -- there is bound to be something out there, so oh we didn’t take that into account for this particular vertical market but the M300 really covers a lot of bases. If you take a look there's a video up on our website that talks about the M300 and it flips through some of the feature sets that this thing has. It really solves I mean I will give us some simple examples, with the product like Google Glass and even the M100 it was difficult to position the headpiece, the eyepiece you walk into in very many places. The M300 you can put it anywhere, [indiscernible] you can literally point it right down at the table so if you're sitting in front of your desk working and you need the glasses to help you do the work these things just easily point and do that.

Many people in medical field need that because they're doing operations and they're looking down. Imagine that with Google Glass where the display and the camera are sticking way up above your eye, you almost have to break your neck in order to look at what you're trying to do. So it's stuff like that point after point after point that we have put into the design documents and into the final for M300. So the bulk of the applications I think we're in great shape for. Let me just give you another simple example the hot swapability of the batteries. When you're working with firms like DHL they're 24/7 operations. They don't want to take a unit at the end of the first operation and plug it in and wait for three hours for it to charge. So we built this thing with a hot swappable battery, you either pop the battery out, pop a new one in and you're off and running again. You can imagine it just continues that way with the M300 in the changes we put into it and we’re focused on real use cases.

Operator

Our next question is from [indiscernible]. Please go ahead.

Unidentified Analyst

In regards to the M100 versus the M300 versus the M3000 is there any cannibalization that may take place or are these targeted for different applications?

Paul Travers

You know sometime in the far future it may be all optically see through waveguide based stuff but the M300 -- well the M300 is a replacement for the 100 clearly. I mean there are some firms that have designed the M100 and they may not want to move and so we would continue to build for them if they wanted it but the 300 is a clear replacement for it, that fractional power consumption, four times the processing speed you kind of get the idea there.

Unidentified Analyst

So my question then is why would we spend resources on the M100. I know between now and then you probably need to continue supplying the M100 but should we look for maybe this being phased out quickly if the M300 gets the adoption kind of you're looking for?

Paul Travers

That will happen short of like I said if somebody really needed to have it but our goal is to phase out the 100. The 300 versus the 3000 though an optical see through system can be used in different areas than an opaque digital see through system and so there is use cases for both of those products, the 300 and the 3000.

Unidentified Analyst

In relation to this manufacturing hiccup that you had for iWear, you know was this mostly on the part of the sub-contractor? Are we doing anything to bring in managers to get head that aspect of the business, somebody who is in China or Japan etcetera, wherever these things are being made who represents Vuzix, is part of Vuzix which is we’re seeing all of this and are we also then sourcing other products from the same sub-contractor or are we sort of diversifying our supply chain a little bit?

Paul Travers

Yes. So the way it works here is we have a main manufacturing partner in China and some of the components there are able to injection mode there etcetera but some of it they source from third parties and the bulk of the problems we encountered were the third batteries and so that’s where we've been doing most of the changes. When you have optics that command half of them aren't coded correctly. Coded on a wrong side, it's just kind of bizarre stuff. So we have moved from some of those suppliers to brand new ones and in other cases the supplier it's just was poor communications. So they were just doing them wrong because they didn’t realize it and so we have been in China visiting and or replacing those vendors. And by the way we do have a gentleman that has a focus on our agent supply at the same time but even with that focus with them being there these optics are unique enough that these things they just got away from us unfortunately.

Unidentified Analyst

I guess scaling out these issues [Technical Difficulty].

Paul Travers

It can be difficult to get a product off the ground the first time but this was especially.

Unidentified Analyst

Right. On the gross margin side are we looking to sort of bounce back from 20% level or maybe back to the 30% levels later in the year?

Grant Russell

We certainly expect so because I did point out. We do have a fair load of effectively fixed cost between minimum royalties and software amortization cost. So a lot of it will the increase in sales and we are forecasting some higher margins on the M300 and 3000 over the M100 should help the net gross margin a lot. But I can say that because some of the production issues with the iWear and the changes that we’ve made are cost have crept up a little bit. So our iWear headphone margins will be because -- they'll be stuck in the 20s.

Unidentified Analyst

So 20s in the near term but slowly creeping up as a scale?

Grant Russell

Yes. It should go up really quickly once we get the volume going.

Unidentified Analyst

Just last question on the balance sheet I guess. What are the cash amount at the end of the year or what are we--

Grant Russell

11.9 million.

Operator

The next question is from Matt Margolis from Wall Street Forensics. Please go ahead.

Matt Margolis

Since nobody's asked an Intel questions, so I got to get that in. So Intel announced they are kind of augmented reality device that they're going to be producing, you guys have an existing relationship with them. Can you guys touch on how Vuzix might be involved with that project?

Paul Travers

Well let me say first of all I'm not sure Matt, I've seen the announcement from Intel. However Vuzix is involved with Intel, it shows up in our financial statements. We talk a little bit about it, it's hard for us to share a whole lot about what we're doing with them. I will say though it is waveguide based and it's [indiscernible] optical systems that you might imagine would make a great addition to an augmented reality style headset.

Matt Margolis

And then Grant you mentioned inventory was around 2.5 million at the end of the year?

Grant Russell

No it's up over 2.5 million from the prior year in total it was about 3.4 million -- 3.3 million.

Matt Margolis

How much of that primarily is from the iWear?

Grant Russell

That would probably be 70% of it almost. We had planned on building the bulk of the order -- that 10,000 pieces in 2015 and because of the production issues, there is only so much you can do to delay way some of deliver. So it popped up.

Matt Margolis

So Paul can you touch on the new Tier 1 manufacturer. Why would you switch? What are the benefits? Are their volume minimums or requirements as part of that deal?

Paul Travers

Okay. The reason why we switched is why we switched. It makes sense to often evaluate the vendors that you're working with to get the best ones for the particular product that you might be making so many companies have multiple vendors they work with. In the case of this one the folks that we're working with are really good at making these kinds of products. They've made ruggedized products for industry and enterprise time and time again and the M300 and 3000 we really want to have that rugged look and feel and performance and so we chose them as the partner because of that number one. And number two we have a high confidence level in their abilities here. They have shown time after time after time that they can build it to a schedule, get it done and get the products in the market and meet the specs. So we really like all of that when we were doing our analysis on our choices here. They were the best one and other than that the cheapest when you go through the kinds of things that we run with iWear it doesn't take long to pay for itself to have the performance that you need there. So that's why we picked them and this is not to discourage our current partners. They do a really good job. It's third Party folks that we've been working with that cause most of the issues associated with our iWear. But again we’re very confident in this new Tier 1 partner.

Grant Russell

Plus we are working with their U.S. based teams and they brought over some of their Asian employees. So it's easier for us to have an ongoing dialogue with them with all our engineering staff and there's a lot of people working on these and it should be easier and faster when there is an issue for us to fly, take a couple hour plane ride versus flying all the way to China somebody.

Matt Margolis

So Paul, you walked through along here with basically all of the top integrator, software developers around the globe that are working on augmented reality. Can you talk about what type of visibility you’ve towards future orders and what does that look like? Are people ordering for 3 to 6 months [indiscernible]?

Paul Travers

Some of that was kind of buzzy Matt, but I think I got the question. Some of the customers that we're talking with today -- so here's what's happening with M100 there was this problem or that problem or this glitch or this reason why even though people who really liked it and like it and in fact some use cases like the guys from Lee Air Conditioning I mean they're getting almost an immediate return on the investment for using these things. The M300 has torn down those barriers, those kinds of things that were sort of sticking in the [indiscernible] getting this done and now we're having discussions with companies that are talking about in some cases major rollouts bundled with their hardware and their software and their Tier 1 Players in the enterprise space and so the numbers knock on wood we should see in some cases could be quite significant. They're not there yet. They're coming and those are the kind of discussions that we're starting to have now versus well maybe we'll do a small rollout of five pieces or 10 pieces here and there.

Matt Margolis

I'm sorry, so my question was you had all these the key integrators the software developers. As far as the visibility goes to order flow are you seeing these being ordered three to six months out or what’s your visibility to the pipeline of orders?

Grant Russell

Visibility, while we haven't been so actively soliciting any orders for the new see through iWear based products so it's difficult for us to really comment because it's all being pretty informal with a lot of these potential customers.

Paul Travers

I missed that. So you’re basing that on the augmented reality, the visibly the see through systems that we’re building?

Matt Margolis

Yes.

Paul Travers

Yes. In the case of some of these partners as Grant said that are the larger folks there are some numbers that are been bantered around but we really can't get into the detail of that.

Matt Margolis

And then can you touch on the potential the Tier 1 waveguide partners, are you guys looking at you know potentially being an ODM putting your products and selling possibly licensing the design to somebody or will you the supply the waveguides or is it OpEx or is it kind of everything on the table at this point?

Paul Travers

It's a mix of that but I would suggest the bulk of it is more related towards you know we're really good at display engines and there's often an optical component that couples between the display engine and the waveguide itself and the waveguides and those are the kinds of components that we're talking about it's the component supply side of it.

Operator

Our next question comes from Ross Silver from Vista Partners. Please go ahead.

Ross Silver

So I know it's been kind of a lengthy Q&A but just wanted to ask a sort of a quick question which is I think the question of question is you know when I was walking the floor at CES last year there is a lot of talk of AR and VR and it was just talk and now this year you have product on the floor and people are buzzing about the products specifically the VR but then people are saying look AR is coming around the corner and it's going to be as you noted in your comments larger than VR and I mean it was unbelievable the amount of -- I mean 2.5 hour long lines for the VR demonstrations. And so I can only imagine what AR could represent when it's here and so the question I was asking to a lot of these guys who are competitor of yours and perspective customers is who are the people and when is that adoption going to occur? And so the good news is it's who everyone mentions it's in the who and I noticed also when I was at your booth it was like a beehive of activity, people coming in and out and talk to your companies you were speaking with right? And so the million dollar question that everyone of course wants to know is the when and when that adoption occurs because I would assume that adoption is significant and drastic in the form of revenue expansion and that's really what kind of the bet is here on those. I know a lot of people kind of asking questions sort of around that when but I mean how would you characterize -- 2015 as you said kind of set the table. In 2016 it seems like the year where you might have the early adoption but that early adoption could be significant. In 2017 is where it really starts to take off. I mean is that sort of a fair way to characterize how you see the adoption for your products or I mean what's the way without giving guidance how would you kind of set that up?

Paul Travers

In the enterprise space, Ross you're going to start to see adoption this year. The M300 and the M3000 are positioned incredibly well to be the lead horse in that race and before this year is up you will see significant uptake start to happen around Vuzix's products. The key for AR and the consumer side is you need the product and software to go with it but you need the product that looks good enough for people to want to wear and that's where a waveguide come in, this is the whole reason behind the debate here of the iWear wireless versus the B3000 whether or not we postpone the wireless in favor to B2000 because the sooner we have the B3000 in the marketplace I think the sooner we start to see the uptake in the consumer side.

Ross Silver

Yes, no it seemed like everyone when talking about waveguide is people walking away from your booth and just dialogue I had with some perspective customers and again competitors as the waveguide it's just you know it's game changing right. And so it sounds like the answer to my question was this year you're set up for that kind of breakout what if I'm hearing you correctly and kind of reading between the lines. So I appreciate you taking the question.

Paul Travers

You will definitely see it on the enterprise side. It will start to happen and your comment on the waveguides and how great they're working now. It's literally it looks as pretty as the heads up display you might see in a luxury car. They are beautiful crisp, clean, clear, they really look great.

Operator

Our next question comes from El Patel [ph], Private Investor. Please go ahead.

Unidentified Analyst

I have a couple questions for you. First of all regarding the shelf offering that was done recently. Are you guys anticipating a big order or I mean that was a big amount, a $100 million in shelf offering. So was that just to basically I mean I could come to sense that it's either -- you’re getting a big deal or maybe to leverage yourself on a buyout situation?

Grant Russell

I mean the shelf was filed for primarily for strategic purposes and it's considered -- I mean I think if you do have a look of now at the companies you will see a large majority of them have shelf filed with the SEC. Just in case you know there is a need or an opportunity for a requirement to raise capital quickly. At this time Vuzix has no intention of raising any funds via that shelf at this time but one of the advantages of being an [indiscernible] company you can have these shelves there and we wanted to take advantage of it. Our various financial advisors and others told us it makes good sense to do it.

Unidentified Analyst

Okay. And [indiscernible] just last week or the week before there was a report out there that Tesla concerned using Vuzix smart glasses over Google Glass, so has Tesla bought the Vuzix M100s?

Paul Travers

Tesla is a private firm that doesn't like to talk a lot about some of the things that they do. Without doubt APX labs is a partner and it's public that they've been working with Tesla and APX Labs is a great partner of Vuzix at the same time.

Unidentified Analyst

Okay. And the other thing was as you mentioned you expect AR to be four times as big as a virtual reality market. So has Vuzix considered maybe licensing the iWear or maybe just selling the iWear completely and displays on the AR like sell the I guess iWear to big company like Apple or Microsoft and just focus on AR market which we all know it's bigger than VR anyways.

Paul Travers

That's part of the reason for our internal discussions around the iWear wireless right now, there is a lot to be done and there's a lot of opportunities in the AR side of the business and so we are just thinking our way through the best way to tackle that and take advantage of what we've done in the VR today. So no final decision made yet though.

Unidentified Analyst

I mean as a business owner I would personally you know I would try to focus on the bigger market and where we know the Vuzix has the edge over anybody else in AR versus VR where there's a ton of competition already and just look at what Facebook did with Oculus, if a bigger company licenses the firewire I guess Vuzix would have a lot better chance or maybe selling it completely.

Paul Travers

We got you.

Unidentified Analyst

And finally I guess there was rumors about Samsung couple of weeks ago also as maybe getting a deal with Samsung, is there an issue to that or?

Paul Travers

We really can't comment on some of the folks that might be in that bucket right now. Sorry.

Unidentified Analyst

And these waveguides, when do you anticipate those order start coming in? Would that be in 2016 like first half or second half or?

Paul Travers

You will see revenues generated out of these relationships even in the first and second quarter of this year but you know kind of volume sort of production inside but I can't comment on when that will happen.

Unidentified Analyst

Okay. So do you think those orders may be still for the pilot programs or will they be or have they already done those?

Paul Travers

It's really hard to get into more detail than this, sorry.

Unidentified Analyst

Thank you so much for taking my call and wish you guys all the best.

Paul Travers

Thanks. You know just a comment many of -- you know the Tier 1 guys that are out there today they're all so secretive about what they are doing, where they are going and it's not good for Vuzix to comment on very much in this regard of anything because it just would frustrate our partners and so sorry that we just can't offer more.

Operator

Our next question comes from [indiscernible]. Please go ahead.

Unidentified Analyst

My question is in regard to the future of AR and I know this Q&A has gone for a while so I will just make it as quick as possible. I'm wondering what is your strategy on reducing the size of the device that holds all the components for your M3000 and reducing the size of that. So it's minimal and fashionable for people consumers to want to buy it and wear it?

Paul Travers

The M3000, it's got every bell and whistle on the planet in it right now including much bigger cameras, a bunch of stuff associated with it and the design that we show people uses a larger display engine than what we'll have by mid-summer. The binocular products that we’re anticipating by the fall of the year, the display engine shrink significantly and the electronics have a much smaller footprint at the same time. So you will see the B3000, the binocular version of it in a trim form factor that looks strikingly like a pair of fashion glasses. The way we can do that is because our optics they have these little tiny input pupils and that allows us to shrink down the display significantly etcetera.

I will offer also there is other technology that goes in these glasses that we've been working on with other partners that allowed things like high tracking and alikes that also fit snugly inside the frames etcetera, so it will be pretty full featured devices.

Operator

Thank you. I would now like to turn the floor back over to management for any closing remarks.

Andrew Haag

This Andrew Haag. Paul. I just wanted to thank everyone all the shareholders of Vuzix and the analysts and people following the company and if you're paying attention to some the use cases, integrations and partners that Vuzix has signed and some of the implementations that have gone on out there and if you're following the industry and some of the other companies as Paul I believe had stated it's pretty clear here that Vuzix right now currently is the leader out there with smart glasses implementations. And with some of the partners and the use cases they've proven out already.

Again I'd just like to thank everyone for joining the call and if Paul you have anything else to say, I will turn it back over to you for any last comment or we can end the call.

Paul Travers

No I would just echo that Andrew, I mean Vuzix and our M100 has made some amazing inroads. The companies that I discussed on the call today is they are a tip of an iceberg and I have been saying this for a while but it is happening. Smart glasses and industry are going to be deployed and right now Vuzix is the best horse in the race. So again we thank everybody for been shareholder and following Vuzix and we look forward to a fantastic 2016.

Operator

Thank you. This includes today's conference. You may disconnect your lines and have a nice evening.

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